nep-cba New Economics Papers
on Central Banking
Issue of 2019‒02‒18
nineteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Empowering central bank asset purchases: The role of financial policies By Darracq Pariès, Matthieu; Körner, Jenny; Papadopoulou, Niki
  2. Inflation Targeting with Sovereign Default Risk By Cristina Arellano; Yan Bai; Gabriel Mihalache
  3. Role of expectations in a liquidity trap By Kohei Hasui; Yoshiyuki Nakazono; Yuki Teranishi
  4. Should Monetary Policy Lean against the Wind? An Evidence from a DSGE Model with Occasionally Binding Constraint By Jan Zacek
  5. Deciphering Monetary Policy Board Minutes through Text Mining Approach: The Case of Korea By Ki Young Park; Youngjoon Lee; Soohyon Kim
  6. Quantitative easing in the euro area and SMEs' access to finance: Who benefits the most? By Anne Kathrin Funk; ;
  7. Monetary Policy Options at the Effective Lower Bound : Assessing the Federal Reserve's Current Policy Toolkit By Hess Chung; Etienne Gagnon; Taisuke Nakata; Matthias Paustian; Bernd Schlusche; James Trevino; Diego Vilan; Wei Zheng
  8. Floating-rate bonds and monetary policy effectiveness: insights from a DSGE model By Paulo de Carvalho Lins; Marcio Issao Nakane
  9. Karl Brunner and U.K. Monetary Debate By Edward Nelson
  10. Policy Mandates and Institutional Architecture By Ioannis Lazopoulos; Vasco J. Gabriel
  11. The impact of the ECB’s targeted long-term refinancing operations on banks’ lending policies: the role of competition By Desislava C. Andreeva; Miguel García-Posada
  12. The Effects of Lender of Last Resort on Financial Intermediation during the Great Depression in Japan By Masami Imai; Tetsuji Okazaki; Michiru Sawada
  13. The Effects of Macroeconomic, Fiscal and Monetary Policy Announcements on Sovereign Bond Spreads: An Event Study from the EMU By António Afonso; João Tovar Jalles; Mina Kazemi
  14. Did BOJ's Negative Interest Rate Policy Increase Bank Lending? By GUNJI Hiroshi
  15. The Nonpuzzling Behavior of Median Inflation By Laurence M. Ball; Sandeep Mazumder
  16. The Effect of Fed’s Future Policy Expectations on Country Shares in Emerging Market Portfolio Flows By Zelal Aktas; Yasemin Erduman; Neslihan Kaya Eksi
  17. Benefits of gradualism or costs of inaction? Monetary policy in times of uncertainty By Giuseppe Ferrero; Mario Pietrunti; Andrea Tiseno
  18. Uncertainty, Attention Allocation and Monetary Policy Asymmetry By Kwangyong Park
  19. Do the ECB’s monetary policies benefit emerging market economies? A GVAR analysis on the crisis and post-crisis period By Andrea Colabella

  1. By: Darracq Pariès, Matthieu; Körner, Jenny; Papadopoulou, Niki
    Abstract: This paper contributes to the debate on the macroeconomic effectiveness of expansionary non-standard monetary policy measures in a regulated banking environment. Based on an estimated DSGE model, we explore the interactions between central bank asset purchases and bank capital-based financial policies (regulatory, supervisory or macroprudential) through its influence on bank risk-shifting motives. We find that weakly-capitalised banks display excessive risk-taking which reinforces the credit easing channel of central bank asset purchases, at the cost of higher bank default probability and risks to financial stability. In such a case, adequate bank capital demand through higher minimum capital requirements curtails the excessive credit origination and restores a more efficient propagation of central bank asset purchases. As supervisors can formulate further capital demands, uncertainty about the supervisory oversight provokes precautionary motives for banks. They build-up extra capital buffer attenuating non-standard monetary policy. Finally, in a weakly-capitalised banking system, countercyclical macroprudential policy attenuates banks risk-taking and dampens the excessive persistence of the non-standard monetary policy impulse. On the contrary, in a well-capitalised banking system, macroprudential policy should look through the effects of central bank asset purchases on bank capital position, as the costs in terms of macroeconomic stabilisation seem to outweigh the marginal financial stability benefits. JEL Classification: E44, E52, F40
    Keywords: asset purchases, bank capital regulation, effective lower bound, non-standard monetary policy, regulatory uncertainty, risk-taking
    Date: 2019–02
  2. By: Cristina Arellano; Yan Bai; Gabriel Mihalache
    Abstract: Since the early 2000s, many emerging markets have adopted inflation targeting as their monetary policy, against a background of recurring sovereign debt crises. We develop a framework that integrates inflation targeting monetary policy with sovereign default risk and identify important interactions. Monetary policy alters incentives for international borrowing and sovereign default risk leads to more volatile nominal interest rates, needed to target inflation. We show that this framework replicates the positive co-movements of sovereign interest rate spreads with domestic nominal rates and inflation, a salient feature of emerging markets data. Our framework rationalizes the experience of Brazil during the 2015 downturn, which featured high inflation, high nominal rates, and high sovereign spreads. Our counterfactual experiment suggests that by raising the domestic rate the Brazilian central bank not only reduced inflation but also alleviated the debt crisis.
    Date: 2018
  3. By: Kohei Hasui; Yoshiyuki Nakazono; Yuki Teranishi
    Abstract: A number of previous studies suggest that inflation expectations are important in considering the effectiveness of monetary policy in a liquidity trap. However, the role of inflation expectations can be very different, depending on the type of monetary policy that a central bank implements. This paper reveals how a private agent forms inflation expectation affects the effectiveness of monetary policy under the optimal commitment policy, the Taylor rule, and a simple rule with price-level targeting. We examine two expectation formations: (i) different degrees of anchoring, and (ii) different degrees of forward-lookingness. We show that how to form inflation expectations is less relevant when a central bank implements the optimal commitment policy, while it is critical when the central bank adopts the Taylor rule or a simple rule with price-level targeting. Even for the Japanese economy, the effects of monetary policy on economic dynamics significantly change according to expectation formations under rules other than the optimal commitment policy.
    Keywords: Expectations, Liquidity Trap, Monetary Policy
    JEL: E31 E52 E58 E61
    Date: 2019–02
  4. By: Jan Zacek (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic)
    Abstract: This research paper studies the performance of the Taylor-type rules augmented with output and asset prices, and compares their performance in a model with an eternally and occasionally binding constraint. The rules are examined under the optimisation of a central bank's loss function and a welfare maximisation of the economic agents. The analysis delivers the following results. The model with occasionally binding constraint has more favourable properties regarding the hump-shaped and asymmetric impulse responses compared to the eternally binding constraint model. The best rule regarding the lowest value of the central banks' loss function proves to be the rule augmented with asset prices. The optimal reactions are, however, shock- and model-dependent. Moreover, a chosen specification of the loss function plays a significant role. The welfare maximisation reveals that reacting to asset prices might not be welfare-improving for both types of economic agents – households and entrepreneurs. This result is, however, model-dependent.
    Keywords: asset prices, DSGE, leaning-against-the-wind, monetary policy, non-linearities, Taylor Rule
    JEL: E30 E44 E50
    Date: 2018–12
  5. By: Ki Young Park (School of Economics, Yonsei University); Youngjoon Lee (School of Business, Yonsei University); Soohyon Kim (Economic Research Institute, The Bank of Korea)
    Abstract: We quantify the Monetary Policy Board (MPB) minutes of the Bank of Korea (BOK) using text mining. We propose a novel approach using a field-specific Korean dictionary and contiguous sequences of words (n-grams) to better capture the subtlety of central bank communications. We find that our lexicon-based indicators help explain the current and future BOK monetary policy decisions when considering an augmented Taylor rule, suggesting that they contain additional information beyond the currently available macroeconomic variables. Our indicators remarkably outperform English-based textual classifications, a media-based measure of economic policy uncertainty, and a data-based measure of macroeconomic uncertainty. Our empirical results also emphasize the importance of using a field-specific dictionary and the original Korean text.
    Keywords: Monetary policy; Text mining; Central banking; Bank of Korea, Taylor rule
    JEL: E43 E52 E58
    Date: 2019–01–07
  6. By: Anne Kathrin Funk (IHEID, Graduate Institute of International and Development Studies, Geneva); ;
    Abstract: After the global financial crisis and during the European sovereign debt crisis, bank lending to companies in the euro area slowed down dramatically, bringing the economy close to a credit crunch. It was only after the start of the European Central Bank (ECB) quantitative easing programme in early 2015 that bank lending improved sustainably. This study analyses the impact of the ECB’s Public Sector Purchase Programme (PSPP) on the access to finance of small- and medium-sized enterprises using firm-level data of the Survey on the Access to Finance of Enterprises and a fixed effects model. The analysis comprises several measures of financial access, such as credit availability, financial constraints, and interest rates. The micro-level nature of the data allows me to distinguish between aggregate and heterogeneous effects across firm size, age, sector, and country. The ECB’s government bond purchases improved financial access on the aggregate euro area level and particularly in the periphery of the euro area. Hence, countries that need the most stimulus benefit the most from the PSPP.
    Keywords: Unconventional monetary policy, credit channel, bank lending, ECB, SME
    JEL: E44 E51 E52 E58
    Date: 2019–02–14
  7. By: Hess Chung; Etienne Gagnon; Taisuke Nakata; Matthias Paustian; Bernd Schlusche; James Trevino; Diego Vilan; Wei Zheng
    Abstract: We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in response to the Global Financial Crisis are modestly effective in speeding up the labor market recovery and return of inflation to 2 percent following an economic slump. However, these policies have only small effects in limiting the initial rise in the unemployment rate during a recession because of transmission lags. As with any model-based analysis, we also discuss a number of c aveats regarding our results.
    Keywords: Effective lower bound ; Federal Reserve balance sheets ; Forward guidance ; Large-scale asset purchases ; Monetary policy
    JEL: E58 E52 E31 E32
    Date: 2019–02–01
  8. By: Paulo de Carvalho Lins; Marcio Issao Nakane
    Abstract: In Brazil, there exists a government bond whose return is directly indexed to short-term interest rate set by the Central Bank. Some economists suggest that its existence decreases the effectiveness of monetary policy, mainly by clogging the wealth transmission channel. We introduce a floating-rate bond as a new financial asset in a canonical DSGE model and analyze its effects on the model dynamics. The new bond does not seem to change the dynamics of any variable, even in the presence of rule-of-thumb agents. We interpret these results as evidence against the argument that floating-rate bonds lead to a weaker monetary policy.
    Keywords: Monetary Policy; Public Debt; Fiscal Policy; Letras Financeiras do Tesouro
    JEL: E52 E63 H63
    Date: 2019–02–13
  9. By: Edward Nelson
    Abstract: Although he was based in the United States, leading monetarist Karl Brunner participated in debates in the United Kingdom on monetary analysis and policy from the 1960s to the 1980s. During the 1960s, his participation in the debates was limited to research papers, but in the 1970s, as monetarism attracted national attention, Brunner made contributions to U.K. media discussions. In the pre-1979 period, he was highly critical of the U.K. authorities’ nonmonetary approach to the analysis and control of inflation-an approach supported by leading U.K. Keynesians. In the early 1980s, Brunner had direct interaction with Prime Minister Margaret Thatcher on issues relating to monetary control and monetary strategy. He was unsuccessful in persuading her to use the monetary base-instead of a short-term interest rate-as the instrument for implementing monetary policy. However, following his interventions, the U.K. authorities during the 1980s assigned weight to the monetary b ase as an indicator and target of monetary policy. Brunner’s imprint on U.K. monetary policy has also been felt in the twenty-first century. Brunner’s analysis, with Allan Meltzer, of the monetary transmission mechanism helped provide the basis for the policy of quantitative easing followed by the Bank of England.
    Keywords: Karl Brunner ; U.K. monetary policy ; Monetarism ; Monetary base control ; Transmission mechanism
    JEL: E51 E58 E52
    Date: 2019–02–01
  10. By: Ioannis Lazopoulos (University of Surrey); Vasco J. Gabriel (University of Surrey and NIPE-UM)
    Abstract: The model developed in this paper examines the interaction between monetary and macroprudential policies in promoting macroeconomic stability, highlighting the role of shocks and policy instruments. The paper shows that assigning the mandates of monetary and financial stability to independent authorities enhances macroeconomic stability only when some level of coordination exists between policymakers and it is the dominant institutional arrangement when monetary stability is socially important. Instead, when society values financial stability, internalising the policy spillovers by assigning the two mandates to a single policymaker could become the dominant configuration depending on the model's parameter values.
    JEL: E42 E44 E52 E58 E61
    Date: 2019–02
  11. By: Desislava C. Andreeva (European Central Bank); Miguel García-Posada (Banco de España)
    Abstract: We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. To guide our empirical research, we build a theoretical model in which banks compete à la Cournot in the credit and deposit markets. According to the model, we distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets and are a priori ambiguous. We then test these theoretical predictions with a sample of 130 banks from 13 countries and the confidential answers to the ECB’s Bank Lending Survey. Regarding direct effects on bidders, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders but, contrary to the direct effects, the transmission of the TLTROs takes place through an easing of credit standards, and it is mainly concentrated in banks facing high competitive pressures. We also find evidence of positive funding externalities.
    Keywords: unconventional monetary policy, TLTROs, lending policies, competition
    JEL: G21 E52 E58
    Date: 2019–02
  12. By: Masami Imai; Tetsuji Okazaki; Michiru Sawada
    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
  13. By: António Afonso; João Tovar Jalles; Mina Kazemi
    Abstract: We assess the impact of announcements corresponding to different fiscal and monetary policy measures on the 10-year sovereign bond yield spreads (relative to Germany) of the 10 EMU countries during the period 01:1999 - 07:2016. Implementing pooled and country-fixed effects OLS regressions, we find that the European Commission’s (EC) releases of the excessive deficit procedure significantly affect the yield spreads. The EC releases of higher debt and better budget balance forecasts contribute to the rise and the decline of spreads, respectively. Moreover, we find that the announcements of the ECB’s key interest rates together with the longer-term refinancing operations (LTROs) and the first covered bond purchase programme (CBPP1) negatively affect sovereign yield spreads in our sample of EMU countries.
    Keywords: sovereign yields, fiscal policy, monetary policy, event analysis, panel data
    JEL: C23 E52 E62 G10 H63
    Date: 2019–02
  14. By: GUNJI Hiroshi
    Abstract: We investigate the effects of the negative interest rate policy (NIRP) in Japan on bank lending using regression discontinuity design (RDD). On January 29, 2016, the Bank of Japan announced the beginning of the NIRP from February 16, 2016. Since the financial market did not anticipate this policy, we use the event as a natural experiment. For a few months, starting from February 2016, a negative interest rate was levied on banks that held reserves exceeding the average monthly reserves of 2015. This allows us to employ RDD. The results suggest the average treatment effect on the banks to which a negative interest was levied was approximately -1.5% to -3.5%. In other words, the loan rates of banks to which negative interest rates were levied declined compared to those of the banks that were not subject to NIRP.
    Date: 2018–12
  15. By: Laurence M. Ball; Sandeep Mazumder
    Abstract: Economists are puzzled by the behavior of U.S. inflation since the Great Recession of 2008-2009, and many suggest that the Phillips curve relating inflation to unemployment has broken down. This paper argues that inflation behavior is easier to understand if we divide headline inflation into core and transitory components, and if core inflation is measured by the weighted median of industry inflation rates. This weighted median is less volatile than the traditional measure of core inflation, the inflation rate excluding food and energy prices, because it filters out large price changes in all industries. We illustrate the usefulness of the weighted median with a case study of inflation in 2017 and early 2018. We also show that a Phillips curve relating the weighted median to unemployment appears clearly in the data for 1985-2017, with no sign of a breakdown in 2008.
    JEL: E31
    Date: 2019–01
  16. By: Zelal Aktas; Yasemin Erduman; Neslihan Kaya Eksi
    Abstract: We analyze how changes in market expectations about the Federal Reserve’s future monetary policy stance affect an emerging country’s share in total portfolio flows to emerging markets. We estimate a seemingly unrelated regression model for a panel of 19 emerging countries, using monthly data from January 2010 to October 2017. Our findings suggest that the effect of Fed’s policy expectations on the country share is asymmetric. The expectations of Fed’s monetary policy is found to reduce an emerging country’s share in total emerging market portfolio flows when expectations imply a policy tightening, while easing expectations do not have a significant effect on the share. A country with stronger financial conditions and safer business environment for international investors tend to downsize the negative effect of Fed’s policy tightening on its share in total portfolio flows, with respect to its counterparts.
    Keywords: Fed expectations, Capital flows, Emerging markets, Panel regression
    JEL: E43 F32 F41 G11
    Date: 2018
  17. By: Giuseppe Ferrero (Bank of Italy); Mario Pietrunti (Bank of Italy); Andrea Tiseno (Bank of Italy)
    Abstract: Should monetary policy be more aggressive or more cautious when facing uncertainty on the relationship between macroeconomic variables? This paper's answer is: “it depends” on the degree of persistence of the shocks that hit the economy. The paper studies optimal monetary policy in a basic (two-equation) forward looking New-Keynesian (NK) framework with random parameters. It relaxes the assumption of full central bank information in two ways: by allowing for uncertainty on the model parameters and by assuming asymmetric information. While the private sector observes the realizations of the random process of the parameters as they occur, the central bank observes them with a one period delay. Compared to the problem with full information, the monetary authority must solve the Bayesian decision problem of minimizing the expected stream of future welfare losses integrating over its prior probability distribution of the unknown parameters. The paper proposes a general method to account for uncertainty on any subset of parameters of the model. As an application, it focuses on two cases: uncertainty on the natural rate of interest and on the slope of the Phillips curve.
    Keywords: optimal monetary policy, parameter uncertainty, asymmetric information, natural rate of interest, Phillips curve
    JEL: E31 E32 E52
    Date: 2019–02
  18. By: Kwangyong Park (Economic Research Institute, Bank of Korea)
    Abstract: We provide a theoretical framework, with empirical evidence, where monetary policy effects become stronger during periods of heightened uncertainty in productivity. Higher aggregate and idiosyncratic productivity volatility induce firms, which are constrained by information capacity, to allocate more attention to productivities and less to the monetary policy shock. This makes firms under-react to monetary policy actions, which increases real effects of monetary policy shocks. A threshold vector autoregression, which incorporates instrumental variables to identify the monetary policy shock, finds that monetary policy shocks have stronger impacts on output when uncertainty, as measured by VIX, is high.
    Keywords: Monetary policy asymmetry, Uncertainty, Information choice
    JEL: E31 E52 D8
    Date: 2019–01–28
  19. By: Andrea Colabella (Bank of Italy)
    Abstract: This paper studies the spillover effects of the ECB’s monetary policies on non-euro area countries over the period 2004-2016, using a GVAR methodology, applied to a large sample of countries and an ample set of variables. Monetary policies are proxied by short-term interest rates and the Wu and Xia’s (2016) shadow rates in the euro area, the US and the UK. Identification is performed via a Cholesky decomposition in the euro area only. An increase in the euro area shadow interest rate triggers a broad-based and persistent output decline abroad, especially strong in Central Eastern and South-Eastern European economies. The euro area shadow rate increase is also transmitted to the short-term interest rates of a number of countries, although such rises are short-lived and not as widespread as the GDP spillovers. There is evidence that differences in countries’ responses to the euro area monetary shock depend on their characteristics. The spillover effects are transmitted mainly through the trade channel and also, to a lesser extent, the short-term interest rate channel.
    Keywords: global VAR, spillover, euro area monetary policy, Europe, CESEE
    JEL: C32 E32 E52 E58 F41 O52
    Date: 2019–02

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