nep-cba New Economics Papers
on Central Banking
Issue of 2019‒02‒04
23 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area By Chi Hyun Kim; Lars Other
  2. Leaning against the wind: macroprudential policy and the financial cycle By Kockerols, Thore; Kok, Christoffer
  3. The Leverage Ratio and Its Impact on Capital Regulation By Lukas Pfeifer; Martin Hodula; Libor Holub; Zdenek Pikhart
  4. Monetary policy with transitory vs. permanently low growth By Christophe Blot; Paul Hubert
  5. Risk endogeneity at the lender/investor-of-last-resort By Caballero, Diego; Lucas, André; Schwaab, Bernd; Zhang, Xin
  6. CoMap: mapping contagion in the euro area banking sector By Covi, Giovanni; Gorpe, Mehmet Ziya; Kok, Christoffer
  7. The transmission of unconventional monetary policy to bank credit supply: evidence from the TLTRO By António Afonso; Joana Sousa-Leite
  8. Macro and Micro Prudential Policies: Sweet and Lowdown in a Credit Network Agent Based Model By Ermanno Catullo; Federico Giri; Mauro Gallegati
  9. Monetary Policy Communications and their Effects on Household Inflation Expectations By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
  10. Money, credit, monetary policy and the business cycle in the euro area: what has changed since the crisis? By Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
  11. Monetary Policy Divergence and Net Capital Flows: Accounting for Endogenous Policy Responses By Davis, Scott; Zlate, Andrei
  12. Bad Sovereign or Bad Balance Sheets? Euro Interbank Market Fragmentation and Monetary Policy, 2011-2015 By Gabrieli, Silvia; Labonne, Claire
  13. Optimal Trend Inflation By Klaus Adam; Henning Weber
  14. Home Ownership and Monetary Policy Transmission By Winfried Koeniger; Marc-Antoine Ramelet
  15. Digital Cash: Principles & Practical Steps By Michael D. Bordo; Andrew T. Levin
  16. The Post-Crisis Phillips Curve: A New Empirical Relationship between Wage and Inflation By Voinea, Liviu
  17. Examining the trade-off between price and financial stability in India. By Patnaik, Ila; Mittal, Shalini; Pandey, Radhika
  18. Monetary and Exchange Rate Policies for Sustained Growth in Asia By Joseph E Gagnon; Philip Turner
  19. Financial Frictions, Durable Goods and Monetary Policy By Leo Michelis; Ugochi T. Emenogu
  20. Credit Subsidies By Fiorella de Fiore; Oreste Tristani; Isabel Horta Correia; Pedro Teles
  22. Off the Radar: Exploring the Rise of Shadow Banking in the EU By Martin Hodula
  23. On the Singular Control of Exchange Rates By Ferrari, Giorgio; Vargiolu, Tiziano

  1. By: Chi Hyun Kim; Lars Other
    Abstract: We examine the credit channel of monetary policy from 2000 to 2015 in the Euro Area using daily monetary policy shock and credit risk measures in an autoregressive distributed lag model. We find that an expansionary monetary policy shock leads to a short-run increase in the credit risk of non-financial corporations. This dysfunctionality of the credit channel is driven by the crisis-dominated post-2009 period. During this period, market participants may have interpreted expansionary monetary policy shocks as a signal of worsening economic prospects. We further distinguish policy shocks aiming at short- and long-run expectations of market participants, i.e. target and path shocks. The adverse effect disappears for crisis countries when the European Central Bank targets long-run rather than short-run expectations.
    Keywords: Credit channel, credit spreads, Euro area financial markets, forward guidance, monetary policy, Zero lower bound
    JEL: C22 E44 E52 G12
    Date: 2019
  2. By: Kockerols, Thore; Kok, Christoffer
    Abstract: Should monetary policy lean against financial stability risks? This has been a subject of fierce debate over the last decades. We contribute to the debate about “leaning against the wind” (LAW) along three lines. First, we evaluate the cost and benefits of LAW using the Svensson (2017) framework for the euro area and find that the costs outweigh the benefits. Second, we extend the framework to address a critique that Svensson does not consider the lower frequency financial cycle. Third, we use this extended framework to assess the costs and benefits of monetary and macroprudential policy. We find that macroprudential policy has net marginal benefits in addressing risks to financial stability in the euro area, whereas monetary policy has net marginal costs. This would suggest that an active use of macroprudential policies targeting financial stability risks would alleviate the burden on monetary policy to “lean against the wind”. JEL Classification: E58, G01
    Keywords: financial cycle, leaning against the wind, macroprudential policy
    Date: 2019–01
  3. By: Lukas Pfeifer; Martin Hodula; Libor Holub; Zdenek Pikhart
    Abstract: The capital regulation reform package proposed for the EU banking sector envisages the introduction of a minimum leverage ratio as a (non-risk-weighted) prudential backstop. In this paper, we use Czech bank-level data to explore the implications of introducing a leverage ratio into the capital regulatory framework. Our results confirm that the capital and leverage ratios complement each other. On the other hand, if a minimum leverage ratio is binding on some institutions, the increase in macroprudential capital buffers does not necessarily lead to a real increase in the capital and resilience of those institutions. We therefore describe possible settings of the macroprudential leverage ratio that would maintain the effectiveness of macroprudential policy. Furthermore, we derive channels through which the capital and leverage ratios might be affected and test the functionality of those channels. We find that the leverage ratio is far less procyclical than the capital ratio.
    Keywords: Capital ratio, leverage ratio, macroprudential policy, regulation
    JEL: G21 G28
    Date: 2018–12
  4. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: The recent economic slowdown in the euro area depends on supply-side and demand-side factors with different consequences on potential output. On the one hand, it may grow at a low pace for a long time; on the other hand, it may soon grow a bit faster. The ECB strategy has to adapt to these different possible outcomes. Anyway, we argue that the ECB has rooms for manoeuvre whatever the trend in output
    Keywords: ECB; Monetary Policy; Growth; Slowdown
    Date: 2018–11
  5. By: Caballero, Diego; Lucas, André; Schwaab, Bernd; Zhang, Xin
    Abstract: We address the question to what extent a central bank can de-risk its balance sheet by unconventional monetary policy operations. To this end, we propose a novel risk measurement framework to empirically study the time-variation in central bank portfolio credit risks associated with such operations. The framework accommodates a large number of bank and sovereign counterparties, joint tail dependence, skewness, and time-varying dependence parameters. In an application to selected items from the consolidated Eurosystem's weekly balance sheet between 2009 and 2015, we find that unconventional monetary policy operations generated beneficial risk spill-overs across monetary policy operations, causing overall risk to be nonlinear in exposures. Some policy operations reduced rather than increased overall risk. JEL Classification: G21, C33
    Keywords: central bank, credit risk, lender-of-last-resort, risk measurement, unconventional monetary policy
    Date: 2019–01
  6. By: Covi, Giovanni; Gorpe, Mehmet Ziya; Kok, Christoffer
    Abstract: This paper presents a novel approach to investigate and model the network of euro area banks’ large exposures within the global banking system. Drawing on a unique dataset, the paper documents the degree of interconnectedness and systemic risk of the euro area banking system based on bilateral linkages. We then develop a Contagion Mapping (CoMap) methodology to study contagion potential of an exogenous default shock via counterparty credit and funding risks. We construct contagion and vulnerability indices measuring respectively the systemic importance of banks and their degree of fragility. Decomposing the results into the respective contributions of credit and funding shocks provides insights to the nature of contagion which can be used to calibrate bank-specific capital and liquidity requirements and large exposures limits. We find that tipping points shifting the euro area banking system from a less vulnerable state to a highly vulnerable state are a non-linear function of the combination of network structures and bank-specific characteristics. JEL Classification: D85, G17, G33, L14
    Keywords: interconnectedness, large exposures, macroprudential policy, network analysis, stress test, systemic risk
    Date: 2019–01
  7. By: António Afonso; Joana Sousa-Leite
    Abstract: We assess the transmission of the Targeted Longer-Term Refinancing Operations (TLTRO) to the bank credit supply for the Euro area (2014:05-2018:01) and for Portugal (2011:01-2018:01), using a panel data setup. For the Euro area, we find a positive relationship between the TLTRO and the amount of credit granted to the real economy. For the vulnerable countries, the effects of the TLTRO on the stock of credit increased from 2016 to 2017. Among the group of small banks, the effects are stronger in less vulnerable countries. We also find that competition has no statistically significant impact on the transmission of the TLTRO to the bank credit supply for the Euro area. For Portugal, using a difference-in-differences model, we find no statistically significant impact of the TLTRO on credit granted by banks. Finally, bidding banks set lower interest rates than non-bidding banks and the difference seems to be larger in 2017. In Portugal, the effects of the TLTRO on loan interest rates also increased from 2016 to 2017 and are stronger for small banks.
    JEL: C33 C87 E50 E51 E52 E58
    Date: 2019
  8. By: Ermanno Catullo (Department of Economics and Social Sciences, Universita' Politecnica delle Marche); Federico Giri (Department of Economics and Social Sciences, Universita' Politecnica delle Marche); Mauro Gallegati (Department of Economics and Social Sciences, Universita' Politecnica delle Marche)
    Abstract: The paper presents an agent based model reproducing a stylized credit network that evolves endogenously through the individual choices of rms and banks. We introduce in this framework a anancial stability authority in order to test the e ects of different prudential policy measures designed to improve the resilience of the economic system. Simulations show that a combination of micro and macro prudential policies reduces systemic risk, but at the cost of increasing banks' capital volatility. Moreover, agent based methodology allows us to implement an alternative meso regulatory framework that takes into consideration the connections between firms and banks. This policy targets only the more connected banks, increasing their capital requirement in order to reduce the di usion of local shocks. Our results support the idea that the meso prudential policy is able to reduce systemic risk without a ecting the stability of banks'capital structure.
    Keywords: Micro prudential policy; Macro prudential policy; Credit Network; Meso prudential policy; Agent based model
    JEL: E50 E58 G18 G28 C63
    Date: 2019–01
  9. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber
    Abstract: We study how different forms of communication influence the inflation expectations of individuals in a randomized controlled trial. We first solicit individuals’ inflation expectations in the Nielsen Homescan panel and then provide eight different forms of information regarding inflation. Reading the actual Federal Open Market Committee (FOMC) statement has about the same average effect on expectations as simply being told about the Federal Reserve’s inflation target. Reading a news article about the most recent FOMC meetings results in a forecast revision which is smaller by half. Our results have implications for how central banks should communicate to the broader public.
    JEL: C83 D84 E31
    Date: 2019–01
  10. By: Giannone, Domenico; Lenza, Michele; Reichlin, Lucrezia
    Abstract: This paper studies the relationship between the business cycle and financial intermediation in the euro area. We establish stylized facts and study their stability during the global financial crisis and the European sovereign debt crisis. Long-term interest rates have been exceptionally high and long-term loans and deposits exceptionally low since the Lehman collapse. Instead, short-term interest rates and short-term loans and deposits did not show abnormal dynamics in the course of the financial and sovereign debt crisis. JEL Classification: E32, E51, E52, C32, C51
    Keywords: euro area, loans, monetary policy, money, non-financial corporations
    Date: 2019–01
  11. By: Davis, Scott (Federal Reserve Bank of Dallas); Zlate, Andrei (Federal Reserve Bank of Boston)
    Abstract: This paper measures the effect of monetary tightening in key advanced economies on net capital flows around the world. Measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock. Using a structural VAR framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock. We find that the endogenous response of domestic monetary policy depends on each economy's capital account openness and exchange rate regime. We use a method to compute counterfactual impulse responses for net capital outflows under the assumption that the domestic policy rate does not respond to foreign monetary tightening. Our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as one-third for countries with open capital accounts.
    Keywords: trilemma; structural VAR; counterfactual VAR; net capital inflows; exchange rates
    JEL: E5 F3 F4
    Date: 2018–09–27
  12. By: Gabrieli, Silvia (Banque de France); Labonne, Claire (Federal Reserve Bank of Boston)
    Abstract: We measure the relative role of sovereign-dependence risk and balance sheet (credit) risk in euro area interbank market fragmentation from 2011 to 2015. We combine bank-to-bank loan data with detailed supervisory information on banks’ cross-border and cross-sector exposures. We study the impact of the credit risk on banks’ balance sheets on their access to, and the price paid for, interbank liquidity, controlling for sovereign-dependence risk and lenders’ liquidity shocks. We find that (i) high non-performing loan ratios on the GIIPS portfolio hinder banks’ access to the interbank market throughout the sample period; (ii) large sovereign bond holdings are priced in interbank rates from mid-2011 until the announcement of the OMT; (iii) the OMT was successful in closing this channel of cross-border shock transmission; it reduced sovereign-dependence and balance sheet fragmentation alike.
    Keywords: interbank market; credit risk; fragmentation; sovereign risk; country risk; credit rationing; market discipline
    JEL: E43 E58 G01 G15 G21
    Date: 2018–07–12
  13. By: Klaus Adam; Henning Weber
    Abstract: Sticky price models featuring heterogeneous firms and systematic firm-level productivity trends deliver radically different predictions for the optimal inflation rate than their popular homogenous-firm counterparts: (1) the optimal steady-state inflation rate generically differs from zero and (2) inflation optimally responds to productivity disturbances. We show this by aggregating a heterogenous-firm model with sticky prices in closed form. Using firm-level data from the U.S. Census Bureau, we estimate the historically optimal inflation path for the U.S. economy. In the year 1977, the optimal inflation rate stood at 1.5%, but subsequently declined to around 1.0% in the year 2015. Inflation rates up to twice these numbers can be rationalized if one considers product demand elasticities more in line with the trade literature or if one considers firms that (partially) index prices to lagged inflation rates
    Keywords: optimal inflation rate, sticky prices, firm heterogeneity
    JEL: E52 E31 E32
    Date: 2018–04
  14. By: Winfried Koeniger; Marc-Antoine Ramelet
    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
  15. By: Michael D. Bordo; Andrew T. Levin
    Abstract: If the global economy encounters another severe adverse shock in coming years, will major central banks be able to provide sufficient monetary stimulus to preserve price stability and foster economic recovery? Our empirical analysis indicates that the Federal Reserve’s QE3 program was not an effective form of monetary stimulus and that unconventional monetary policies undertaken in the Eurozone and in Japan have been similarly limited in impact. We then consider how digital cash could bolster the effectiveness of monetary policy, and we characterize some potential steps for implementing digital cash via public-private partnerships between the central bank and supervised financial institutions. Our analysis indicates that digital cash could significantly enhance the stability of the financial system.
    JEL: E42 E52 E58
    Date: 2019–01
  16. By: Voinea, Liviu
    Abstract: In this paper we test a new empirical relationship between wage and inflation. We introduce the concept of a cumulative wage gap, meaning the cumulative gap between the current wage and a maximum peak wage value in the past. In a crisis, people relate to their peak gains in the immediate past. We assume that people judge their consumption decisions based on the relation between their current wages and their past wages, adjusted for inflation. We call this the post-crisis Phillips Curve. The shape of the post-crisis Phillips Curve expresses the theoretical assumption that the inflation rate stays below its target until the cumulative real wage gap closes, and that it increases above its target when the cumulative real wage gap becomes positive. We test our hypothesis using data for 35 OECD countries for the period 1990-2017. We are able to confirm our hypothesis, as the coefficients have the expected sign and are statistically significant for the OECD panel as well as for most of the individual countries. We also find a break in the slope of the curve, as the coefficients are higher after the cumulative wage gap closes.
    Keywords: wage,cumulative wage gap,inflation,Phillips Curve,monetary policy
    JEL: E21 E24 E31
    Date: 2019
  17. By: Patnaik, Ila (National Institute of Public Finance and Policy); Mittal, Shalini (National Institute of Public Finance and Policy); Pandey, Radhika (National Institute of Public Finance and Policy)
    Abstract: In recent years, many emerging economies including India have adopted inflation targeting framework. Post the global financial crisis, there is a growing debate on whether monetary policy should target financial stability. Using India as a case study, we present an empirical approach to assess whether monetary policy can target financial stability. This is done by examining the trade-off between price and financial stability for India. Using correlation between price and financial cycles, we find that a trade-off exists between price and financial stability. Our finding is robust to a series of robustness checks. Our study has implications for the conduct of monetary policy in emerging economies. Presence of a trade-off may constrain the ability of a central bank in emerging economies to target financial stability with monetary policy instrument.
    Date: 2019–01
  18. By: Joseph E Gagnon; Philip Turner
    Abstract: The more advanced economies in Asia are experiencing slower growth rates. Structural reforms are the most important policies for keeping growth rates up, but this paper takes the growth slowdown as given and focuses on implications for monetary policy. The key policy implication is the impor­tance of keeping core inflation at or above 2 percent to avoid prolonged periods of economic slack.
    Date: 2019–01
  19. By: Leo Michelis (Department of Economics, Ryerson University, Toronto, Canada); Ugochi T. Emenogu (Bank of Canada, Ottawa, Canada)
    Abstract: This paper examines the effect of financial frictions on the consumption of durables and non-durables in a two-sector DSGE model with sticky prices and heterogeneous agents. The financial frictions are a combination of loan-to-value (LTV) and payment-to-income (PTI) constraints faced by borrowers. In this setting a monetary contraction reduces drastically the maximum amount that consumers can borrow in order to purchase durable goods. As a result, the model predicts that the consumption of durables falls, along with non-durables even when durable prices are fully flexible. Also output falls and the nominal interest rate increases following a monetary tightening. Thus, the model matches better the predictions of the model with the data, relative to the existing literature.
    Keywords: Durable goods, Sticky prices, Financial frictions, Monetary policy
    JEL: E44 E52
    Date: 2019–01
  20. By: Fiorella de Fiore; Oreste Tristani; Isabel Horta Correia; Pedro Teles
    Abstract: Credit subsidies are an alternative to interest rate and credit policies when dealing with high and volatile credit spreads. In a model where credit spreads move in response to shocks to the net worth of financial intermediaries, credit subsidies are able to stabilize those spreads avoiding the transmission to the real economy. Interest rate policy can be a substitute for credit subsidies but is limited by the zero bound constraint. Credit subsidies overcome this constraint. They are superior to a policy of credit easing as long as the government is less efficient than financial intermediaries in providing credit.
    JEL: E31 E40 E44 E52 E58 E62 E63
    Date: 2018
  21. By: Roman N. Bozhya-Volya (National Research University Higher School of Economics); Alina S. Rybak (National Research University Higher School of Economics)
    Abstract: We investigate new instrument of monetary policy which is able to stimulate economy in the age of electronic money. Demurrage (negative interest on money holdings) is a non inflationary monetary instrument that is able to boost the rate of economic transactions. We show with the search-theoretic model that the search effort of buyers is increasing in demurrage fees and higher search effort is associated with the lower price level and higher aggregate output. We find that aggregate welfare is higher when demurrage is imposed compared to quantitative easing policy. While demurrage is complicated to impose on banknotes it is easily set on electronic money which makes this unconventional policy measure more technologically feasible
    Keywords: demurrage, negative interest on money, monetary policy, government policy in recession
    JEL: E50
    Date: 2019
  22. By: Martin Hodula
    Abstract: This paper uses novel ECB/Eurosystem data on non-bank financial intermediation to investigate the potential factors of shadow banking growth for a panel of 24 EU countries. Consistent with several strands of literature, the EU shadow banking system is found to be highly procyclical and positively related to increasing demand of long-term institutional investors, more stringent capital regulation, and faster financial development. In addition, the paper offers two findings that have not been reported in the literature. First, it shows that the relationship between monetary policy and shadow banking growth is level-dependent and may be determined by the relative magnitude of interest rates in the economy. In this respect, two main motives driving the relationship are identified - the "funding cost" motive and the "search for yield" motive. Second, the driving forces of shadow banking differ between the old and new EU countries, largely due to the missing legal framework for securitization in the new members.
    Keywords: European Union, monetary policy, panel data analysis, shadow banking
    JEL: E44 E52 G21 G23
    Date: 2018–12
  23. By: Ferrari, Giorgio (Center for Mathematical Economics, Bielefeld University); Vargiolu, Tiziano (Center for Mathematical Economics, Bielefeld University)
    Abstract: Consider the problem of a central bank that wants to manage the exchange rate between its domestic currency and a foreign one. The central bank can purchase and sell the foreign currency, and each intervention on the exchange market leads to a proportional cost whose instantaneous marginal value depends on the current level of the exchange rate. The central bank aims at minimizing the total expected costs of interventions on the exchange market, plus a total expected holding cost. We formulate this problem as an infinite time-horizon stochastic control problem with controls that have paths which are locally of bounded variation. The exchange rate evolves as a general linearly controlled one-dimensional diffusion, and the two nondecreasing processes giving the minimal decomposition of a bounded-variation control model the cumulative amount of foreign currency that has been purchased and sold by the central bank. We provide a complete solution to this problem by finding the explicit expression of the value function and a complete characterization of the optimal control. At each instant of time, the optimally controlled exchange rate is kept within a band whose size is endogenously determined as part of the solution to the problem. We also study the expected exit time from the band, and the sensitivity of the width of the band with respect to the model's parameters in the case when the exchange rate evolves (in absence of any intervention) as an Ornstein-Uhlenbeck process, and the marginal costs of controls are constant. The techniques employed in the paper are those of the theory of singular stochastic control and of one-dimensional diffusions
    Keywords: singular stochastic control, exchange rates, target zones, central bank, variational inequality, optimal stopping
    Date: 2018–08–16

This nep-cba issue is ©2019 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.