nep-cba New Economics Papers
on Central Banking
Issue of 2019‒02‒25
33 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. A Framework for Analyzing Monetary Policy in an Economy with E-money By Yu Zhu; Scott Hendry
  2. Central bank communication during normal and crisis time By Christophe Blot; Paul Hubert
  3. Monetary Policy, Macroprudential Policy, and Financial Stability By Martinez-Miera, David; Repullo, Rafael
  4. Banks' Systemic Risk and Monetary Policy By Faia, Ester; Karau, Soeren
  5. Quantitative Easing and the Hot Potato Effect: Evidence from Euro Area Banks By Ryan, Ellen; Whelan, Karl
  6. The Long-Run Information Effect of Central Bank Communication By Hansen, Stephen; McMahon, Michael; Tong, Matthew
  7. The effect of ECB forward guidance on the term structure of interest rates By Paul Hubert; Fabien Labondance
  8. Firms’ Expectations and Monetary Policy Shocks in the Eurozone By Snezana Eminidou; Marios Zachariadis
  9. Does Central Bank Tone Move Asset Prices? By Schmeling, Maik; Wagner, Christian
  10. Monetary Policy in a World of Cryptocurrencies By Benigno, Pierpaolo
  11. The effect and risks of ECB collateral framework changes By Christophe Blot; Jérôme Creel; Paul Hubert
  12. The Signalling Effect of Monetary Policy Rate on Lending Rates in Ghana. By Lartey, Lawrencia
  13. The Phillips Multiplier By Barnichon, Régis; Mesters, Geert
  14. The Euro Crisis in the Mirror of the EMS By Corsetti, Giancarlo; Eichengreen, Barry; Hale, Galina B; Tallmann, Eric
  15. Monetary Policy Strategies for a Low-Rate Environment By Ben S. Bernanke; Michael T. Kiley; John M. Roberts
  16. Risk endogeneity at the lender/investor-of-last-resort By Diego Caballero; André Lucas; Bernd Schwaab; Xin Zhang
  17. Monetary policy transmission to mortgages in a negative interest rate environment By Amzallag, Adrien; Calza, Alessandro; Georgarakos, Dimitris; Sousa, João
  18. Debates and dissident inside the FOMC during WW2 By Etienne Farvaque; Antoine Parent; Piotr, Cracow University) Stanek
  19. Macroprudential Policy with Capital Buffers By Josef Schroth
  20. The Distributional Effects of Conventional Monetary Policy and Quantitative Easing: Evidence from an Estimated DSGE Model By Stefan Hohberger; Romanos Priftis; Lukas Vogel
  21. Fed’s Unconventional Monetary Policy and Risk Spillover in the US Financial Markets By Mehmet Balcilar; Zeynel Abidin Ozdemir; Huseyin Ozdemir; Mark E. Wohar
  22. A Silver Transformation: Chinese Monetary Integration in Times of Political Disintegration during 1898-1933 By Ma, Debin; Zhao, Liuyan
  23. Evaluating the macroeconomic effects of the ECB’s unconventional monetary policies By Sarah Mouabbi; Jean-Guillaume Sahuc
  24. The Trials of the Trilemma: International Finance 1870-2017 By Eichengreen, Barry; Esteves, Rui
  25. Macroprudential Policy and Household Leverage: Evidence from Administrative Household-Level Data By Gabarro, Marc; Irani, Rustom M; Peydró, José Luis; van Bekkum, Sjoerd
  26. Do zero and sign restricted SVARs identify unconventional monetary policy shocks in the euro area? By Adam Elbourne; Kan Ji
  27. The Euro Crisis in the Mirror of the EMS: How Tying Odysseus to the Mast Avoided the Sirens but Led Him to Charybdis By Corsetti, Giancarlo; Eichengreen, Barry; Hale, Galina; Tallman, Eric
  28. Central counterparty capitalization and misaligned incentives By Wenqian Huang
  29. A Structural VAR Model for Estimating the Link between Monetary Policy and Home Prices in Israel By Dana Orfaig
  30. Global Price of Risk and Stabilization Policies By Adrian, Tobias; Stackman, Daniel; Vogt, Erik
  31. Digital Innovation, Data Revolution and Central Bank Digital Currency By Noriyuki Yanagawa; Hiromi Yamaoka
  32. Greening monetary policy By Dirk Schoenmaker
  33. Imperfect information in macroeconomics By Paul Hubert; Giovanni Ricco

  1. By: Yu Zhu; Scott Hendry
    Abstract: This paper considers an economy where central-bank-issued fiat money competes with privately issued e-money. We study a policy-setting game between the central bank and the e-money issuer and find (1) the optimal monetary policy of the central bank depends on the policy of the private issuer and may deviate from the Friedman rule; (2) there may exist multiple equilibria; (3) when the economy approaches a cashless state, the central bank’s optimal policy improves the market power of the e-money issuer and can lead to a discrete decrease in welfare and a discrete increase in inflation; and (4) first best cannot be achieved. Central-bank-issued e-money leads to a simple optimal policy that achieves the first best.
    Keywords: Digital Currencies; Monetary Policy
    JEL: E52
    Date: 2019
  2. By: Christophe Blot (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Central banks have intensified their communication strategy since the mid 1990’s and it has become an important instrument of central banks’ policymaking toolkit. A large empirical evidence suggests that central bank communication has effectively enhanced the transmission of monetary policy before and during the financial crisis. Nevertheless, the use of communication as a policy instrument is fragile since it depends on economic agents’ perceptions and beliefs. It is crucial that central bank communication be consistent with policy decisions.
    Keywords: ECB; Communication; Monetary policy
    Date: 2018–09
  3. By: Martinez-Miera, David; Repullo, Rafael
    Abstract: This paper reexamines from a theoretical perspective the role of monetary and macroprudential policies in addressing the build-up of risks in the financial system. We construct a stylized general equilibrium model in which the key friction comes from a moral hazard problem in firms' financing that banks' equity capital serves to ameliorate. Tight monetary policy is introduced by open market sales of government debt, and tight macroprudential policy by an increase in capital requirements. We show that both policies are useful, but macroprudential policy is more effective in terms of financial stability and leads to higher social welfare.
    Keywords: Bank monitoring; Capital requirements; Financial Stability; intermediation margin; macroprudential policy; monetary policy
    JEL: E44 E52 G21 G28
    Date: 2019–02
  4. By: Faia, Ester; Karau, Soeren
    Abstract: The risk-taking channel of monetary policy acquires relevance only if it affects systemic risk. We find robust evidence of a systemic risk-taking channel using cross-country and time-series evidence in panel and proxy VARs for 29 G-SIBs from seven countries. We detect a significant role for pecuniary externalities by exploiting the differential impact of monetary policy shocks on book and market leverage. We rationalize these findings through a model in which a fall in interest rates induces banks to increase leverage and reduce monitoring. In an interacted VAR, we find that macro-prudential policy has a significant role in taming the un-intended consequences of monetary policy on systemic risk.
    Keywords: DeltaCoVaR; leverage; LRMES; macroprudential policy; monitoring intensity; panel VAR; policy complementarities; proxy VAR; Risk-taking channel of monetary policy
    JEL: E44 E52 G18 G21
    Date: 2019–01
  5. By: Ryan, Ellen; Whelan, Karl
    Abstract: We use a bank-level data set to examine the behaviour of central bank reserves in the euro area banking system over the course of the ECB QE programme. Previous research on QE has generally paid little attention to the role of reserve dynamics within the banking system and some have assumed that the system passively absorbs additional reserves generated by asset purchases. However, with a negative deposit rate in place throughout the sample we study, euro area banks have had a disincentive to hold excess reserves and thus could wish to treat them as a "hot potato" that is preferably passed on to other banks. We find evidence for this hot potato effect, reporting substantial month-to-month churn in bank reserves as well as evidence that banks are responding to high reserve balances by pushing them off their balance sheets. Unlike in the traditional money multiplier model, where excess reserves are used in loan creation, banks appear to be primarily managing reserves through debt security purchases. As such, this hot potato effect seems likely to have had an effect on European bond yields that is distinct from the portfolio rebalancing effect emphasised in the QE literature thus far.
    Keywords: central banks; Quantitative easing; Reserves
    JEL: E4 E5 G21
    Date: 2019–02
  6. By: Hansen, Stephen; McMahon, Michael; Tong, Matthew
    Abstract: Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England's Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty.
    Keywords: communication; Machine Learning; monetary policy
    JEL: E52 E58
    Date: 2019–01
  7. By: Paul Hubert (Observatoire français des conjonctures économiques); Fabien Labondance (Observatoire français des conjonctures économiques)
    Abstract: This paper investigates the instantaneous and dynamic effects of ECB forward guidance announcements on the term structure of interest rates. We estimate the static and dynamic impacts of forward guidance on overnight indexed swaps (OIS) rates using a high-frequency methodology and an ARCH model, complemented with local projections. We find that ECB forward guidance announcements have lowered the term structure of private short-term interest rates at most maturities, even after controlling for the macroeconomic information published by the ECB. The effect is stronger on longer maturities and persistent
    Keywords: European central bank; Guidance; Interest rates
    JEL: E43 E52 E58
    Date: 2018–12
  8. By: Snezana Eminidou; Marios Zachariadis
    Abstract: The purpose of this paper is to investigate the impact of monetary policy shocks on firms’ selling price and production expectations. We estimate a panel structural vector autoregressive (SVAR) model for 10 euro-area economies using monthly survey data for the period from 1999:1 to 2018:6. To identify the monetary policy shocks, we use narrative and high frequency instruments taking into account the central bank’s announcements regarding its policy decisions. The impulse responses from a panel SVAR analysis indicate that firms typically revise their expectations in a manner consistent with imperfect information theoretical settings, e.g., increasing their production and selling price expectations after an unanticipated interest rate hike. Interestingly, we observe an overshooting pattern where following the initial surprise that leads imperfectly informed firms to raise (reduce) their production and selling expectations after an unanticipated interest rate hike (M1 expansion), firms gradually come to expect contractionary (expansionary) monetary policy shocks to eventually decrease (increase) production and then inflation, thus revise their expectations accordingly by decreasing (increasing) first their production expectations and then their selling price expectations in accordance with this learning experience over time.
    Keywords: Rational inattention; imperfect information; survey data; SVAR; narrative shocks; interest rate shock; divisia index
    JEL: E31 E52
    Date: 2019–02
  9. By: Schmeling, Maik; Wagner, Christian
    Abstract: This paper shows that changes in the tone of central bank communication have a significant effect on asset prices. Tone captures how the central bank frames economic fundamentals and its monetary policy. When tone becomes more positive, stock prices increase, and more so for stocks with high systematic risk, whereas credit spreads and volatility risk premia decrease. These tone effects are robust to controlling for fundamentals, policy actions, and other features of central bank communication, which suggests that tone is a generic instrument of monetary policy that can affect risk premia embedded in asset prices.
    Keywords: central bank communication; credit spreads; monetary policy; risk premia; Stock returns; textual analysis; volatility risk
    JEL: E43 E44 E58 G10 G12
    Date: 2019–01
  10. By: Benigno, Pierpaolo
    Abstract: Can currency competition destabilize central banks' control of interest rates and prices? Yes, it can. In a two-currency world, the growth rate of cryptocurrency sets a lower bound on the nominal interest rate and the attainable inflation rate. In a world of multiple competing currencies issued by profit-maximizing agents, the central bank completely loses control of the nominal interest rate and the inflation rate, which are both determined by structural factors, and thus not subject to manipulation, a result welcomed by the proponents of currency competition. The article also proposes some fixes for the classical problem of indeterminacy of exchange rates.
    Date: 2019–02
  11. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: During the crisis, the ECB modified its collateral framework to face increased liquidity needs of commercial banks. This has taken two forms: the minimum required rating for different classes of assets has been reduced and the haircut associated to these assets has evolved conditional on the default risks of these assets. The benefits in terms of cushioning a liquidity crisis and enhancing monetary policy transmission have most probably exceeded the costs in terms of riskier central bank balance sheet and potential capital losses. This document was provided by Policy Department A at the request of the Economic and Monetary Affairs Committee.
    Date: 2018–07
  12. By: Lartey, Lawrencia
    Abstract: This study was undertaken to determine the pass through effect of the Central bank’s monetary policy rate on commercial banks’ lending rates. Specifically, the study sought to ascertain the short and long run relationship between these variables of interest. It employed monthly time series data spanning from 2002 to 2017 which was sourced mainly from the World Development Indicator (WDI) and Bank of Ghana (BOG). Autoregressive Distributed Lag Model (ARDL) was the estimation technique used for analyzing the data. Estimates from the Augmented Dicker- Fuller (ADF) and Phillips-Perron (PP) unit root test showed that the variables were all integrated of order one (1). The findings found that there is a positive relationship between average lending rates and Monetary Policy Rate (MPR). MPR was significant in both the long and short run and had a large marginal effect on lending rates compared to all the other variables. However, in the short run the speed of adjustment was relatively slow. This implied a more rigid downward adjustment of average lending rate to changes in all the variables. Money supply in the economy denoted by M2+ was negatively related to average lending rates. Treasury bill rate was the only variable which was negatively insignificant in the short run. Based on the above findings the study recommends appropriate measures to be implemented to assist in fully developing the financial markets.
    Keywords: Average Lending Rates, Monetary Policy Rate, Bank of Ghana
    JEL: E4 E5
    Date: 2018–07
  13. By: Barnichon, Régis; Mesters, Geert
    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: Dynamic Multiplier; Inflation-Unemployment trade-off; instrumental variables; Marginal Rate of Transformation; Phillips curve
    JEL: C14 C32 E32 E52
    Date: 2019–01
  14. By: Corsetti, Giancarlo; Eichengreen, Barry; Hale, Galina B; Tallmann, Eric
    Abstract: Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992-3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.
    Keywords: Backstop; Currency devaluation; financial crises; Sovereign and banking risk
    JEL: E63 G01 N14
    Date: 2019–02
  15. By: Ben S. Bernanke; Michael T. Kiley; John M. Roberts
    Abstract: In low-rate environments, policy strategies that involve holding rates “lower for longer” (L4L) may mitigate the effects of the effective lower bound (ELB). However, these strategies work in part by managing the public’s expectations, which is not always realistic. Using the Fed’s large-scale macroeconometric model, we study the effectiveness of L4L policies when financial market participants are forward-looking but other agents are not. We find that the resulting limited ability to manage expectations reduces but does not eliminate the advantages of L4L policies. The best policies provide adequate stimulus at the ELB while avoiding sizable overshoots of inflation and output.
    Keywords: Intererst rates ; Model comparison ; Monetary policy
    JEL: E58 E61 E52 E13
    Date: 2019–02–13
  16. By: Diego Caballero; André Lucas; Bernd Schwaab; Xin Zhang
    Abstract: We address to what extent a central bank can de-risk its balance sheet by unconventional monetary policy operations. To that 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 spillovers across monetary policy operations, causing overall risk to be non-linear in exposures. Some policy operations reduced rather than increased overall risk.
    Keywords: credit risk, risk measurement, central bank, lender-of-last-resort, unconventional monetary policy
    JEL: G21 C33
    Date: 2019–01
  17. By: Amzallag, Adrien; Calza, Alessandro; Georgarakos, Dimitris; Sousa, João
    Abstract: Do negative policy rates hinder banks’ transmission of monetary policy? To answer this question, we examine the behaviour of Italian mortgage lenders using a novel loan-level dataset. When policy rates turn negative, banks with higher ratios of retail overnight deposits to total assets charge more on new fixed rate mortgages. This suggests that the funding structure of banks may matter for the transmission of negative policy rates, especially for long-maturity illiquid assets. Nevertheless, the aggregate economic implications for households are small, suggesting that concerns about inefficient monetary policy transmission to households under modestly negative rates are likely overstated. JEL Classification: E40, E52, E58, G21
    Keywords: bank lending, monetary policy, mortgages, negative interest rates
    Date: 2019–02
  18. By: Etienne Farvaque (Economie Quantitative, Intégration, Politiques Publiques et Econométrie); Antoine Parent (Observatoire français des conjonctures économiques); Piotr, Cracow University) Stanek (Cracow University)
    Abstract: We demonstrate that even though during WWII the interest rate was close to zero supporting the financing of the military effort, dissent inside the FOMC occurred with a similar frequency to other policy episodes. Our analysis highlights that the debates which resulted in dissents turned around two broad issues: the size of the Fed’s balance sheet as well as the functioning of and communication with financial markets. Thus, we argue that the conventional view depicting the Fed as merely accommodating treasury needs should be revised. Our detailed investigation of dissents emphasises the modernity of the objections raised by Fed officials.
    Keywords: Central Banking; Federal open market committee; Governance; Public debt; WW2
    JEL: D71 D78 E58 N12 N42
    Date: 2018–12
  19. By: Josef Schroth
    Abstract: This paper studies optimal bank capital requirements in a model of endogenous bank funding conditions. I find that requirements should be higher during good times such that a macroprudential “buffer” is provided. However, whether banks can use buffers to maintain lending during a financial crisis depends on the capital requirement during the subsequent recovery. The reason is that a high requirement during the recovery lowers bank shareholder value during the crisis and thus creates funding-market pressure to use buffers for deleveraging rather than for maintaining lending. Therefore, buffers are useful if banks are not required to rebuild them quickly.
    Keywords: Credit and credit aggregates; Financial stability; Financial system regulation and policies; Business fluctuations and cycles; Credit risk management; Lender of last resort
    JEL: E13 E32 E44
    Date: 2019
  20. By: Stefan Hohberger; Romanos Priftis; Lukas Vogel
    Abstract: This paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area. The model includes two groups of households: (i) wealthier households, who own financial assets and can smooth consumption over time, and (ii) poorer households, who only receive labor and transfer income and live “hand to mouth.” We compare the impact of policy shocks on constructed measures of income and wealth inequality (net disposable income, net asset position, and relative per-capita income). Except for the short term, expansionary conventional policy and QE shocks tend to mitigate income and wealth inequality between the two population groups.
    Keywords: Economic models; Interest rates; Monetary Policy; Transmission of monetary policy
    JEL: E44 E52 E53 F41
    Date: 2019
  21. By: Mehmet Balcilar (Department of Economics, Eastern Mediterranean University); Zeynel Abidin Ozdemir (Gazi University, Ankara, Turkey); Huseyin Ozdemir (Gazi University, Ankara, Turkey); Mark E. Wohar (University of Nebraska-Omaha, USA)
    Abstract: This study examines volatility spillover dynamics among the S&P 500 index, the US 10-year Treasury yield, the US dollar index futures and the commodity price index. The focus of the study is to analyze effects of Fed’s unconventional monetary policy on the US financial markets. We use realized volatility measures based on daily data covering the period from December 29, 1996 to November 12, 2018. To address nonlinear and asymmetric spillover dynamics in low and high volatility states, we propose a new regime-dependent spillover index based on a smooth transition vector autoregressive (STVAR) model, extending the study of Diebold and Yilmaz (2009,2012) to regime switching models. When applied to US financial data, we find strong evidence that the US financial market risk structure changes after the announcement of quantitively easing (QE) through the portfolio balance channel. The risk spillover moves from purchased assets to non-purchased assets after the QE announcements.
    Keywords: Unconventional Monetary Policy; US Financial Markets; Volatility Spillover; STVAR Model
    JEL: C01 C51 C58 E58 G01 G11 G12 G14 Q43
    Date: 2019
  22. By: Ma, Debin; Zhao, Liuyan
    Abstract: This paper provides the first systematic econometric study on the evolution of Chinese silver exchange and monetary regimes during 1898-1933. Using high quality data sets of monthly and daily prices of silver dollars, we apply the threshold autoregressive models to estimate the silver points between Shanghai and other seventeen cities in Northern and Central China. We find a dramatic improvement in monetary integration from the 1910s, consolidated throughout the 1920s and 1930s to rival the global standard. We supplement our analysis with new data sets on volumes and costs of silver flows and with an in-depth historical narrative. Our paper revaluates the efficiency of the silver regime and China's economic performance in the Republican era.
    Date: 2019–02
  23. By: Sarah Mouabbi; Jean-Guillaume Sahuc
    Abstract: We quantify the macroeconomic effects of the European Central Bank’s unconventional monetary policies using a DSGE model which includes a set of shadow interest rates. Extracted from the yield curve, these shadow rates provide unconstrained measures of the overall stance of monetary policy. Counterfactual analyses show that, without unconventional measures, the euro area would have suffered (i) a substantial loss of output since the Great Recession and (ii) a period of deflation from mid-2015 to early 2017. Specifically, year-on-year inflation and GDP growth would have been on average about 0.61% and 1.09% below their actual levels over the period 2014Q1-2017Q2, respectively.
    Keywords: Unconventional monetary policy, shadow policy rate, DSGE model, euro area
    JEL: E32 E44 E52
    Date: 2019
  24. By: Eichengreen, Barry; Esteves, Rui
    Abstract: In this paper we survey the history of international finance spanning a century and a half. We start by characterizing capital flows in the long run, organizing our discussion around six facts relating to the volume and volatility of capital flows, measured in both net and gross terms. We then connect up the discussion with exchange rates and monetary policies. The organizing framework for this section is the macroeconomic trilemma. We describe where countries situated themselves relative to the trilemma over time and consider the political economy of their choices. Finally, we study the connections between international finance and economic and financial stability. We present consistent measures of growth and debt crises over the century and a half covered in this paper and discuss how their incidence is related to those institutional and political circumstances and, more generally, to the nature of the international monetary and financial regime.
    Keywords: Capital Flows; financial crises; Monetary Systems
    JEL: F21 F33 F34 N10
    Date: 2019–01
  25. By: Gabarro, Marc; Irani, Rustom M; Peydró, José Luis; van Bekkum, Sjoerd
    Abstract: We examine the effects of macroprudential policy for household leverage, liquidity, and default. For identification, we exploit the August 2011 introduction of a limit on mortgage loan-to-value ratios in the Netherlands, in conjunction with population tax-return and property ownership data linked to the universe of housing transactions. First-time homebuyers most affected by the policy shock substantially reduce household leverage and mortgage debt servicing costs by taking on less mortgage debt. Rather than buying more affordable homes or taking non-regulated loans, households consume greater liquidity in the year of home purchase to plug the funding gap. Improvements in household solvency are accompanied by a lower mortgage default rate; however, along the extensive margin, fewer households transition from renting into ownership. These effects are stronger among poorer households and those with fewer liquid assets.
    Keywords: financial regulation; household finance; household leverage; Liquidity vs. Solvency; macroprudential policy; Residential Mortgages
    JEL: D14 D31 E21 E58 G21 G28
    Date: 2019–02
  26. By: Adam Elbourne (CPB Netherlands Bureau for Economic Policy Analysis); Kan Ji (CPB Netherlands Bureau for Economic Policy Analysis)
    Abstract: This research re-examines the findings of the existing literature on the effects of unconventional monetary policy. It concludes that the existing estimates based on vector autoregressions in combination with zero and sign restrictions do not successfully isolate unconventional monetary policy shocks from other shocks impacting the euro area economy. In our research, we show that altering existing published studies by making the incorrect assumption that expansionary monetary shocks shrink the ECB’s balance sheet or even ignoring all information about the stance of monetary policy results in the same shocks and, therefore, the same estimated responses of output and prices. As a consequence, it is implausible that the shocks previously identified in the literature are true unconventional monetary policy shocks. Since correctly isolating unconventional monetary policy shocks is a prerequisite for subsequently estimating the effects of unconventional monetary policy shocks, the conclusions from previous vector autoregression models are unwarranted. We show this lack of identification for different specifications of the vector autoregression models and different sample periods.
    JEL: C32 E52
    Date: 2019–02
  27. By: Corsetti, Giancarlo (Cambridge University); Eichengreen, Barry (University of California, Berkeley); Hale, Galina (Federal Reserve Bank of San Francisco); Tallman, Eric (Federal Reserve Bank of San Francisco)
    Abstract: Why was recovery from the euro area crisis delayed for a decade? The explanation lies in the absence of credible and timely policies to backstop financial intermediaries and sovereign debt markets. In this paper we add light and color to this analysis, contrasting recent experience with the 1992-3 crisis in the European Monetary System, when national central banks and treasuries more successfully provided this backstop. In the more recent episode, the incomplete development of the euro area constrained the ability of the ECB and other European institutions to do likewise.
    Date: 2019–02–01
  28. By: Wenqian Huang
    Abstract: Financial stability depends on the effective regulation of central counterparties (CCPs), which must take account of the incentives that drive CCP behavior. This paper studies the incentives of a for-profit CCP with limited liability. It faces a trade-off between fee income and counterparty credit risk. A better-capitalized CCP sets a higher collateral requirement to reduce potential default losses, even though it forgoes fee income by deterring potential traders. I show empirically that a 1% increase in CCP capital is associated with a 0.6% increase in required collateral. Limited liability, however, creates a wedge between its capital and collateral policy and the socially optimal solution to this trade-off. The optimal capital requirements should account for clearing fees.
    Keywords: central counterparties (CCPs), capital requirement, financial stability
    JEL: G01 G12 G21 G22
    Date: 2019–02
  29. By: Dana Orfaig (Bank of Israel)
    Abstract: In recent years, the marked increase in home prices in Israel has prompted the need to understand the impact of monetary policy on home prices, including the mag- nitude and persistence of that impact. This paper finds that in response to a positive shock of 1 percentage point in the Bank of Israel's monetary interest rate, nominal home prices decline by 2.6 percent, and real home prices decline by 1.1 percent (and in a symmetrical manner to a negative shock). A broad international comparison indicates that the impact on home prices in Israel of a monetary shock is similar to the average impact worldwide. This paper adds to a wide global research base, and proposes-apparently for the first time in Israel-a structural VAR examination of the dynamic links between monetary policy and home prices. The VAR structure takes into account the main variables in the economy that affect, and are affected by, this link. The main conclusion is that monetary shocks, on their own, were not a dominant factor in explaining the changes in home prices in the research period-from the second quarter of 1995 through the first quarter of 2015.
    Date: 2017–09
  30. By: Adrian, Tobias; Stackman, Daniel; Vogt, Erik
    Abstract: We estimate a highly significant price of risk that forecasts global stock and bond returns as a nonlinear function of the VIX. We show that countries' exposure to the global price of risk is related to macroeconomic risks as measured by output, credit, and inflation volatility, the magnitude of financial crises, and stock and bond market downside risk. Higher exposure to the global price of risk corresponds to both higher output volatility and higher output growth. We document that the transmission of the global price of risk to macroeconomic outcomes is mitigated by the magnitude of stabilization in the Taylor rule, the degree of countercyclicality of fiscal policy, and countries' tendencies to employ prudential regulations. The estimated magnitudes are quantitatively important and significant, with large cross sectional explanatory power. Our findings suggest that macroeconomic and financial stability policies should be considered jointly.
    Keywords: Financial Stability; Fiscal policy; monetary policy; regulatory policy
    JEL: G01 G12 G17
    Date: 2019–01
  31. By: Noriyuki Yanagawa (University of Tokyo); Hiromi Yamaoka (Bank of Japan)
    Abstract: Under the developments of digital innovation, global expansion of cashless payments and the emergence of crypto-assets, some argue that central banks should issue digital currencies that can be used by ordinary people instead of paper-based banknotes. The debates on central bank digital currencies are now gathering great attention from worldwide. Although many of major central banks, including the Bank of Japan, do not have an immediate plan to issue digital currencies that can replace banknotes, some central banks are seriously considering whether they should issue digital currencies in the near future or have already issued them as pilot studies. The debates on central bank digital currencies cover broad issues, such as their possible impacts on payment efficiency, banks f fund intermediation, liquidity crises and the transmission mechanism of monetary policy. All of these issues have important implications for the functions of money as well as its future. Digital innovation expands the possibility of money and enables new types of money with a variety of functions to emerge. These functions may include not only traditional payments but also processing various information and data attached to payments as well as executing transactions. In order to consider the pros and cons of central bank digital currencies as well as the future of money, it is needed to assess their possible impacts not only on payment efficiency but also on financial structure and the overall economy. It is also important to examine their impacts on effective utilization of data and the dynamics of gnetworks externality h, which is one of major characteristics of payment infrastructure.
    Keywords: central bank digital currency; innovation; payment; negative interest rate
    Date: 2019–02–19
  32. By: Dirk Schoenmaker
    Abstract: Central banks have already started to look at climate-related risks in the context of financial stability. Should they also take the carbon intensity of assets into account in the context of monetary policy? The guiding principle in the implementation of monetary policy has been ‘market neutrality’, whereby the central bank buys a proportion of the market portfolio of available corporate and bank bonds (in addition to government bonds). But this implies a carbon bias, because capital-intensive companies tend to be more carbon intensive. The author first reviews the legal mandate of the Eurosystem. While the primary objective is price stability, the Treaty on European Union allows the greening of monetary policy as a secondary objective. He proposes a tilting approach to steer or tilt the allocation of the Eurosystem’s assets and collateral towards low-carbon sectors, which would reduce the cost of capital for these sectors relative to high-carbon sectors. This allocation policy must be designed so it does not affect the effective implementation of monetary policy. The working of the tilting approach is calibrated with data on European corporate and bank bonds. We find that a modest tilting approach could reduce carbon emissions in the corporate and bank bond portfolio by 44 per cent and lower the cost of capital of low carbon companies by 4 basis points. Our findings also suggest that such a low carbon allocation can be done without undue interference with the transmission mechanism of monetary policy. Price stability, the primary objective, is, and should remain, the priority of the Eurosystem.
    Date: 2019–02
  33. By: Paul Hubert (Observatoire français des conjonctures économiques); Giovanni Ricco (Observatoire français des conjonctures économiques)
    Abstract: This article presents some recent theoretical and empirical contributions to the macroeconomic literature that challenge the perfect information hypothesis. By taking into account the information frictions encountered by economic agents, it is possible to explain some of the empirical regularities that are difficult to rationalise in the standard framework of full information rational expectations. As an example, we discuss how the sign, size and persistence of the estimated effects of monetary and fiscal policies can change when the informational frictions experienced by economic agents are taken into account.
    Keywords: Infomational frictions; Imperfect information; Economic policy
    Date: 2018–09

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