nep-cba New Economics Papers
on Central Banking
Issue of 2019‒03‒11
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The impact of QE on liquidity: evidence from the UK Corporate Bond Purchase Scheme By Boneva, Lena; Elliott, David; Kaminska, Iryna; Linton, Oliver; McLaren, Nick; Morley, Ben
  2. Bank Capital Regulation and Endogenous Shadow Banking Crises By Poeschl, Johannes; Zhang, Xue
  3. Mr. Taylor and the Central Bank: Two Inference Exercises By Francesco Luna
  4. Inflation Targeting and Liquidity Traps Under Endogenous Credibility By Cars Hommes; Joep Lustenhouwer
  5. Managing the Yield Curve in a Financially Globalized World By ITO Hiroyuki; Phuong TRAN
  6. Macroprudential policy with capital buffers By Josef Schroth
  7. The expansionary lower bound: contractionary monetary easing and the trilemma By Paolo Cavallino; Damiano Sandri
  8. Keeping up with Innovation: Designing a European Sandbox for Fintech By Ringe, Wolf-Georg; Ruof, Christopher
  9. International capital flows at the security level – evidence from the ECB’s asset purchase programme By Luitel, Prabesh; Vanpée, Rosanne
  10. Quantitative Easing and Excess Reserves By Valentin Jouvanceau
  11. Discipline or external balance? The choice of international monetary systems in Europe By Ljungberg, Jonas; Ögren, Anders
  12. At Your Service! Liquidity Provision and Risk Management in 19th Century France By Avaro, Maylis; Bignon, Vincent
  13. Destabilizing the Global Monetary System: Germany’s Adoption of the Gold Standard in the Early 1870s By Johannes Wiegand
  14. Assessing the Macroeconomic Impact of the ECB’s Asset Purchase Programme in a Dynamic Nelson–Siegel Modelling Framework By Zhou, Siwen
  15. Estimating a Markov Switching DSGE Model with Macroeconomic Policy Interaction By Nobuhiro Abe; Takuji Fueki; Sohei Kaihatsu
  16. Understanding Inflation in Emerging and Developing Economies By Jongrim Ha; M. Ayhan Kose; Franziska L. Ohnsorge
  17. The Missing Link: Monetary Policy and The Labor Share By Cantore, Cristiano; Ferroni, Filippo; León-Ledesma, Miguel
  18. A Reconsideration of Money Growth Rules By Michael T. Belongia; Peter N. Ireland
  19. Dynamic Impact of the U.S. Monetary Policy on Oil Market Returns and Volatility By Hardik A. Marfatia; Rangan Gupta; Esin Cakan
  20. Safe assets: made, not just born By Robert N McCauley

  1. By: Boneva, Lena (Bank of England); Elliott, David (Bank of England); Kaminska, Iryna (Bank of England); Linton, Oliver (University of Cambridge); McLaren, Nick (Bank of England); Morley, Ben (Bank of England)
    Abstract: In August 2016, the Bank of England (BoE) announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to £10 billion of sterling corporate bonds. To investigate the impact of these purchases on liquidity, we create a novel dataset that combines transaction-level data from the secondary corporate bond market with proprietary offer-level data from the BoE’s CBPS auctions. Identifying the impact of central bank asset purchases on liquidity is potentially impacted by reverse causality, because liquidity considerations might impact purchases. But the offer-level data allow us to construct proxy measures for the BoE’s demand for bonds and auction participants’ supply of bonds, meaning that we can control for the impact of liquidity on purchases. Across a range of liquidity measures, we find that CBPS purchases improved the liquidity of purchased bonds.
    Keywords: Quantitative easing; market liquidity; market-making; corporate bonds
    JEL: E52 E58 G12 G23
    Date: 2019–03–01
  2. By: Poeschl, Johannes; Zhang, Xue
    Abstract: We study the macroeconomic effects of bank capital requirements in an economy with two banking sectors. Banks are connected through a wholesale funding market. Anticipated banking crises occur endogenously in the form of self-fulfilling wholesale funding rollover crises. Retail bank capital requirements can reduce the frequency and severity of banking crises. Tightening retail bank capital requirements increases the size and leverage of the shadow banking sector through a novel channel that works through the anticipation of banking crises. A policy which corrects this spillover is more than twice as effective in reducing the frequency and severity of banking crises.
    Keywords: Bank capital regulation, shadow banking, anticipated bank runs.
    JEL: E44 G24 G28
    Date: 2018–12–20
  3. By: Francesco Luna
    Abstract: Many observers argue that the world has changed after the latest financial crisis. If that is the case, monetary policy and the process informing it will have to be reconsidered and “learned” anew by all stakeholders. Perhaps, a new Taylor rule will emerge. A “Taylor rule” is predicated upon two successful inference exercises: one by the researcher who is interested in identifying the Central Bank’s behavior and one by the Central Bank, which tries to infer how the economy works and interacts with its monetary policy interventions. Because of certain granularities imposed by institutional arrangements and the need for transparent communication in policy making, this paper proposes an analytical framework based on computability theory to model these inference exercises and to assess their general possibility of success. So, is it possible to infer/learn the central bank’s policy rule? The answer is a qualified positive and depends on the “complexity” of the economy and on the quality of information. As for policy implications, the results show that transparency and understandable “reaction functions” will go a long way in fostering learnability.
    Date: 2019–02–15
  4. By: Cars Hommes; Joep Lustenhouwer
    Abstract: Policy implications are derived for an inflation-targeting central bank, whose credibility is endogenous and depends on its past ability to achieve its targets. This is done in a New Keynesian framework with heterogeneous and boundedly rational expectations. We find that the region of allowed policy parameters is strictly larger than under rational expectations. However, when the zero lower bound on the nominal interest rate is accounted for, self-fulfilling deflationary spirals can occur, depending on the credibility of the central bank. Deflationary spirals can be prevented with a high inflation target and aggressive monetary easing.
    Keywords: Business fluctuations and cycles; Credibility; Monetary policy
    JEL: E52 E32 C62
    Date: 2019
  5. By: ITO Hiroyuki; Phuong TRAN
    Abstract: It has been increasingly argued that highly globalized financial markets have been playing a bigger role in determining domestic asset prices and long-term interest rates. Rey (2013) argues that global financial cycles essentially dictate the movements of domestic financial markets to such an extent that policy makers have to decide between either retaining monetary autonomy by imposing capital controls, or retaining free capital mobility but relinquishing monetary independence. In such a world, managing long-term interest rates through manipulating short-term interest rates can be difficult. In this paper, we empirically examine whether net capital inflows contribute to weakening the link between short-term and long-term interest rates. We find that economies open to cross-border capital flows or with more developed financial markets tend to have a greater negative relationship between net capital inflows and interest rate pass-through. We also examine whether macroprudential policies can affect the extent of interest rate pass-through and find that broad-based capital macroprudential tools are effective in retaining control of short- to long-term interest rate pass-through.
    Date: 2019–02
  6. 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: financial frictions, financial intermediation, regulation, counter-cyclical capital requirements, market discipline, access to funding
    JEL: E13 E32 E44
    Date: 2019–02
  7. By: Paolo Cavallino; Damiano Sandri
    Abstract: We provide a theory of the limits to monetary policy independence in open economies arising from the interaction between capital flows and domestic collateral constraints. The key feature is the existence of an "Expansionary Lower Bound" (ELB), defined as an interest rate threshold below which monetary easing becomes contractionary. The ELB can be positive, thus binding before the ZLB. Furthermore, the ELB is affected by global monetary and financial conditions, leading to novel international spillovers and crucial departures from Mundell's trilemma. We present two models in which the ELB may arise due to either carry-trade capital flows or currency mismatches.
    Keywords: monetary policy, collateral constraints, currency mismatches, carry trade, spillovers
    JEL: E5 F3 F42
    Date: 2019–02
  8. By: Ringe, Wolf-Georg; Ruof, Christopher
    Abstract: In the aftermath of the 2007-09 global financial crisis, regulators in all major jurisdictions introduced significant new requirements for financial firms. Certainly justified in purpose, these regulations have increased market barriers, both directly through specific obligations, and indirectly through the sheer magnitude and complexity they involve. Regulators primarily focused on bolstering financial stability and consumer protection, while frequently disregarding their objective of promoting financial innovation. Ten years after the crisis, it is time to reconsider the appropriate balance between those objectives. In this commentary, the authors show how EU financial regulation may stifle the innovation of financial services. Using the example of automated investment advice, so-called ‘robo-advisors’, they show how a proper balance between regulatory objectives could be achieved through establishing a ‘guided’ regulatory sandbox.
    Date: 2019–01
  9. By: Luitel, Prabesh; Vanpée, Rosanne
    Abstract: The paper investigates the importance of having a sovereign credit rating for a country’s financial development. After controlling for endogeneity and selection bias, the authors compare different aspects of the financial sector and the capital markets of recently rated countries with otherwise similar, but unrated countries. The findings indicate that obtaining a sovereign credit rating changes the composition of the assets of domestic banks and leads to a growth in bank assets. With a sovereign rating, the government is less dependent on bank financing and it can tap international bond markets. Banks subsequently provide more credit to the private sector, which translates into riskier debt holdings, resulting in an increase in the banks’ risk-weighted assets. In addition, an initial sovereign credit rating attracts foreign investors, both FDI and portfolio investments. Hence, the authors conclude that a sovereign credit provision plays a crucial role in enabling the financial development in a country.
    Date: 2018–11
  10. By: Valentin Jouvanceau (Univ Lyon, Université Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: What are the impacts of a flush of interest-bearing excess reserves to the real economy? Surprisingly, the theoretical literature remains silent about this question. We address this issue in a new Keynesian model with various financial frictions and reserve requirements in the balance sheet of bankers. Modeling QE by the supply of excess reserves, allow for endogenous changes in the relative supply of financial assets. We find that this mechanism is crucial to identify and disentangle between the portfolio balance, the credit and the asset prices channels of QE. Further, we demonstrate that the macroeconomic effects of QE are rather weak and mainly transmitted through the asset prices channel.
    Keywords: Quantitative Easing, Excess Reserves, Transmission Channels, Securitization Crisis
    JEL: E32 E44 E52 E58 G01
    Date: 2019
  11. By: Ljungberg, Jonas (Department of Economic History, Lund University); Ögren, Anders (Department of Economic History, Lund University)
    Abstract: While there is a huge literature on exchange rate systems since the classical gold standard, less research has been devoted to comparisons of the different arguments that guided the choices. While the origin of the international gold standard in the 1870s was a result of silver coins disappearing from circulation due to rising silver prices, the gold standard has later been interpreted as a quest for monetary discipline. This discipline argument was introduced by the end of WWI as a support for a restoration of the gold standard. Its failure led to an emphasis on the need to avoid external imbalances, which came to the fore in the preparations of the Bretton Woods system. The balance argument was also central in the early discussions of a monetary union in Europe, but with the critique of Keynesianism it was superseded by the disciplinary argument which became determinant for the design of EMU.
    Keywords: exhange rates; Europe; gold standard; EMU
    JEL: F31 N13 N14
    Date: 2019–02–28
  12. By: Avaro, Maylis; Bignon, Vincent
    Abstract: This paper uses a historical study to show a solution to the trade-off faced by central banks between providing liquidity to a broad group of financial intermediaries and the risk that this easy access may fuel moral hazard. In late 19th century the Bank of France operated a very wide discount window and used a variety of risk management techniques to effectively subdue risk-taking behaviors and to protect its balance sheet from taking any loss. This allowed agents to monetize a very diverse set of capital while limiting the risk of bail-out. We show that this effectively helped the central bank to stabilize the economy from the consequences of negative income shocks.
    Keywords: central bank; discount window; lender of last resort; Retail and shadow banks
    JEL: E51 G23 N13
    Date: 2019–02
  13. By: Johannes Wiegand
    Abstract: In 1871-73, newly unified Germany adopted the gold standard, replacing the silver-based currencies that had been prevalent in most German states until then. The reform sparked a series of steps in other countries that ultimately ended global bimetallism, i.e., a near-universal fixed exchange rate system in which (mostly) France stabilized the exchange value between gold and silver currencies. As a result, silver currencies depreciated sharply, and severe deflation ensued in the gold block. Why did Germany switch to gold and set the train of destructive events in motion? Both a review of the contemporaneous debate and statistical evidence suggest that it acted preemptively: the Australian and Californian gold discoveries of around 1850 had greatly increased the global supply of gold. By the mid-1860s, gold threatened to crowd out silver money in France, which would have severed the link between gold and silver currencies. Without reform, Germany would thus have risked exclusion from the fixed exchange rate system that tied together the major industrial economies. Reform required French accommodation, however. Victory in the Franco-Prussian war of 1870/71 allowed Germany to force accommodation, but only until France settled the war indemnity and regained sovereignty in late 1873. In this situation, switching to gold was superior to adopting bimetallism, as it prevented France from derailing Germany’s reform ex-post.
    Date: 2019–02–15
  14. By: Zhou, Siwen
    Abstract: This paper examines the macroeconomic impact of the Asset Purchase Programme (APP) in the euro area on the basis of a set of macro-finance variables included in a Dynamic Nelson–Siegel modelling framework. The empirical results emphasise the role of the APP’s portfolio balance channel in stimulating economic growth and inflation, both at the aggregate euro area level and at the disaggregated country-specific level. The portfolio balance channel works at the aggregated level through greater international price competitiveness, easier conditions on capital markets, and higher asset prices. Moreover, the results suggest that the initial APP announcement has increased the annual real GDP growth rates and HICP inflation in the euro area by up to 0.7% and 0.8%, respectively. At the disaggregated level, there is evidence for the stimulation of bank lending through the portfolio balance channel in the core countries. Moreover, the stronger rise in stock prices in the core countries shows that the wealth effect triggered by portfolio rebalancing is mainly concentrated in the richer member countries. A comparison of the country-specific macroeconomic impact of APP shows that while overall GDP responses are broadly comparable across countries, the peripheral countries that have implemented effective labour market reforms have benefited significantly from bond purchases in stimulating inflation. This points to the need for further labour market reforms in Italy. A reform package of labour and product market reforms can help to reduce the resulting transition costs.
    Keywords: Quantitative Easing, Asset Purchase Programme, European Central Bank, Term Structure Model, Portfolio Balance Channel
    JEL: E43 E44 E52 F31 F42
    Date: 2019–02–08
  15. By: Nobuhiro Abe (Bank of Japan); Takuji Fueki (Bank of Japan); Sohei Kaihatsu (Strategy, Policy, and Review Department, International Monetary Fund)
    Abstract: This paper estimates a Markov switching dynamic stochastic general equilibrium model (MS-DSGE) allowing for changes in monetary/fiscal policy interaction. The key feature of the model is that it seeks to quantitatively examine the impact of changes in monetary/fiscal policy interaction on economic outcomes even during a period when the ZLB is binding and unconventional monetary policy is implemented. To this end, we estimate our model using the shadow interest rate, which can be interpreted as an aggregate that captures the overall effect of unconventional monetary policies as well as conventional monetary policy. Applying our model to Japan, we identify changes in monetary/fiscal policy interaction even during the period when unconventional monetary policy has been implemented. We find that the introduction of Qualitative and Quantitative Easing (QQE) enables the Bank of Japan to actively respond to the inflation rate, which has helped to push up inflation.
    Keywords: Monetary policy; Inflation; Markov-switching DSGE
    JEL: E52 E62 C32
    Date: 2019–03–01
  16. By: Jongrim Ha (World Bank, Development Prospects Group); M. Ayhan Kose (World Bank, Development Prospects Group; Brookings Institution; CEPR, and CAMA); Franziska L. Ohnsorge (World Bank, Development Prospects Group; CAMA)
    Abstract: Emerging market and developing economies (EMDEs) have experienced an extraordinary decline in inflation since the early 1970s. After peaking in 1974 at 17.3 percent, inflation in these economies declined to 3.5 percent in 2017. Despite a checkered history of managing inflation among many EMDEs, disinflation occurred across all regions. This paper presents a summary of our recent book, “Inflation in Emerging and Developing Economies: Evolution, Drivers, and Policies,” that analyzes this remarkable achievement. Our findings suggest that many EMDEs enjoy the benefits of stability-oriented and resilient monetary policy frameworks, including central bank transparency and independence. Such policy frameworks need to be complemented by strong macroeconomic and institutional arrangements. Inflation expectations are more weakly anchored in EMDEs than in advanced economies. In EMDEs that do not operate inflation targeting frameworks, exchange rate movements tend to have larger and more persistent effects on inflation.
    Keywords: Prices; Inflation; Monetary Systems; Monetary Policy; Globalization.
    JEL: E31 E42 E52 E58
    Date: 2019–02
  17. By: Cantore, Cristiano; Ferroni, Filippo; León-Ledesma, Miguel
    Abstract: The textbook New-Keynesian (NK) model implies that the labor share is pro-cyclical conditional on a monetary policy shock. We present evidence that a monetary policy tightening robustly increased the labor share and decreased real wages and labor productivity during the Great Moderation period in the US, the Euro Area, the UK, Australia, and Canada. We show that this is inconsistent not only with the basic NK model, but with a wide variety of NK models commonly used for monetary policy analysis and where the direct link between the labor share and the markup can be broken.
    Keywords: Labor Share; monetary policy shocks
    JEL: C52 E23 E32
    Date: 2019–02
  18. By: Michael T. Belongia (University of Mississippi); Peter N. Ireland (Boston College)
    Abstract: A New Keynesian model, estimated using Bayesian methods over a sample period that includes the recent episode of zero nominal interest rates, illustrates the effects of replacing the Federal Reserve's historical policy of interest rate management with one targeting money growth instead. Counterfactual simulations show that a rule for adjusting the money growth rate, modestly and gradually, in response to changes in the output gap delivers performance comparable to the estimated interest rate rule in stabilizing output and inflation. The simulations also reveal that, under the same money growth rule, the US economy would have recovered more quickly from the 2007-09 recession, with a much shorter period of exceptionally low interest rates. These results suggest that money growth rules can serve as a simple and effective alternative guide for monetary policy in the current low interest rate environment.
    Keywords: Divisia monetary aggregates, Monetary policy rules, New Keynesian models, Zero lower bound
    JEL: E31 E32 E41 E47 E51 E52
    Date: 2019–03–01
  19. By: Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, BBH 344G, 5500 N. St. Louis Ave., Chicago, IL 60625, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Esin Cakan (Department of Economics, University of New Haven, 300 Boston Post Road, West Haven, CT 06516, USA)
    Abstract: In this paper, we assess the dynamic impact of the U.S. monetary policy announcements on oil market futures returns and volatility. We use intra-day data together with a time-varying modeling approach to study the nature of this dynamic impact. In addition, we also control for macroeconomic news shocks and separately study the response of good and bad realized volatility. Evidence suggests that there is a significant time variation in the response of oil returns as well as its volatility to the Federal Reserve policy announcements. Furthermore, we find that higher (lower) uncertainty about Federal Reserve policy actions weakens (strengthens) the impact of the announcements on oil returns and volatility.
    Keywords: Monetary Policy, Macroeconomic Surprises, Oil Returns and Volatility, Time-Varying Model
    JEL: C32 E44 E52 G14 Q43
    Date: 2019–02
  20. By: Robert N McCauley
    Abstract: Official reserve managers have a big stake in the debate over safe assets: their portfolios just about define such assets. This paper conveys the message that reserve managers need not worry about a shortage of safe assets. The debate turns first on whether demand for dollar safe assets will grow as rapidly as emerging market economies (EMEs). Second, it turns on whether the supply of dollar safe assets only grows with US fiscal deficits. Neither holds. On the demand side, EMEs' growth does not require ever higher dollar reserves. Indeed, the global economy may have reached "peak reserves" in 2014. On the supply side, law and policy extend state backing to various IOUs, thereby creating safe assets. US government support for the housing agencies Fannie Mae and Freddie Mac has made their debt into safe assets, albeit with wobbles. Federal Reserve liquidity, Federal Deposit Insurance Corporation insurance, and, in extremis as in 2008, Treasury equity also work to make US bank deposits safe. Elsewhere, government support of banks allows those from well rated countries to compete with US banks in issuing safe dollar deposits. Moreover, supranational organisations, non-US sovereigns and their agencies all compete with the US Treasury in issuing safe dollar bonds. In allocating their dollar foreign exchange reserves, central banks make room for such competitors. In particular, they hold more than a third of such reserves in instruments other than US Treasury securities.
    Keywords: safe assets; US Treasury securities; agency securities; bank deposits; Eurodollars; Triffin dilemma
    JEL: F31 F33 G15
    Date: 2019–02

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