nep-cba New Economics Papers
on Central Banking
Issue of 2018‒11‒19
fourteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Leaning against housing prices as robustly optimal monetary policy By Adam, Klaus; Woodford, Michael
  2. Credit mechanics - a precursor to the current money supply debate By Decker, Frank; Goodhart, Charles A
  3. State Dependent Effects of Monetary Policy: the Refinancing Channel By Martin Eichenbaum; Sergio Rebelo; Arlene Wong
  4. Where did inflation targeting matter? By Barbosa, Rodrigo dos Santos; Brito, Ricardo D.; Teles, Vladimir Kühl
  5. Exploring the implications of different loan-to-value macroprudential policy designs By Rita Basto; Diana Lima; Sandra Gomes
  6. Nominal exchange rate dynamics and monetary policy: uncovered interest rate parity and purchasing power parity revisited By Saadon, Yossi; Sussman, Nathan
  7. Cryptocurrencies: A Crash Course in Digital Monetary Economics By Jesus Fernandez-Villaverde
  8. Nonfarm Employment, Inflationary Expectations, and Monetary Policy after the Global Financial Crisis By Willem THORBECKE
  9. On the perils of stabilizing prices when agents are learning By Mele, Antonio; Molnar, Krisztina; Santoro, Sergio
  10. Equity versus Bail-in Debt in Banking: An Agency Perspective By Caterina Mendicino; Kalin Nikolov; Javier Suarez
  11. Monetary Policy Pass-through, Excess Liquidity and Price Spillover: A Comparative Study of Conventional and Islamic Banks of Pakistan By Muhammad Omer
  12. Could a large scale asset purchase programme have mitigated the Great Depression? By Garabedian, Garo; Stuart, Rebecca
  13. Markets, Banks, and Shadow Banks By Martinez-Miera, David; Repullo, Rafael
  14. Should I stay or should I go? A latent threshold approach to large-scale mixture innovation models By Huber, Florian; Kastner, Gregor; Feldkircher, Martin

  1. By: Adam, Klaus; Woodford, Michael
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian model with a housing sector. In a setting where the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a "target criterion" that refers to inflation and the output gap only is optimal, as in the standard model without a housing sector. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks to choose a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to "lean against" housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and similarly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between "fundamental" and "non-fundamental" movements in housing prices.
    JEL: D81 D84 E52
    Date: 2018
  2. By: Decker, Frank; Goodhart, Charles A
    Abstract: This paper assesses the theory of credit mechanics within the context of the current money supply debate. Credit mechanics and related approaches were developed by a group of German monetary economists during the 1920s-1960s. Credit mechanics overcomes a one-sided, bank-centric view of money creation, which is often encountered in monetary theory. We show that the money supply is influenced by the interplay of loan creation and repayment rates; the relative share of credit volume neutral debtor-to-debtor and creditor-to-creditor payments; the availability of loan security; and the behavior of non-banks and non-borrowing bank creditors . With the standard textbook models of money creation now discredited, we argue that a more general approach to money supply theory involving credit mechanics needs to be established.
    Keywords: balances mechanics; Bank credit; credit creation; credit mechanics; money supply theory
    JEL: E40 E41 E50 E51
    Date: 2018–10
  3. By: Martin Eichenbaum; Sergio Rebelo; Arlene Wong
    Abstract: This paper studies how the impact of monetary policy depends on the distribution of savings from refinancing mortgages. We show that the efficacy of monetary policy is state dependent, varying in a systematic way with the pool of potential savings from refinancing. We construct a quantitative dynamic lifecycle model that accounts for our findings. Motivated by the rapid expansion of Fintech, we study the impact of a fall in refinancing costs on the efficacy of monetary policy. Our model implies that as refinancing costs decline, the effects of monetary policy become less state dependent and more powerful.
    JEL: E52 G31
    Date: 2018–10
  4. By: Barbosa, Rodrigo dos Santos; Brito, Ricardo D.; Teles, Vladimir Kühl
    Abstract: We investigate the effects of inflation targeting (IT) adoption on industrial economies by comparing each inflation targeter country (ITer) with its synthetic control, defined as the convex combination of non-IT countries that best reproduce the ITer counterfactual inflation trajectory. We show that most of the ITers enjoyed lower inflation and higher output growth than their synthetics in most of the 1990 years’ IT experience. Although those gains could be transitory, they were economically important to justify IT Central Banks optimism with their regime choice, both case-by-case and on average.
    Date: 2018–10
  5. By: Rita Basto; Diana Lima; Sandra Gomes
    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 financial 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 effects but the short-run recessionary impact is attenuated by the monetary policy response.
    JEL: E58 E61 F42
    Date: 2018
  6. By: Saadon, Yossi; Sussman, Nathan
    Abstract: The increasing globalization of trade in goods and services and the deepening of financial markets have reduced frictions that may impede the operation of the PPP and UIP relationships in the short run. In this paper, we estimate the short term relative PPP and UIP relationships. Using data from Israel, which has a deep market for inflation expectations for 12 months, we show that relative PPP and UIP cannot be rejected. Deviations from equilibrium last less than a year. Data from Israel's capital account of the balance of payments shows that the deviations are not destabilizing. Our findings suggest that greater globalization and financial deepening contribute to the effectiveness of monetary policy.
    Keywords: Balance sheet effects; Exchange Rates; Inflation expectations; monetary policy; purchasing power parity; uncovered interest rate parity
    JEL: E52 F3 F31 F41 G15
    Date: 2018–10
  7. By: Jesus Fernandez-Villaverde (Department of Economics, University of Pennsylvania)
    Abstract: This paper reviews what cryptocurrencies are, and it frames them within the context of historical monetary experiences and contemporary monetary economics. The paper argues that, as pure duciary private money, cryptocurrencies are a bubble without a fundamental value and that they will not provide, in general, optimal amounts of money or deliver price stability. Nevertheless, cryptocurrencies can play a role in improving the current means of payments and in disciplining central banks into providing better government-run duciary monies.
    Keywords: Private money, currency competition, cryptocurrencies, monetary policy
    JEL: E40 E42 E52
    Date: 2018–09–03
  8. By: Willem THORBECKE
    Abstract: Unemployment has tumbled since the Global Financial Crisis (GFC). This paper investigates whether news of a tightening labor market since the GFC has generated expectations of an overheating economy or excessive Fed tightening. Evidence from the response of interest rates, exchange rates, Treasury Inflation Protected Securities and other assets indicates that investors did not expect a strong labor market to produce inflation. Neither did they expect the Fed to overreact and derail growth. The Fed has thus succeeded so far in navigating between the shoals of overheating and premature tightening.
    Date: 2018–11
  9. By: Mele, Antonio (University of Surrey); Molnar, Krisztina (Dept. of Economics, Norwegian School of Economics and Business Administration); Santoro, Sergio (Bank of Italy)
    Abstract: The main advantage of price level stabilization compared with inflation stabilization rests on the central bank's ability to shape expectations. We show that stabilizing prices is no longer optimal when the central bank can shape expectations of agents with incomplete knowledge, who have to learn about the policy implemented. Disinating in the short run more than agents expect generates short-term gains without triggering an abrupt loss of confidence, because agents update expectations sluggishly. Following this policy, in the long run, the central bank loses the ability to shape agents' beliefs, and the economy converges to a rational expectations equilibrium in which policy does not stabilize prices, economic volatility is high, and agents su er the corresponding welfare losses. However, these losses are outweighed by short-term gains from the learning phase.
    Keywords: Price; stabilization
    JEL: C62 D83 D84 E52
    Date: 2018–10–26
  10. By: Caterina Mendicino (European Central Bank); Kalin Nikolov (European Central Bank); Javier Suarez (CEMFI)
    Abstract: We examine the optimal size and composition of banks’ total loss absorbing capacity (TLAC). Optimal size is driven by the trade-off between providing liquidity services through deposits and minimizing deadweight default costs. Optimal composition (equity vs. bail-in debt) is driven by the relative importance of two incentive problems: risk shifting (mitigated by equity) and private benefit taking (mitigated by debt). Our quantitative results suggest that TLAC size in line with current regulation is appropriate. However, an important fraction of it should consist of bail-in debt because such buffer size makes the costs of risk-shifting relatively less important at the margin.
    Keywords: Bail-in debt, loss absorbing capacity, risk shifting, agency problems, bank regulation.
    JEL: G21 G28 G32
    Date: 2017–05
  11. By: Muhammad Omer (State Bank of Pakistan)
    Abstract: This study investigates the comparative pass-through of policy rate to the retail prices, spillover of prices between Islamic and conventional banking systems, and the impact of excess liquidity on these pass-throughs using data from interbank market of Pakistan. The results suggest that the monetary policy shock affect retail prices of Islamic banks similar to conventional banks, confirming the findings of earlier studies. Moreover, there is a strong spillover between the prices of two systems; Islamic banks are following (leading) the conventional banks in pricing the lending (deposit) products. Islamic bank have acquired advantage in the deposit pricing by taping the religious depositors, which also has promoted financial inclusion in the economy. Our results suggest that the presence of excess liquidity have no effect on pass-through of policy rate in the Islamic system, which is contrary to the prevalent notion. However, excess liquidity significantly affects the spillovers of prices between the systems. These results support the hypothesis that the Islamic banks are investing in government securities indirectly via conventional banks.
    Keywords: Excess Liquidity, Islamic Banks, Monetary Policy Pass-through, VECM, Mediation
    JEL: C43 E31 F41
    Date: 2018–10
  12. By: Garabedian, Garo (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: Since Friedman and Schwarz (1963), the role of the Federal Reserve during the Great Depression has been an issue of debate. In this paper, we focus on the purchases of government securities by the Federal Reserve over a four-month period in 1932. Using a Bayesian VAR model, we estimate the effect of an extension of this programme in conjunction with an interest rate cut on a range of variables capturing prices, output and macro-financial linkages. Our results indicate that this policy would have substantially shortened and reduced the impact of the Great Depression.
    Keywords: Federal Reserve, Bayesian VARs, Quantitative easing, Great Depression
    JEL: B16 E51 E58
    Date: 2018–07
  13. By: Martinez-Miera, David; Repullo, Rafael
    Abstract: We analyze the effect of bank capital requirements on the structure and risk of a financial system where markets, regulated banks, and shadow banks coexist. Banks face a moral hazard problem in screening entrepreneurs' projects, and they choose whether to be regulated or not. If regulated, a supervisor certifies their capital; if not, they have to rely on more expensive private certification. Under both risk-insensitive and risk-sensitive requirements, safer entrepreneurs borrow from the market and riskier entrepreneurs borrow from banks. But risk-insensitive (sensitive) requirements are especially costly for relatively safe (risky) entrepreneurs, which may shift from regulated to shadow banks.
    Keywords: Bank Regulation; bank supervision; Capital requirements; credit screening; credit spreads; loan defaults; market finance; optimal regulation; Shadow banks
    JEL: G21 G23 G28
    Date: 2018–10
  14. By: Huber, Florian (University of Salzburg); Kastner, Gregor (WU Wirtschaftsuniversität Wien); Feldkircher, Martin (Österreichische Nationalbank (Austrian Central Bank))
    Abstract: We propose a straightforward algorithm to estimate large Bayesian time-varying parameter vector autoregressions with mixture innovation components for each coefficient in the system. The computational burden becomes manageable by approximating the mixture indicators driving the time-variation in the coefficients with a latent threshold process that depends on the absolute size of the shocks. Two applications illustrate the merits of our approach. First, we forecast the US term structure of interest rates and demonstrate forecast gains relative to benchmark models. Second, we apply our approach to US macroeconomic data and find significant evidence for time-varying effects of a monetary policy tightening
    Keywords: Time-varying parameter vector autoregression with stochastic volatility (TVP-VARSV); Change point model; Structural breaks; Term structure of interest rates; Monetary policy; R package threshtvp
    JEL: C11 C32 C52 E42
    Date: 2018–11–07

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