nep-cba New Economics Papers
on Central Banking
Issue of 2019‒02‒11
nineteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Optimal Monetary Policy Regime Switches By Choi, Jason; Foerster, Andrew
  2. Unconventional Monetary Policy and the Bond Market in Japan: A New-Keynesian Perspective By Parantap Basu; Kenji Wada
  3. Taking the Fed at its Word: Direct Estimation of Central Bank Objectives using Text Analytics By Shapiro, Adam Hale; Wilson, Daniel J.
  4. Expectations' Anchoring and Inflation Persistence By Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss; Weicheng Lian
  5. Banking Panics and the Lender of Last Resort in a Monetary Economy By Tarishi Matsuoka; Makoto Watanabe
  6. The interest rate exposure of euro area households By Tzamourani, Panagiota
  7. The Phillips multiplier By Régis Barnichon; Geert Mesters
  8. Can the U.S. Interbank Market Be Revived? By Kim, Kyungmin; Martin, Antoine; Nosal, Ed
  9. A schematic view of government as regulator and insurer of the financial system By Henri-Paul Rousseau
  10. Assessing the uncertainty in central banks' inflation outlooks By Knüppel, Malte; Schultefrankenfeld, Guido
  11. Super-inertial interest rate rules are not solutions of Ramsey optimal monetary policy By Jean-Bernard Chatelain; Kirsten Ralf
  12. The Indeterminacy of Determinacy with Fiscal, Macro-prudential or Taylor Rules By Jean-Bernard Chatelain; Kirsten Ralf
  13. Imperfect Credibility versus No Credibility of Optimal Monetary Policy By Jean-Bernard Chatelain; Kirsten Ralf
  14. The Monetary Base in Allan Meltzer's Analytical Framework By Edward Nelson
  15. Money, Asset Markets and Efficiency of Capital Formation By van Buggenum, Hugo; Uras, Burak
  16. Monetary policy and the cost of wage rigidity: Evidence from the stock market By Faia, Ester; Pezone, Vincenzo
  17. The Effects of Lender of Last Resort on Financial Intermediation during the Great Depression in Japan By Masami Imai; Tetsuji Okazaki; Michiru Sawada
  18. Monetary policy, housing, and collateral constraints By Franz, Thorsten
  19. The Bank Multiplier and A New Mechanism for the Transmission of the Monetary Policy By Nizam, Ahmed Mehedi

  1. By: Choi, Jason (University of Wisconsin-Madison); Foerster, Andrew (Federal Reserve Bank of San Francisco)
    Abstract: An economy that switches between high and low growth regimes creates incentives for the monetary authority to change its rule. As lower growth tends to produce lower real interest rates, the monetary authority has an incentive to increase the inflation target and increase the degree of inertia in setting rates in an attempt to keep the nominal rate positive. An optimizing monetary authority therefore responds to permanently lower growth by slightly increasing both the inflation target and inertia; focusing solely on the inflation target ignores a key margin of adjustment. With repeated growth rate regime switches, an optimal monetary rule that switches at the same time internalizes both the direct effects of growth regime change and the indirect expectation effects generated by switching in policy. The switching rule improves economic outcomes relative to a constant rule and one that does not consider the impact of regime changes; this result is robust to the case when the monetary authority misidentifies the growth regime with relatively high frequency.
    JEL: C63 E31 E52
    Date: 2019–02–01
  2. By: Parantap Basu (Professor, Durham University Business School, Durham University (E-mail:; Kenji Wada (Professor, Faculty of Business and Commerce, Keio University (E-mail:
    Abstract: In this paper, we set up a medium scale new-Keynesian dynamic stochastic general equilibrium (DSGE) model to analyze the effects of various phases of unconventional monetary policy (UMP) on the Japanese bond market. Our model has two novel features: (i) a banking friction in the form of an aggregate bank run risk to motivate commercial banks' demand for excess reserve, and (ii) dynamic linkage between Central Bank resource constraint and the government budget constraint via a transfer payment by the Central Bank to the Treasury. We do three policy simulations to analyze the effects of various phases of UMP shocks on the bond market, namely: (i) effect of a quantitative easing (QE) shock; (ii) the effect of a negative shock to the overnight borrowing rate; and (iii) the effect of a negative shock to the interest rate on banks' excess reserve (IOER). In light of these results, we do an evaluation of the recent yield curve control policy of the Bank of Japan.
    Keywords: QE, QQE, Excess Reserve, Overnight Borrowing Rate, IOER, Yield Curve Control
    JEL: E43 E44 E58
    Date: 2018–08
  3. By: Shapiro, Adam Hale (Federal Reserve Bank of San Francisco); Wilson, Daniel J. (Federal Reserve Bank of San Francisco)
    Abstract: There is an extensive literature that studies optimal monetary policy with an assumed central bank loss function, yet there has been very little study of what central bank preferences are in practice. We directly estimate the Federal Open Market Committee's (FOMC) loss function, including the implicit inflation target, from the tone of the language used in FOMC transcripts, minutes, and members' speeches. Direct estimation is advantageous because it requires no knowledge of the underlying macroeconomic structure nor observation of central bank actions. We fi nd that the FOMC had an implicit inflation target of approximately 1 1/2 percent on average over our baseline 2000-2012 sample period. We also find that the FOMC's loss depends strongly on output growth and stock market performance and less so on their perception of current slack.
    Date: 2019–01–18
  4. By: Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss; Weicheng Lian
    Abstract: Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an empirical assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct a novel index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies starting in 1989. We then study the response of consumer prices to terms-of-trade shocks for countries with flexible exchange rates. We fi nd that these shocks have a signifi cant and persistent eff ect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.
    Keywords: Inflation expectations;Inflation persistence;Anchoring, credibility, terms of trade, Monetary Policy (Targets, Instruments, and Effects)
    Date: 2018–12–11
  5. By: Tarishi Matsuoka; Makoto Watanabe
    Abstract: This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank’s monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks’ ex ante incentive to hold reserves, which increases the probability of a panic, and causes moral hazard in asset investments. We also examine the combined effect of other related policies such as a penalty in lending rate, liquidity requirements and constructive ambiguity.
    Keywords: monetary equilibrium, banking panic, moral hazard, lender of last resort
    JEL: E40
    Date: 2019
  6. By: Tzamourani, Panagiota
    Abstract: We estimate the "unhedged interest rate exposure" (URE) of euro area households. The URE is a welfare metric that captures the extent to which households are exposed to changes in real interest rates, and reflects the direct gains and losses in interest income flows incurred by households after such a change. It is defined as the difference between maturing assets and maturing liabilities at a given point in time (Auclert 2019). We examine the distribution of the UREs along the net wealth, income, age and housing status distributions for the euro area as a whole and for individual countries, and document substantial heterogeneity across these dimensions. The median household in the euro area has a positive interest rate exposure, indicating that it would gain, in the first instance, from an increase in the interest rate, all other things remaining constant. Households in the lower end of the net wealth and income distribution, younger households and mortgagors, have negative interest rate exposure and would lose from an increase in interest rates. The heterogeneity across countries is largely attributed to the differences in the prevalence of adjustable rate mortgages (ARMs). Countries with a high prevalence of ARMs have interest rate exposure distributions skewed to the left, with negative mean interest rate exposure. Interest gains/losses after a monetary policy shock can be substantial for households with negative interest rate exposure, particularly for mortgagors, and of a similar (absolute) magnitude to capital gains/losses from associated changes in house prices. Besides the direct distributional consequences and the implications for monetary policy, the distribution of the interest rate exposures may help explain the general public's views with the respect to the prevailing monetary policy regime or the central bank.
    Keywords: interest rate exposure,URE,monetary policy,distributional effects,adjustable rate mortgage (ARM),Household Finance and Consumption Survey (HFCS)
    JEL: D31 E21 E52 E58
    Date: 2019
  7. By: Régis Barnichon; Geert Mesters
    Abstract: We propose a model-free approach for determining the inflation-unemployment trade-off faced by a central bank, i.e., the ability of a central bank to transform unemployment into inflation (and vice versa) via its interest rate policy. We introduce the Phillips multiplier as a statistic to non-parametrically characterize the trade-off and its dynamic nature. We compute the Phillips multiplier for the US, UK and Canada and document that the trade-off went from being very large in the pre-1990 sample period to being small (but significant) post-1990 with the onset of inflation targeting and the anchoring of inflation expectations.
    Keywords: Marginal rate of transformation, inflation-unemployment, trade-off, dynamic multiplier, Instrumental variables, Phillips curve
    JEL: C14 C32 E32 E52
    Date: 2019–01
  8. By: Kim, Kyungmin (Federal Reserve Board); Martin, Antoine (Federal Reserve Bank of New York); Nosal, Ed (Federal Reserve Bank of Atlanta)
    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 precrisis volumes due to costs associated with recent banking regulations. Although the volume of interbank trade may initially increase as excess reserves are decreased from their current abundant levels, the new regulations may engender changes in market structure that result in interbank trading being completely replaced by nonbank lending to banks when excess reserves become scarce. This nonmonotonic 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 its balance sheet by reducing excess reserves.
    Keywords: interbank market; monetary policy implementation; balance sheet costs
    JEL: E42 E58
    Date: 2018–11–01
  9. By: Henri-Paul Rousseau (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The purpose of this paper is to present a schematic of the interactions between the government as the REGULATOR of financial institutions and the government as the INSURER of financial institutions while taking into account the long-term feedback relationships between the size and the scope of the financial sector and the level of public debt resulting from financial crises over time. The analysis concludes that at certain high level of public debt and size of the expected support of the financial sector by the government, the regulator and /or the central bank may have to "stabilize" the situation, but there may be cases where the support becomes socially "unacceptable."
    Date: 2019–01
  10. By: Knüppel, Malte; Schultefrankenfeld, Guido
    Abstract: Recent research has found that macroeconomic survey forecasts of uncertainty exhibit several deficiencies, such as horizon-dependent biases and lower accuracy than simple unconditional uncertainty forecasts. We examine the inflation uncertainty forecasts from the Bank of England, the Banco Central do Brasil, the Magyar Nemzeti Bank and the Sveriges Riksbank to assess whether central banks' uncertainty forecasts might be subject to similar problems. We find that, while most central banks' uncertainty forecasts also tend to be underconfident at short horizons and overconfident at longer horizons, they are mostly not significantly biased. Moreover, they tend to be at least as precise as unconditional uncertainty forecasts from two different approaches.
    Keywords: Density Forecasts,Fan Charts,Forecast Optimality,Forecast Accuracy
    JEL: C13 C32 C53
    Date: 2018
  11. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (ESCE – International Business School)
    Abstract: Giannoni and Woodford (2003) found that the equilibrium determined by com- mitment to a super-inertial rule (where the sum of the parameters of lags of interest rate exceed ones and does not depend on the auto-correlation of shocks) corresponds to the unique bounded solution of Ramsey optimal policy for the new-Keynesian model. By contrast, this note demonstrates that commitment to an inertial rule (where the sum of the parameters of lags of interest rate is below one and depends on the auto-correlation of shocks) corresponds to the unique bounded solution.
    Keywords: Ramsey optimal policy,Interest rate smoothing,Super-inertial rule,Inertial rule,New-Keynesian model
    Date: 2018–08
  12. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (ESCE – International Business School)
    Abstract: The determinacy of dynamic stochastic general equilibrium models including fiscal, macro-prudential or Taylor rules relies on the assumption that policy instruments are forward-looking when policy targets are also forward-looking. Blanchard and Kahn (1980) determinacy condition does not forbid to assume that policy instruments are backward-looking when policy targets are forward-looking, as it is the case for Ramsey optimal policy under quasi-commitment. There is indeterminacy of determinacy unless six criteria are considered which are in favor of assuming that policy instruments are backward-looking when policy targets are forward-looking.
    Keywords: Determinacy,Proportional Feedback rules,Dynamic Stochastic General Equilibrium,Taylor rule,Fiscal rule,Macro-prudential rule,optimal control,Ramsey optimal policy under quasi-commitment
    Date: 2018–09
  13. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: When the probability of not reneging commitment of optimal monetary policy under quasi-commitment tends to zero, the limit of this equilibrium is qualitatively and quantitatively different from the discretion equilibrium assuming a zero probability of not reneging commitment for the classic example of the new-Keynesian Phillips curve. The impulse response functions and welfare are different. The policy rule parameter have opposite signs. The inflation auto-correlation parameter crosses a saddlenode bifurcation when to near-zero to zero probability of not reneging commitment. These results are obtained for all values of the elasticity of substitution between goods in monopolistic competition which enters in the welfare loss function and in the slope of the new-Keynesian Phillips curve.
    Keywords: Ramsey optimal policy under imperfact commitment,zero-credibility policy,Impulse response function,Welfare,New-Keynesian Phillips curve, zero-,credibility policy, Impulse response function, Welfare, New-Keynesian Phillips,curve
    Date: 2018–07
  14. By: Edward Nelson
    Abstract: This analysis of Allan Meltzer’s analytical framework focuses on the role that Meltzer assigned to the monetary base. For many years, Meltzer suggested that central banks should use the monetary base as their policy instrument, in place of a short-term nominal interest rate. However, he recognized that in practice central banks did not follow this prescription. He believed that the monetary base could play an important role even when an interest rate was used as the instrument. Meltzer’s reasoning was twofold: (i) The monetary base might shed light on the behavior of important asset prices that mattered for aggregate demand. (ii) The base might serve as a useful indicator of the likely future course of the money stock. In later years, while still emphasizing the valuable indicator properties of the monetary base, Meltzer accepted that interest-rate-based rules could deliver monetary control and economic stabilization. For the situation in which the short-term nom inal interest rate was at its lower bound, Meltzer continued to stress quantities as monetary policy instruments. He felt that, at the lower bound, the central bank remained able, through quantitative easing, to boost asset prices, the money stock, and the economy. Such stimulative actions implied increases in the monetary base; however, Meltzer did acknowledge that the manner in which the base was increased (that is, what asset purchases generated the increase) figured importantly in securing the stimulus.
    Keywords: Monetarism ; Monetary base ; Money supply ; Transmission mechanism
    JEL: E52 E51 E58
    Date: 2019–02–01
  15. By: van Buggenum, Hugo (Tilburg University, Center For Economic Research); Uras, Burak (Tilburg University, Center For Economic Research)
    Abstract: Holdings of money and illiquid assets are likely to be determined jointly. Therefore, frictions that give rise to a need for money may affect capital formation, resulting in either too much or too little investment. Existing models of money and capital however tend to overlook that both types of investment inefficiencies can be equilibrium outcomes. Building upon insights from the New-Monetarist literature, we construct a model in which preference heterogeneity between agents implies that both over- and under-investment can arise. We use our framework to study whether monetary policy can effectively resolve both types of investment inefficiencies, and find that increasing inflation could resolve under-investment inefficiencies while reducing inflation could curb over-investment inefficiencies.
    Keywords: optiam monetary policy; asses markets; under-investment; over-investment
    JEL: E22 E41 E44 E52 O16
    Date: 2019
  16. By: Faia, Ester; Pezone, Vincenzo
    Abstract: Using a unique confidential contract level dataset merged with firm-level asset price data, we find robust evidence that firms' stock market valuations and employment levels respond more to monetary policy announcements the higher the degree of wage rigidity. Data on the renegotiations of collective bargaining agreements allow us to construct an exogenous measure of wage rigidity. We also find that the amplification induced by wage rigidity is stronger for firms with high labor intensity and low profitability, providing evidence of distributional consequences of monetary policy. We rationalize the evidence through a model in which firms in different sectors feature different degrees of wage rigidity due to staggered renegotiations vis-a-vis unions.
    Keywords: heterogeneous monetary policy response,distributional consequences of monetary policy,employer-employee level dataset,monetary policy surprise shocks,heterogeneous wage rigidity
    Date: 2018
  17. By: Masami Imai (Department of Economics, Wesleyan University); Tetsuji Okazaki (University of Tokyo); Michiru Sawada (University of Tokyo)
    Abstract: The interwar Japanese economy was unsettled by chronic banking instability, and yet the Bank of Japan (BOJ) restricted access to its liquidity provision to a select group of banks, i.e. BOJ correspondent banks, rather than making its loans widely available “to merchants, to minor bankers, to this man and to that man” as prescribed by Bagehot (1873). This historical episode provides us with a quasi-experimental setting to study the impact of Lender of Last Resort (LOLR) policies on financial intermediation. We find that the growth rate of deposits and loans was notably faster for BOJ correspondent banks than the other banks during the bank panic phase of the Great Depression from 1931-1932, whereas it was not faster before the bank panic phase. Furthermore, BOJ correspondent banks were less likely to be closed during the bank panics. To address possible selection bias, we also instrument a bank’s corresponding relationship with the BOJ with its geographical proximity to the nearest branch or the headquarters of the BOJ, which was a major determinant of a bank’s transaction relationship with the BOJ at the time. This instrumental variable specification yields qualitatively same results. Taken together, Japan’s historical experience suggests that central banks’ liquidity provisions play an important backstop role in supporting the essential financial intermediation services in time of financial stringency.
    Date: 2019–01
  18. By: Franz, Thorsten
    Abstract: House-purchasing decisions and the possibility of existing homeowners to tap into their housing equity depend decisively on prevailing loan-to-value (LTV) ratios in mortgage markets with borrowing constrained households. Utilizing a smooth transition local projection (STLP) approach, I show that monetary policy shocks in the U.S. evoke stronger reactions in the housing sector in times of high LTV ratios, which, through changes in mortgage lending and mortgage equity withdrawals (MEWs), translate into larger effects of consumption. This result is more pronounced for contractionary shocks, in line with occasionally binding constraints. The strong procyclicality of LTV ratios reconciles these findings with past evidence on a less powerful transmission of monetary policy during recessions.
    Keywords: monetary policy,LTV ratio,mortgage equity withdrawals,collateral constraints,local projections,non-linear impulse responses
    JEL: E21 E52 G21 R31
    Date: 2019
  19. By: Nizam, Ahmed Mehedi
    Abstract: The concept of economic multiplier has been extensively used in the design and analysis of the fiscal policy. However, it has never been used to analyse the impact of nominal interest income received by the depositors through the banking channel on the total output. Here, we investigate the impact of nominal interest income on the macroeconomy using multiplier theory. We define and calculate the corresponding multiplier values algebraically and then we empirically calculate them using impulse response analysis. Along the way, we have shown a new mechanism for the transmission of the monetary policy decision which transcends through, as we call it here, the nominal interest income channel.
    Keywords: nominal interest expense; nominal lending rate; nominal interest rate; domestic credit; GDP; economic multiplier; monetary policy transmission mechanism; banking
    JEL: E43 E50 E52 E58 G20 G21
    Date: 2019–02–02

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