nep-cba New Economics Papers
on Central Banking
Issue of 2018‒11‒26
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Central Bank Financial Strength and Inflation: A Meta-Analysis By Mojmir Hampl; Tomas Havranek
  2. The Foreign Exchange Interventions of the CNB as an Unconventional Instrument of Monetary Policy By Andrea Cecrdlova
  3. The Impact of the ECB’s Quantitative Easing Policy on Capital Flows in the CESEE Region By Anita Angelovska–Bezhoska; Ana Mitreska; Sultanija Bojcheva-Terzijan
  4. The Covered Interest Parity Puzzle and the Evolution of the Japan Premium By Alexis Stenfors
  5. Monetary policy regimes and the lower bound on interest rates By Corbisiero, Giuseppe
  6. Bank Capital in the Short and in the Long Run By Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik
  7. Monetary and Macroprudential Policy Coordination Among Multiple Equilibria By Itai Agur
  8. Money Creation in Different Architectures By Faure, Salomon; Gersbach, Hans
  9. Life below zero: Bank lending under negative policy rates By Heider, Florian; Saidi, Farzad; Schepens, Glenn
  10. Estimated policy rules for different monetary regimes: Flexible inflation targeting versus a dual mandate By Jacob Punnoose; Amber Wadsworth
  11. A New Approach for Detecting Shifts in Forecast Accuracy By Chiu,Ching-Wai; Hayes, Simon; Kapetanios, George; Theodoridis, Konstantinos
  12. Missing Events in Event Studies: Identifying the Effects of Partially-Measured News Surprises By Gürkaynak, Refet S.; Kisacikoglu, Burçin; Wright, Jonathan H.
  13. An Heterogeneous-Agent New-Monetarist Model with an Application to Unemployment By Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
  14. Degree of indépendance and accountability within the monetary policy committee of the BCEAO By Régis Bokino; Moustapha Gano
  15. Macroprudential FX Regulations: Shifting the Snowbanks of FX Vulnerability? By Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt
  16. Systemic illiquidity in the interbank network By Langfield, Sam; Liu, Zijun; Ota, Tomohiro; Ferrara, Gerardo
  17. Monetary and Fiscal Policy in a Cash-in-advance Economy with Quasi-geometric Discounting By Daiki Maeda
  18. Understanding the Aspects of Federal Reserve Forward Guidance By Lunsford, Kurt Graden
  19. Unconventional policies in a monetary union: a policy game approach By Manuela Mischitelli; Giovanni Di Bartolomeo
  20. Home Ownership and Monetary Policy Transmission By Koeniger, Winfried; Ramelet, Marc-Antoine
  21. The Expansionary Lower Bound: Contractionary Monetary Easing and the Trilemma By Paolo Cavallino; Damiano Sandri

  1. By: Mojmir Hampl; Tomas Havranek
    Abstract: Several empirical studies have reported that financially weak central banks tend to tolerate systematically higher inflation. If the effect were genuine, central banks would have to pay attention to their capital levels and could not treat them as a residuum. In this note, we take stock of this literature using the statistical techniques of meta-analysis. We collect 176 estimates of the effect of central bank financial strength on inflation and observe that 86% of them are negative, suggesting that low capital levels indeed lead to higher inflation. However, we show that the literature is plagued by publication bias, the preferential reporting of intuitive and significant results. When we correct the literature for this bias, we obtain no evidence for any interplay between central bank financial strength and inflation. The result is robust to employing various meta-regression and nonparametric selection models.
    Keywords: Central bank capital, inflation, monetary policy, publication bias, seigniorage
    JEL: C83 E58
    Date: 2017–10
  2. By: Andrea Cecrdlova (University of Economics in Prague)
    Abstract: During the last crisis monetary authorities hit zero interest rates and as a result they began to use less standard instruments. However, they failed to meet the declared inflation target for a long time. The Czech National Bank (CNB) decided to use the unconventional instrument in November 2013 when the exchange rate commitment was introduced. The aim of the paper is to evaluate the decision to use the exchange rate commitment with regard to its potential side effects. The most significant side effect is the enormous amount of foreign exchange reserves, which, due to the appreciation of the domestic currency, can get the CNB into more cumulative negative values than it already is.
    Keywords: CNB, monetary policy, unconventional monetary instruments, foreign exchange interventions, foreign exchange reserves.
    JEL: E31 E52 E58
    Date: 2018–10
  3. By: Anita Angelovska–Bezhoska (National Bank of Republic of Macedonia); Ana Mitreska (National Bank of Republic of Macedonia); Sultanija Bojcheva-Terzijan (National Bank of Republic of Macedonia)
    Abstract: This paper attempts to empirically assess the impact of the ECB’s quantitative easing policy on capital flows in the countries of the Central and South Eastern region. Given the tight trade and financial linkages of the region with the euro area, one should expect that the buoyant liquidity provided by the ECB might affect the size of the capital inflows. We test this hypothesis by employing panel estimation on a sample of 14 countries CESEE countries for the 2003-2015 period. Contrary to the expected outcome, the results reveal either negative or insignificant impact of the change in the ECB balance sheet on the different types of capital inflows. The results suggest that the magnitude of the crisis, to which the ECB responded to was immense, hence precluding any significant impact of the monetary easing on capital flows in the region. The inclusion of a dummy in the model, to control for the 2008 crisis confirms the findings from the first specification and also does not change the finding on the ECB quantitative easing impact on the capital flows. The impact of the crisis dummy on capital flows is negative and it holds for almost all types of capital inflows, except for the government debt flows, which is consistent with the countercyclical fiscal policies and rising public debt after the crisis.
    Keywords: quantitative easing polices, ECB, capital flows, CESEE countries, panel estimates, mean group estimator
    JEL: E43 F21 C33
    Date: 2018
  4. By: Alexis Stenfors (University of Portsmouth)
    Abstract: A disturbance or breakdown of the first stage of the monetary transmission mechanism tends to be synonymous with high and volatile money market risk premia. Such market indicators include violations of the covered interest parity (CIP). This was not only evident during the financial crisis of 2007-08, but already during the Japanese banking crisis in the late 1990s, when it became referred to as the 'Japan Premium'. Despite extraordinary policy measures by central banks in recent years, however, deviations from the CIP indicate continuing or even elevated stress in the international monetary system. This paper examines a string of distinct, but closely interconnected, assumptions and perceptions regarding CIP arbitrage. By doing so, it not only sheds some fresh light on the recent 'CIP puzzle' but also on the era of the Japan Premium during the 1990s and its aftermath.
    Keywords: arbitrage, covered interest parity, financial crisis, FX swap market, Japan Premium, money market
    JEL: E4 E52 F3 G15
    Date: 2018–11–21
  5. By: Corbisiero, Giuseppe (Central Bank of Ireland)
    Abstract: This Letter analyses different monetary policy regimes from the New Keynesian perspective. In the presence of a lower bound on policy rates, adjusting the inflation target with past realisations of inflation strengthens monetary stimuli during recessions. However, amplified short-term fluctuations in inflation and output make such history-dependent regimes unappealing. Therefore, this Letter discusses a hybrid regime that incorporates their advantages without suffering from their drawbacks.
    Date: 2018–05
  6. By: Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik
    Abstract: How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but carry transition costs because their imposition reduces aggregate demand on impact. Under accommodative monetary policy, increasing capital requirements addresses financial stability risks without imposing large transition costs on the economy. In contrast, when the policy rate hits the lower bound, monetary policy loses the ability to dampen the effects of the capital requirement increase on the real economy. The long-run benefits of higher capital requirements are larger and the transition costs are smaller when the risk that causes bank failure is high.
    Keywords: Bank Fragility; Default Risk; effective lower bound; Financial Frictions; macroprudential policy; Transition Dynamics
    JEL: E3 E44 G01 G21
    Date: 2018–09
  7. By: Itai Agur
    Abstract: The notion of a tradeoff between output and financial stabilization is based on monetary-macroprudential models with unique equilibria. Using a game theory setup, this paper shows that multiple equilibria lead to qualitatively different results. Monetary and macroprudential authorities have tools that impose externalities on each other's objectives. One of the tools (macroprudential) is coarse, while the other (monetary policy) is unconstrained. We find that this asymmetry always leads to multiple equilibria, and show that under economically relevant conditions the authorities prefer different equilibria. Giving the unconstrained authority a weight on "helping" the constrained authority ("leaning against the wind") now has unexpected effects. The relation between this weight and the difficulty of coordinating is hump-shaped, and therefore a small degree of leaning worsens outcomes on both authorities' objectives.
    Date: 2018–11–02
  8. By: Faure, Salomon; Gersbach, Hans
    Abstract: We examine monetary architectures in which money is solely created by the public and lent by the central bank to the private sector. We compare them to today's fractional-reserve system in which money is created mainly by commercial banks. We use a simple general equilibrium setting and determine under which conditions these architectures yield the same welfare and stability outcomes and under which conditions they do not. We show, in particular, that the decentralized sovereign money system yields the same level of money creation and allocation of commodities as the fractional-reserve monetary system if the central bank solely pursues interest-rate policy.
    Keywords: 100% reserve banking; Capital regulation; Chicago Plan; full-reserve banking; monetary architecture; monetary policy; monetary system; money creation; price rigidities; reserve requirement
    JEL: D50 E4 E5 G21
    Date: 2018–09
  9. By: Heider, Florian; Saidi, Farzad; Schepens, Glenn
    Abstract: We show that negative policy rates affect the supply of bank credit in a novel way. Banks are reluctant to pass on negative rates to depositors, which increases the funding cost of high-deposit banks, and reduces their net worth, relative to low-deposit banks. As a consequence, the introduction of negative policy rates by the European Central Bank in mid-2014 leads to more risk taking and less lending by euro-area banks with greater reliance on deposit funding. Our results suggest that negative rates are less accommodative, and could pose a risk to financial stability, if lending is done by high-deposit banks.
    Keywords: bank balance-sheet channel; bank risk-taking channel; deposits; Negative Interest Rates; zero lower bound
    JEL: E44 E52 E58 G20 G21
    Date: 2018–09
  10. By: Jacob Punnoose; Amber Wadsworth (Reserve Bank of New Zealand)
    Abstract: The Reserve Bank of New Zealand (RBNZ) has had a single price-stability mandate for monetary policy since February 1990. This mandate is set to be extended due to the RBNZ (Monetary Policy) Amendment Bill that is currently before parliament and that seeks to add employment to the RBNZ’s mandate. The Federal Reserve System in the United States (Federal Reserve) also has a dual mandate for monetary policy. In this paper we compare the responses of monetary policy to inflation and economic activity in New Zealand and the United States. We estimate how monetary policy in New Zealand responded to inflation and economic activity using the data available to policy makers at each point in time from 2000 through 2017. We then compare these estimates to similar estimates for the United States and assess how monetary policy settings have evolved over time. We find that, on average, monetary policy in New Zealand and the United States has responded to changes in economic activity and inflation in similar ways. Our findings show that the RBNZ has stabilised measures of economic activity, i.e. the output gap and output growth, to a similar extent to that of the Federal Reserve. This is despite the RBNZ not operating under a dual mandate. A potential explanation for this result is that the flexibility of the RBNZ’s inflation targeting strategy over history has allowed it to stabilise economic activity while maintaining the broader emphasis on price stability.
    Date: 2018–11
  11. By: Chiu,Ching-Wai; Hayes, Simon; Kapetanios, George (King's College London); Theodoridis, Konstantinos (Cardiff Business School)
    Abstract: Forecasts play a critical role at inflation targeting central banks, such as the Bank of England. Breaks in the forecast performance of a model can potentially incur important policy costs. Commonly used statistical procedures, however, implicitly put a lot of weight on type I errors (or false positives), which result in a relatively low power of tests to identify forecast breakdowns in small samples. We develop a procedure which aims at capturing the policy cost of missing a break. We use data-based rules to find the test size that optimally trades of the costs associated with false positives with those that can result from a break going undetected for too long. In so doing, we also explicitly study forecast errors as a multivariate system. The covariance between forecast errors for different series, though often overlooked in the forecasting literature, not only enables us to consider testing in a multivariate setting but also increases the test power. As a result, we can tailor the choice of the critical values for each series not only to the in-sample properties of each series but also to how the series for forecast errors covary.
    Keywords: Forecast Breaks, Statistical Decision Making, Central Banking
    JEL: C53 E47 E58
    Date: 2018–11
  12. By: Gürkaynak, Refet S.; Kisacikoglu, Burçin; Wright, Jonathan H.
    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 heteroskedasticity-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: Bond Markets; event study; high-frequency data; identification
    JEL: E43 E52 E58 G12 G14
    Date: 2018–09
  13. By: Guillaume Rocheteau; Pierre-Olivier Weill; Tsz-Nga Wong
    Abstract: We develop a New Monetarist model with expenditure and unemployment risks that generates equilibria with non-degenerate distribution of money holdings. Distributional effects can overturn key insights of the model with degenerate distributions such that, e.g., the value of money depends on the income distribution, a one-time money injection raises aggregate real balances in the short run – price adjustments look sluggish; anticipated inflation can raise output and welfare; there can be a long-run trade-off between inflation and unemployment. Our model features an aggregate demand channel through which transfers to workers can raise employment and a new amplification mechanism of productivity shocks.
    JEL: E40 E50
    Date: 2018–11
  14. By: Régis Bokino; Moustapha Gano
    Abstract: The organization of the monetary decision-making in central banks has changed internationally and for the Central Bank of West African States (BCEAO). The decisions are now taken by the Monetary Policy Committee (MPC). The arguments on the expected benefits of this procedure are provided by the economic literature and are linked to the recent wave of central bank independence. If the MPC is independent, it has an obligation to be accountable. However, independence and accountability are not identical in term of the MPC. This article examines the MPC of BCEAO established in 2010, which is independent in accordance with the recommendations of the credibility strategy of the new classical economics and collective accountability.
    Keywords: CPM, central bank independence, accountability, BCEAO monetary policy
    JEL: D71 E58 O55
    Date: 2018
  15. By: Toni Ahnert; Kristin Forbes; Christian Friedrich; Dennis Reinhardt
    Abstract: Can macroprudential foreign exchange (FX) regulations on banks reduce the financial and macroeconomic vulnerabilities created by borrowing in foreign currency? To evaluate the effectiveness and unintended consequences of macroprudential FX regulations, we develop a parsimonious model of bank and market lending in domestic and foreign currency and derive four predictions. We confirm these predictions using a rich data set of macroprudential FX regulations. These empirical tests show that FX regulations (1) are effective in terms of reducing borrowing in foreign currency by banks; (2) have the unintended consequence of simultaneously causing firms to increase FX debt issuance; (3) reduce the sensitivity of banks to exchange rate movements; but (4) are less effective at reducing the sensitivity of corporates and the broader financial market to exchange rate movements. As a result, FX regulations on banks appear to be successful in mitigating the vulnerability of banks to exchange rate movements and the global financial cycle, but partially shift the snowbank of FX vulnerability to other sectors.
    Keywords: Financial system regulation and policies, Exchange rates, Financial institutions, International financial markets
    JEL: F32 F34 G15 G21 G28
    Date: 2018
  16. By: Langfield, Sam; Liu, Zijun; Ota, Tomohiro; Ferrara, Gerardo
    Abstract: We study systemic illiquidity using a unique dataset on banks’ daily cash flows, short-term interbank funding and liquid asset buffers. Failure to roll-over short-term funding or repay obligations when they fall due generates an externality in the form of systemic illiquidity. We simulate a model in which systemic illiquidity propagates in the interbank funding network over multiple days. In this setting, systemic illiquidity is minimised by a macroprudential policy that skews the distribution of liquid assets towards banks that are important in the network. JEL Classification: D85, E44, E58, G28
    Keywords: liquidity regulation, macroprudential policy, systemic risk
    Date: 2018–11
  17. By: Daiki Maeda (Graduate School of Economics, Osaka University)
    Abstract: In this paper, we analyze monetary and fiscal policies in a dynamic general equilibrium model in which households have a preference of quasi-geometric discounting and face a cash- in-advance constraint. From this policy analysis, we obtain the following two outcomes. First, when the government can control only the money supply, the Friedman rule is optimal. Second, when the government can also control income tax rates, the Friedman rule may not be optimal.
    Keywords: Quasi-geometric discounting; Friedman rule
    JEL: E21 E40
    Date: 2018–11
  18. By: Lunsford, Kurt Graden (Federal Reserve Bank of Cleveland)
    Abstract: This paper studies the effects of Federal Open Market Committee (FOMC) forward guidance language. I estimate two policy surprises at FOMC meetings: a change in the current federal funds rate and an orthogonal change in the expected path of the federal funds rate. From February 2000 to June 2003, the FOMC only gave forward guidance about risks to the economic outlook, and a surprise increase in the expected federal funds rate path had expansionary effects. This is consistent with models of central bank information effects, where a positive economic outlook causes private agents to revise up their expectations for the economy. From August 2003 to May 2006, the FOMC also gave forward guidance about policy inclinations, and a surprise increase in the federal funds rate path had contractionary effects. These results are consistent with standard macroeconomic models of forward guidance. Overall, the effects of forward guidance depend on the FOMC’s choice to use one or both of the economic-outlook and policy-inclination aspects of forward guidance.
    Keywords: Central Bank Communication; Event Study; Federal Funds Futures; Information Effects; Monetary Policy;
    JEL: E43 E44 E52 E58 G14
    Date: 2018–11–07
  19. By: Manuela Mischitelli (La Sapienza); Giovanni Di Bartolomeo (La Sapienza)
    Abstract: How does the availability of fiscal and unconventional monetary measures modify the composition of the optimal policy mix, in a monetary union, when ZLB is binding? In order to answer to this question, we have built a simply three-period generalized New Keynesian model, in which we have assumed that non-money assets are not perfect substitutes. Following Friedman (2013), private agents' choice is responsive to a sort of long run interest rate.We have proved that in a monetary union, greater is the number of member countries adopting autonomous fiscal policy, greater will be public spending and more moderate will be the use of unconventional policies measures by central bank. Anyway, deviations in output and inflation decrease with the enlargement of the monetary union.
    Keywords: Unconventional Monetary policies, ZLB, Fiscal policy, Quantitative Easing, Forward Guidance, Policy game
    JEL: C70 E52 E60
    Date: 2018–10
  20. By: Koeniger, Winfried; Ramelet, Marc-Antoine
    Abstract: We present empirical evidence on the heterogeneity in monetary policy transmission across countries with different home ownership rates. We use household-level data together with shocks to the policy rate identified from high-frequency data. We find that housing tenure reacts more strongly to unexpected changes in the policy rate in Germany and Switzerland –the OECD countries with the lowest home ownership rates– compared with existing evidence for the U.S. An unexpected decrease in the policy rate by 25 basis points increases the home ownership rate by 0.8 percentage points in Germany and by 0.6 percentage points in Switzerland. The response of non-housing consumption in Switzerland is less heterogeneous across renters and mortgagors, and has a different pattern across age groups than in the U.S. We discuss economic explanations for these findings and implications for monetary policy.
    Keywords: Monetary policy transmission, Home ownership, Housing tenure, Consumption
    JEL: E21 E52 R21
    Date: 2018–11
  21. By: Paolo Cavallino; Damiano Sandri
    Abstract: We provide a theory of the limits to monetary policy independence in open economies arising from the interaction between capital flows and domestic collateral constraints. The key feature of our theory is the existence of an “Expansionary Lower Bound” (ELB), defined as an interest rate threshold below which monetary easing becomes contractionary. The ELB can be positive, thus acting as a more stringent constraint than the Zero Lower Bound. Furthermore, the ELB is affected by global monetary and financial conditions, leading to novel international spillovers and crucial departures from Mundell’s trilemma. We present two models under which the ELB may arise, the first featuring carry-trade capital flows and the second highlighting the role of currency mismatches.
    Date: 2018–11–02

This nep-cba issue is ©2018 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.