nep-cba New Economics Papers
on Central Banking
Issue of 2019‒01‒07
29 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Forward Guidance: Is It Useful After the Crisis? By Maliar, Lilia; Taylor, John B.
  2. The Reversal Interest Rate By Markus K. Brunnermeier; Yann Koby
  3. Gains from wage flexibility and the zero lower bound By Roberto M. Billi; Jordi Galí
  4. Can the US Interbank Market be Revived? By Kyungmin Kim; Antoine Martin; Ed Nosal
  5. Lending Relationships and Optimal Monetary Policy By Guillaume Rocheteau; Tsz-Nga Wong; Cathy Zhang
  6. The first twenty years of the European Central Bank: Monetary Policy By Hartmann, Philipp; Smets, Frank
  7. Limited Commitment, Endogenous Credibility and the Challenges of Price-level Targeting By Gino Cateau; Malik Shukayev
  8. Inflation Targeting and the Taylor Principle: evidence from Colombia By Martha Misas, Edgar Villa, Andres F. Giraldo; Edgar Villa; Andres F. Giraldo
  9. What drives sovereign debt portfolios of banks in a crisis context? By Matías Lamas; Javier Mencía
  10. A model of endogenous financial inclusion: implications for inequality and monetary policy By Mohammed Ait Lahcen; Pedro Gomis-Porqueras
  11. The Immediate Impact and Persistent Effect of FX Purchases on the Exchange Rate By Itamar Caspi; Amit Friedman; Sigal Ribon
  12. Monetary Independence and Rollover Crises By Javier Bianchi; Jorge Mondragon
  13. Mortgages, cash-flow shocks and local employment By Cumming, Fergus
  14. Employment and the Collateral Channel of Monetary Policy By Saleem Bahaj; Angus Foulis; Gabor Pinter; Paolo Surico
  15. The Imbalances of the Bretton Woods System 1965 to 1973: U.S. Inflation, The Elephant in the Room By Michael D. Bordo
  16. Monetary and Fiscal History of Peru 1960-2010: Radical Policy Experiments, Inflation and Stabilization By Martinelli, César; Vega, Marco
  17. The Monetary and Fiscal History of Brazil, 1960-2016 By Ayres, Joao Luiz; Garcia, Marcio; Guillen, Diogo; Kehoe, Patrick J.
  18. Dominant Currency Debt By Eren, Egemen; Malamud, Semyon
  19. Spillovers from Euro Area Monetary Policy: A Focus on Emerging Europe By Sona Benecka; Ludmila Fadejeva; Martin Feldkircher
  20. The Transmission of Monetary Policy Shocks By Miranda-Agrippino, Silvia; Ricco, Giovanni
  21. Brazil; Financial Sector Assessment Program-Detailed Assessment of Observance – Basel Core Principles for Effective Banking Supervision By International Monetary Fund
  22. The Impact of Post Stress Tests Capital on Bank Lending By William F. Bassett; Jose M. Berrospide
  23. The Optimal Inflation Rate with Discount Factor Heterogeneity By Antoine Lepetit
  24. How expectations became governable: institutional change and the performative power of central banks By Wansleben, Leon
  25. Managing Expectations without Rational Expectations By George-Marios Angeletos; Karthik A. Sastry
  26. Macroeconomic Effects of Inflation Target Uncertainty Shocks By Marcelo Arbex; Sidney Caetano; Wilson Correa
  27. Continuous Time Versus Discrete Time in the New Keynesian Model: Closed-Form Solutions and Implications for Liquidity Trap By Maliar, Lilia
  28. Monetary policy and the redistribution of net worth in the US By Albert, Juan-Francisco; Gómez-Fernández, Nerea
  29. Interest rates, capital and bank risk-taking By Acosta-Smith, Jonathan

  1. By: Maliar, Lilia; Taylor, John B.
    Abstract: During recent economic crisis, when nominal interest rates were at their effective lower bounds, central banks used forward guidance -- announcements about future policy rates -- to conduct their monetary policy. Many policymakers believe that forward guidance will remain in use after the end of the crisis, however, there is uncertainty about its effectiveness. In this paper, we study the impact of forward guidance in a stylized new Keynesian economy away from the effective lower bound on nominal interest rates. Using closed-form solutions, we show that the impact of forward guidance on the economy depends critically on a specific monetary policy rule, ranging from non-existing to immediate and unrealistically large, the so-called forward guidance puzzle. We show that the puzzle occurs under very special -- empirically implausible and socially suboptimal -- monetary policy rules, whereas empirically relevant Taylor rules lead to sensible implications.
    Keywords: forward guidance; New Keynesian Model
    JEL: C61 C63 C68 E31 E52
    Date: 2018–12
  2. By: Markus K. Brunnermeier; Yann Koby
    Abstract: The “reversal interest rate” is the rate at which accommodative monetary policy reverses its intended effect and becomes contractionary for lending. It occurs when banks' asset revaluation from duration mismatch is more than offset by decreases in net interest income on new business, lowering banks' net worth and tightening their capital constraints. The determinants of the reversal interest rate are 1) banks' fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of pass-through to deposit rates, and 4) the initial capitalization of banks. Furthermore, quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions and show that the economics behind the reversal interest rate carry through general equilibrium.
    JEL: E43 E44 E52 G21
    Date: 2018–12
  3. By: Roberto M. Billi; Jordi Galí
    Abstract: We analyze the welfare impact of greater wage áexibility while taking into account explicitly the existence of the zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally ampliÖes the adverse e§ects of greater wage áexibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the presence of the ZLB implies that an increase in wage áexibility reduces welfare even under the optimal monetary policy with commitment.
    Keywords: labor market, flexibility, nominal rigidities, optimal monetary policy with commitment, Taylor rule, ZLB
    JEL: E24 E32 E52
    Date: 2018–12
  4. By: Kyungmin Kim; Antoine Martin; Ed Nosal
    Abstract: Large-scale asset purchases by the Federal Reserve as well as new Basel III banking regulations have led to important changes in U.S. money markets. Most notably the interbank market has essentially disappeared with the dramatic increase in excess reserves held by banks. We build a model in the tradition of Poole (1968) to study whether interbank market activity can be revived if the supply of excess reserves is decreased sufficiently. We show that it may not be possible to revive the market to pre-crisis volumes due to costs associated with recent banking regulations. Although the volume of interbank trading may initially increase as excess reserves continue to decline, the new regulations may engender changes in market structure that result in interbank trading being completely replaced by non-bank lending to banks when excess reserves become scarce. This non-monotonic response of interbank trading volume to reductions in excess reserves may lead to misleading forecasts about future fed funds prices and quantities when/if the Fed begins to normalize their balance sheet by reducing excess reserves.
    Keywords: Balance sheet costs ; Interbank market ; Monetary policy implementation
    JEL: E42 E58
    Date: 2018–12–21
  5. By: Guillaume Rocheteau; Tsz-Nga Wong; Cathy Zhang
    Abstract: We study optimal monetary policy in a monetary model of internal and external finance with bank entry and endogenous formation of lending relationships through search and bargaining. Following an unanticipated destruction of relationships, optimal monetary policy under com- mitment lowers the interest rate in the aftermath of the shock and uses forward guidance to promote bank entry and rebuild relationships. Absent commitment, forward guidance fails to anchor inflation expectations and optimal policy is subject to a deflationary bias that delays recovery. If there is a temporary freeze in relationship creation, the interest rate is set at the zero lower bound for some period of time.
    Keywords: credit relationships, banks, optimal monetary policy
    JEL: D83 E32 E51
    Date: 2018–12
  6. By: Hartmann, Philipp; Smets, Frank
    Abstract: On 1 May 2018 the ECB celebrated its 20th anniversary. This paper provides a comprehensive view of the ECB’s monetary policy over these two decades. The first section provides a chronological account of the macroeconomic and monetary policy developments in the euro area since the adoption of the euro in 1999, going through four cyclical phases “conditioning” ECB monetary policy. We describe the monetary policy decisions from the ECB’s perspective and against the background of its evolving monetary policy strategy and framework. We also highlight a number of the key critical issues that were the subject of debate. The second section contains a partial assessment. We first analyze the achievement of the price stability mandate and developments in the ECB’s credibility. Next, we investigate the ECB’s interest rate decisions through the lens of a simple empirical interest rate reaction function. This is appropriate until the ECB hits the zero-lower bound in 2013. Finally, we present the ECB’s framework for thinking about non-standard monetary policy measures and review the evidence on their effectiveness. One of the main themes of the paper is how ECB monetary policy responded to the challenges posed by the European twin crises and the subsequent slow economic recovery, making use of its relatively wide range of instruments, defining new ones where necessary and developing the strategic underpinnings of its policy framework. JEL Classification: E52, E31, E32, E42, N14, G01
    Keywords: crisis, euro area economy, European Central Bank, European Economic and Monetary Union, inflation, monetary policy, non-standard measures, zero-lower bound
    Date: 2018–12
  7. By: Gino Cateau; Malik Shukayev
    Abstract: This paper studies the cost of limited commitment when a central bank has the discretion to adjust policy whenever the costs of honoring its past commitments become high. Specifically, we consider a central bank that seeks to implement optimal policy in a New Keynesian model by committing to a price-level target path. However, the central bank retains the flexibility to reset the target path if the cost of adhering to it exceeds a social tolerance threshold. We find that endowing the central bank with such discretion undermines the credibility of the price-level target and weakens its effectiveness to stabilize the economy through expectations. The endogenous nature of credibility also brings novel results relative to models with exogenous timing of target resets. A much higher degree of credibility is needed to realize the stabilization benefits of commitment. Multiple equilibria also emerge, including a low credibility equilibrium with frequent target resets and high volatility.
    Keywords: Credibility, Inflation targets, Monetary policy framework
    JEL: E31 E52
    Date: 2018
  8. By: Martha Misas, Edgar Villa, Andres F. Giraldo; Edgar Villa; Andres F. Giraldo
    Abstract: We develop a theoretical model that generates an optimal Taylor rule in which structural parameters can change in a two monetary policy regime under ináation targeting. The theoretical model gives rise to an empirical structural STAR model. SpeciÖcation tests suggest a LSTAR speciÖcation of the transition function with the output gap lagged four periods as the transition variable. We Önd estimate this LSTAR model in reduced form that is used to recover structural deep parameters, like the weights in Banco de la Rep ?blicaís loss function for the two monetary regimes during the period of ináation targeting from IV.2000 to IV.2017. We Önd evidence that the nonlinear LSTAR Taylor rule outperforms in terms of within sample predictions the linear optimal Taylor rule which supports the conclusion that under ináation targeting the behavior of Banco de la Rep ?blica (Banrep) is described better with a two monetary regime policy than with a single monetary regime. We also Önd evidence that suggests that the monetary policy has been consistent with the so called Taylor principle in both regimes where in one of these Banrep has reacted aggresively to ináationary pressures while in the other regime it has reacted strongly, but not aggresively, to recessionary pressures. The asymmetric behavior of the monetary policy can be rationalized through asymmetric neo Keynesian price stickiness.
    Keywords: Monetary policy Taylor rules, Ináation Targeting, Taylor Principle, Nonlinear STAR models
    JEL: C22 E42 E43 E52 E58 E61
    Date: 2018–12–13
  9. By: Matías Lamas (Banco de España); Javier Mencía (Banco de España)
    Abstract: We study determinants of sovereign portfolios of Spanish banks over a long time-span, starting in 2008. Our findings challenge the view that banks engaged in moral hazard strategies to exploit the regulatory treatment of sovereign exposures. In particular, we show that being a weakly capitalized bank is not related to higher holdings of domestic sovereign debt. While a strong link is present between central bank liquidity support and sovereign holdings, opportunistic strategies or reach-for-yield behavior appear to be limited to the non-domestic sovereign portfolio of well-capitalized banks, which might have taken advantage of their higher risk-bearing capacity to gain exposure (via central bank liquidity) to the set of riskier sovereign bonds. Furthermore, we document that financial fragmentation in EMU markets has played a key role in reshaping sovereign portfolios of banks. Overall, our results have important implications for the ongoing discussion on the optimal design of the risk-weighted capital framework of banks.
    Keywords: banks’ sovereign holdings, sovereign crisis, moral hazard, central bank liquidity, EMU financial fragmentation
    JEL: G01 G21 H63
    Date: 2018–12
  10. By: Mohammed Ait Lahcen; Pedro Gomis-Porqueras
    Abstract: We propose a monetary dynamic general equilibrium model with endogenous credit market participation to study the impact of financial inclusion on welfare and inequality. We find that significant consumption inequality can result from limited access to basic financial services. In this environment, monetary policy has distributional consequences as agents face different liquidity constraints. This heterogeneity generates a pecuniary externality which can result in overconsumption of financially included agents above the socially efficient level. We conduct a quantitative assessment for the case of India. Our simple model is able to account for approximately a third of the observed consumption inequality. We analyze various policies aimed at increasing financial inclusion. As a result of pecuniary externalities, interest rate policies can result in a decrease in welfare and an increase in consumption inequality. Moreover, we find that a direct benefit transfer to bank account owners is superior to interest rate policies as it can increase welfare and reduce consumption inequality despite a decrease in individual consumption.
    Keywords: Money, credit, banking, financial inclusion, inequality
    JEL: E40 E50
    Date: 2018–12
  11. By: Itamar Caspi (Bank of Israel); Amit Friedman (Bank of Israel); Sigal Ribon (Bank of Israel)
    Abstract: In recent years, Forex (FX) interventions have been routinely used by the Bank of Israel as well as by other central banks as an additional monetary instrument, with the objective of moderating appreciation trends of the domestic currency. This paper analyzes the immediate effect of the Bank of Israel’s FX interventions on the exchange rate and the persistence of this effect over time. To identify this effect, we first measure the intraday impact of FX intervention using a novel high-frequency, minute-by-minute dataset of interventions between 2009 and 2017. Next, we use our intraday measure to estimate the persistence of FX intervention shocks over longer horizons (in trading days), where we base our empirical approach on the potential outcome framework and the Local Projections method. We find that FX intervention shocks – that is, unexpected FX purchases – cause, on impact USDILS exchange rate depreciation in over 90 percent of the cases. We also find that this effect has a persistent impact on the nominal effective exchange rate for about 40­–60 trading days, which are equivalent to between 2 and 3 calendar months. Based on this finding we infer that between 2013 and 2017 interventions caused the level of the exchange rate to depreciate by about 2–3 percent on average, where the effect of each intervention varied with its intensity. We stress that these results reflect the contribution of unexpected FX purchases given the fact that the discretionary intervention regime was in place throughout the investigated period, and not the effect of the presence of the regime itself.​
    Keywords: Sterilized FX interventions, high frequency data, impulse response, local projections, potential outcome, Bank of Israel
    JEL: C22 E58 F31
    Date: 2018–06
  12. By: Javier Bianchi; Jorge Mondragon
    Abstract: This paper shows that the inability to use monetary policy for macroeconomic stabilization leaves a government more vulnerable to a rollover crisis. We study a sovereign default model with self-fulfilling rollover crises, foreign currency debt, and nominal rigidities. When the government lacks monetary autonomy, lenders anticipate that the government will face a severe recession in the event of a liquidity crisis, and are therefore more prone to run on government bonds. By contrast, a government with monetary autonomy can stabilize the economy and can easily remain immune to a rollover crisis. In a quantitative application, we find that the lack of monetary autonomy played a central role in making the Eurozone vulnerable to a rollover crisis. A lender of last resort can help ease the costs from giving up monetary independence.
    JEL: E4 E5 F34 G15
    Date: 2018–12
  13. By: Cumming, Fergus (Bank of England)
    Abstract: This paper quantifies the local impact of monetary policy through the cash-flow channel during the Crisis by combining novel micro datasets with near-universal coverage of UK mortgages and employment. I estimate that a reduction in mortgage payments equivalent to 1% of household income led to around a 5 percentage point increase in employment growth in non-tradable businesses the following year. But the spatial distribution of mortgage and labour market structures resulted in significant heterogeneity of this effect across the country. Taken at face value, the estimates suggest that the overall effect of accommodative monetary policy on total employment growth in 2010 varied by around 1.5 percentage points across regions.
    Keywords: Mortgages; interest rates; monetary policy; employment
    JEL: E21 E52 G21
    Date: 2018–12–21
  14. By: Saleem Bahaj (Centre for Macroeconomics (CFM); Bank of England); Angus Foulis (Centre for Macroeconomics (CFM); Bank of England); Gabor Pinter (Centre for Macroeconomics (CFM); Bank of England); Paolo Surico (Centre for Macroeconomics (CFM); London Business School)
    Abstract: This paper uses a detailed firm-level dataset to show that monetary policy propagates via asset prices through corporate debt collateralised on real estate. Our research design exploits the fact that many small and medium sized firms use the homes of the firm’s directors as a key source of collateral, and directors’ homes are typically not in the same region as their firm. This spatial separation of firms and firms’ collateral allows us to separate the propagation of monetary policy via fluctuations in collateral values from that via demand channels. We find that younger and more levered firms who have collateral values that are particularly sensitive to monetary policy show the largest employment response to monetary policy. The collateral channel explains a sizeable share of the aggregate employment response.
    Date: 2018–12
  15. By: Michael D. Bordo
    Abstract: This paper argues that the key deep underlying fundamental for the growing international imbalances leading to the collapse of the Bretton Woods system between 1971 and 1973 was rising U.S. inflation since 1965. It was driven in turn by expansionary fiscal and monetary policies—the elephant in the room. What was kept in the background at the Camp David meeting on August 15 1971 when President Richard Nixon closed the U.S. gold window, as well as imposing a ten per cent surcharge on all imports and a ninety day wage price freeze—was that U.S. inflation, driven by macro policies, was the main problem facing the Bretton Woods System, and that for political and doctrinal reasons was not directly addressed. Instead President Nixon blamed the rest of the world rather than focusing on issues with U.S. monetary and fiscal policies. In addition, at the urging of Federal Reserve Chairman Arthur F. Burns, Nixon adopted wage and price controls to mask the inflation, hence punting the problem into the future. This paper revisits the story of the collapse of the Bretton Woods system and the origins of the Great Inflation. Based on historical narratives and conversations with the Honorable George P. Shultz, a crucial player in the events of the period 1969 to 1973, I argue the case that the pursuit of tighter monetary and fiscal policies could have avoided much of the turmoil in the waning years of Bretton Woods. Moreover, I point out some of the similarities between the imbalances of the 1960s and 1970s—especially fiscal and the use of tariff protection as a strategic tool, as well as some differences—relatively stable monetary policy and floating exchange rates.
    JEL: E31 E42 E62 F33 F41 N10
    Date: 2018–12
  16. By: Martinelli, César (George Mason University); Vega, Marco (Banco Central de Reserva del Perú)
    Abstract: We show Peru's experience of chronic inflation through the 1970s and 1980s resulted from inflationary taxation in a regime of fiscal dominance of monetary policy. Hyperinflation occurred when further debt accumulation became unavailable, and a populist administration engaged in a counterproductive policy of price controls and loose credit. We interpret the fiscal difficulties preceding the stabilization as a process of social learning to live within the realities of fiscal budget balance. The credibility of policy regime change in the 1990s may be linked ultimately to the change in public opinion giving proper incentives to politicians, after the traumatic consequences of the hyper stagflation of 1987-1990.
    Date: 2018–11
  17. By: Ayres, Joao Luiz (Inter-American Development Bank); Garcia, Marcio (Pontifical Catholic University of Rio de Janeiro,); Guillen, Diogo (Itau-Unibanco Asset Management); Kehoe, Patrick J. (Federal Reserve Bank of Minneapolis)
    Abstract: Brazil has had a long period of high inflation. It peaked around 100 percent per year in 1964, decreased until the first oil shock (1973), but accelerated again afterward, reaching levels above 100 percent on average between 1980 and 1994. This last period coincided with severe balance of payments problems and economic stagnation that followed the external debt crisis in the early 1980s. We show that the high-inflation period (1960-1994) was characterized by a combination of fiscal deficits, passive monetary policy, and constraints on debt financing. The transition to the low-inflation period (1995-2016) was characterized by improvements in all of these features, but it did not lead to significant improvements in economic growth. In addition, we document a strong positive correlation between inflation rates and seigniorage revenues, although inflation rates are relatively high for modest levels of seigniorage revenues. Finally, we discuss the role of the weak institutional framework surrounding the fiscal and monetary authorities and the role of monetary passiveness and inflation indexation in accounting for the unique features of inflation dynamics in Brazil.
    Keywords: Brazils hyperinflation; Brazils stagnation; Stabilization plans; Fiscal deficit; Debt accounting
    JEL: E42 E63 H62 H63
    Date: 2018–12–20
  18. By: Eren, Egemen; Malamud, Semyon
    Abstract: Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.
    Keywords: dollar debt; dominant currency; Exchange Rates; inflation
    JEL: E44 E52 F33 F34 F41 F42 F44 G01 G15 G32
    Date: 2018–12
  19. By: Sona Benecka (Ceska Narodni Banka); Ludmila Fadejeva (Bank of Latvia); Martin Feldkircher (Oesterreichische Nationalbank)
    Abstract: This paper investigates the international effects of a euro area monetary policy shock, focusing on countries from Central, Eastern, and Southeastern Europe (CESEE). To that end, we use a global vector autoregressive (GVAR) model and employ shadow rates as a proxy for the monetary policy stance during normal and zero-lower-bound periods. We propose a new way of modelling euro area countries in a multi-country framework, accounting for joint monetary policy, and a novel approach to simultaneously identifying shocks. Our results show that in most euro area and CESEE countries prices adjust and output falls in response to a euro area monetary tightening, but with a substantial degree of heterogeneity.
    Keywords: euro area monetary policy, global vector autoregression, spillovers
    JEL: C32 F44 E32 O54
    Date: 2018–10–18
  20. By: Miranda-Agrippino, Silvia; Ricco, Giovanni
    Abstract: Commonly used instruments for the identification of monetary policy disturbances are likely to combine the true policy shock with information about the state of the economy due to the information disclosed through the policy action. We show that this signalling effect of monetary policy can give rise to the empirical puzzles reported in the literature, and propose a new high-frequency instrument for monetary policy shocks that accounts for informational rigidities. We find that a monetary tightening is unequivocally contractionary, with deterioration of domestic demand, labour and credit market conditions, as well as of asset prices and agents' expectations.
    Keywords: Expectations; External Instruments; Information Rigidity; local projections; monetary policy; Survey Forecasts; VARs
    JEL: C11 C14 E52 G14
    Date: 2018–12
  21. By: International Monetary Fund
    Abstract: The Central Bank of Brazil (BCB) has shown a determined commitment to enhancing its standards and practices of banking supervision. Changes in the thinking and practices of the BCB’s supervision are not limited to responses to the demands of the international regulatory reform agenda. Overall, the BCB has been guided by the principle of integration, both in terms of the expectations that it places on its own internal operations but on the standards it expects the financial institutions to meet in governing their own risks and activities. One example is the BCB’s innovative and challenging work in the field of contagion analysis at the systemic level which is a perspective it also seeks to embed in its analysis of contagion risk in its prudential work at firm level. Boosting staff levels in conduct supervision, introducing a form of twin peaks, contagion risk analysis, and the prudential conglomerate approach also exemplify welcome developments.
    Date: 2018–11–30
  22. By: William F. Bassett; Jose M. Berrospide
    Abstract: We investigate one channel through which the annual bank stress tests, as part of the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) review, could unexpectedly affect the provision of bank credit. To quantify the impact of the stress tests on lending, we compare the capital implied by the supervisory stress tests with the level of capital implied by the banks’ own models, a measure we call the capital gap. We then study the impact of the capital gap on the loan growth of BHCs subject to supervisory or bank-run stress tests. Consistent with previous results in the bank capital literature, we find evidence that better capitalized banks have higher loan growth. The additional capital implied by the supervisory stress tests (capital gap) does not appear to unduly restrict loan growth.
    Keywords: Bank capital ; Bank lending ; Regulatory capital ; Stress tests
    JEL: G28 G21
    Date: 2018–12–21
  23. By: Antoine Lepetit
    Abstract: This paper shows that deviations from long-run price stability are optimal in the presence of price stickiness whenever profit and utility flows are discounted at a different rate. In that case, a monetary authority acting under commitment will choose a path for the inflation rate that ends with a non-zero value. Such a property is relevant in a wide range of macroeconomic environments. I first illustrate this by studying optimal monetary policy in a New Keynesian model with a perpetual youth structure. In this setting, profit flows are discounted more heavily than utility flows and the optimal inflation target is equal to 3.2 percent in a baseline calibration of the model. I also show that this property leads to a positive long-run inflation rate in models with firm entry and exit and in environments with search and matching frictions in the labor market and another form of nominal rigidity, wage stickiness.
    Keywords: Discount factor heterogeneity ; Inflation target ; Optimal inflation rate ; Optimal monetary policy ; Perpetual youth ; Sticky prices
    JEL: E31 E32 E52
    Date: 2018–12
  24. By: Wansleben, Leon
    Abstract: Central banks have accumulated unparalleled power over the conduct of macroeconomic policy. Key for this development was the articulation and differentiation of monetary policy as a distinct policy domain. While political economists emphasize the foundational institutional changes that enabled this development, recent performativity-studies focus on central bankers’ invention of expectation management techniques. In line with a few other works, this article aims to bring these two aspects together. The key argument is that, over the last few decades, central banks have identified different strategies to assume authority over “expectational politics” and reinforced dominant institutional forces within them. I introduce a comparative scheme to distinguish two different expectational governance regimes. My own empirical investigation focuses on a monetarist regime that emerged from corporatist contexts, where central banks enjoyed “embedded autonomy” and where commercial banks maintained conservative reserve management routines. I further argue that innovations towards inflation targeting took place in countries with non-existent or disintegrating corporatist structures and where central banks turned to finance to establish a different version of expectation coordination. A widespread adoption of this “financialized” expectational governance has been made possible by broader processes of institutional convergence that were supported by central bankers themselves.
    Keywords: expectations; financialization; monetarism; monetary policy; neoliberal institutional change; performativity
    JEL: E5 E58
    Date: 2018–11–21
  25. By: George-Marios Angeletos; Karthik A. Sastry
    Abstract: Should a policymaker offer forward guidance by committing to a path for the policy instrument or a target for an equilibrium outcome? We study how the optimal approach depends on plausible bounds on agents’ depth of knowledge and rationality. Agents make mistakes in predicting, or reasoning about, the behavior of others and the GE effects of policy. The optimal policy minimizes the bite of such mistakes on implementability and welfare. This goal is achieved by fixing and communicating an outcome target if and only if the GE feedback is strong enough. Our results suggest that central banks should stop talking about interest rates and start talking about unemployment when faced with a steep Keynesian cross or a prolonged liquidity trap.
    JEL: D82 D84 E52 E58
    Date: 2018–12
  26. By: Marcelo Arbex (Department of Economics, University of Windsor); Sidney Caetano (Department of Economics, Federal University of Juiz de Fora); Wilson Correa (Department of Economics, Federal University of Minas Gerais)
    Abstract: This note studies the macroeconomic effects of uncertainty shocks on the inflation target (IT). The IT is assumed to change over time and its stochastic volatility is modeled as an autoregressive process. We show that an IT uncertainty shock, namely a shock on its volatility) resembles an aggregate demand shock, a robust qualitative result for different Taylor-type rules. The magnitude of real and nominal variables responses depend crucially on the Taylor rule considered: a more reactive rule implies a less severe recession and deflation, while an empirical plausible degree of interest rate smoothing leads output, unemployment, and inflation to react more strongly causing the recession to be more severe and deflationary.
    Keywords: Uncertainty shocks, Infl ation target, Monetary policy.
    JEL: E31 E32 E52 E58
    Date: 2018–12
  27. By: Maliar, Lilia
    Abstract: Economists often use interchangeably the discrete- and continuous-time versions of the Keynesian model. In the paper, I ask whether or not the two versions effectively lead to the same implications. I analyze several alternative monetary policies, including a Taylor rule, discretionary interest rate choice and forward guidance. I show that the answer depends on a specific scenario and parameterization considered. In particular, in the presence of liquidity trap, the discrete-time analysis helps overcome some negative implications of the continuous-time model, such as excessively strong impact of price stickiness on inflation and output, unrealistically large government multipliers, as well as implausibly large effects of forward guidance.
    Keywords: closed-form solution; continuous time; forward guidance; New Keynesian Model; ZLB. liquidity trap
    JEL: C61 C63 C68 E31 E52
    Date: 2018–12
  28. By: Albert, Juan-Francisco; Gómez-Fernández, Nerea
    Abstract: The view that expansionary monetary policy can exacerbate both income and wealth inequality by increasing asset prices has become increasingly popular. The aim of this paper is to study the distributive effects of monetary policy on wealth inequality. In the first part of this research, we develop a simple framework based on accounting identity to examine the redistributive repercussions of changes in monetary policy on net worth through different channels. Based on this framework, in the second part of the paper, we show empirical evidence concerning the effects of monetary policy on wealth inequality in the US. To derive this, we combined macro and micro data, and proceeded in two steps. Firstly, we estimated a Proxy structural vector autoregression (SVAR) model, combining high-frequency identification used as external instruments with a classic SVAR, to measure the response of the real and financial variables that could affect wealth inequality after an expansive monetary policy shock. Considering this information, we then used the microdata of the Survey of Consumer Finance (US, 2016) and simulated changes to the value of a household's assets and liabilities, as well as the inflation rate, produced by an expansive monetary policy. We considered three different time horizons and the whole of the distribution, measured by the Gini coefficients, and the simulation results suggest that wealth inequality increases after an expansive monetary policy shock. Additionally, focusing on the net worth by deciles, we found a relevant result. The expansive monetary policy shock substantially increases the net worth of the richest and the poorest households, while the middle class tends to benefit the least. Monetary policy on stock prices is the most important driver of the significant increases in net wealth among the richest households, while its effect on debt is most significant among the poorest.
    JEL: E52 E58
    Date: 2018–12–15
  29. By: Acosta-Smith, Jonathan (Bank of England)
    Abstract: Are low interest rates more likely to incentivise greater bank risk-taking? This is the question we seek to answer. Using a model in which banks raise funds from depositors to create an investment portfolio which can differ in its risk and return, we suggest so. In particular, we show that lowering the interest rate makes it more likely banks will make risky investments. This is because reducing the interest rate makes safer assets less attractive, while increasing the relative gains from gambling. We show that risk-taking is highly dependent on banks’ skin-in-the-game, as banks always ignore the full extent of losses on bankruptcy. Raising the interest rate has a similar effect. It reinforces this behaviour, as by increasing the yield on the portfolio, banks have more to lose on bankruptcy.
    Keywords: Banking; monetary policy; risk-taking; interest rates
    JEL: E44 E58 G21
    Date: 2018–12–21

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