nep-cba New Economics Papers
on Central Banking
Issue of 2019‒03‒18
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The impact of size, composition and duration of the central bank balance sheet on inflation expectations and market prices By Stephanie Titzck; Jan Willem van den End
  2. On the global Impact of risk-off shocks and policy-put frameworks By Ricardo Caballero; Güneş Kamber
  3. Does monetary policy affect income inequality in the euro area? By Anna Samarina; Anh D.M. Nguyen
  4. Measuring Monetary Policy Surprises Using Text Mining: The Case of Korea By Youngjoon Lee; Soohyon Kim; Ki Young Park
  5. 'Whatever it Takes' to Change Belief: Evidence from Twitter By Michael Stiefel; Rémi Vivès
  6. Modern financial repression in the euro area crisis: making high public debt sustainable? By van Riet, Ad
  7. Government ideology and monetary policy in OECD countries By Dodge Cahan; Luisa Dörr; Niklas Potrafke
  8. Population growth, the natural rate of interest, and inflation By Weiske, Sebastian
  9. Monetary Policy Autonomy and International Monetary Spillovers By Demir, Ishak
  10. Target balances and financial crises By Krahnen, Jan Pieter
  11. The Cost of Banking Crises: Does the Policy Framework Matter? By Grégory Levieuge; Yannick Lucotte; Florian Pradines-Jobet
  12. Measuring and mitigating cyclical systemic risk in Ireland: The application of the countercyclical capital buffer By O'Brien, Eoin; O'Brien, Martin; Velasco, Sofia
  13. The Effect of News Shocks and Monetary Policy By Luca Gambetti; Christoph Görtz; Dimitris Korobilis; John Tsoukalas; Francesco Zanetti
  14. Central Bank Digital Currency and Financial Stability By Young Sik Kim; Ohik Kwon
  15. Monetary financing with interest-bearing money By Harrison, Richard; Thomas, Ryland
  16. Alchemy of Financial Innovation: Securitization, Liquidity and Optimal Monetary Policy By Jungu Yang
  17. Behavioural economics is useful also in macroeconomics : the role of animal spirits By de Grauwe, Paul; Ji, Yuemei
  18. Interest Rates, Moneyness, and the Fisher Equation By Lucas Herrenbrueck

  1. By: Stephanie Titzck; Jan Willem van den End
    Abstract: We analyse the effects of announcements of changes in the Eurosystem's balance sheet size, duration and composition on inflation expectations, the exchange rate and the 10-year euro area government bond yield, using local projections. We explicitly take into account interaction effects between the three balance sheet dimensions. We provide evidence for the duration extraction channel of monetary policy transmission, as we find that the bond yield is sensitive to the combined impact of shocks to balance sheet size and duration. The exchange rate is also affected by a joint size-duration shock. Moreover, the bond yield and exchange rate are sensitive to the joint effect of changes in size and composition. The results indicate that interactions between balance sheet dimensions matter.
    Keywords: central banks and their policies; monetary policy
    JEL: E58 E52
    Date: 2019–03
  2. By: Ricardo Caballero; Güneş Kamber
    Abstract: Global risk-off shocks can be highly destabilizing for financial markets and, absent an adequate policy response, may trigger severe recessions. Policy responses were more complex for developed economies with very low interest rates after the GFC. We document, however, that the unconventional policies adopted by the main central banks were effective in containing asset price declines. These policies impacted long rates and inspired confidence in a policy-put framework that reduced the persistence of risk-off shocks. We also show that domestic macroeconomic and financial conditions play a key role in benefiting from the spillovers of these policies during risk-off episodes. Countries like Japan, which already had very low long rates, benefited less. However, Japan still benefited from the reduced persistence of risk-off shocks. In contrast, since one of the main channels through which emerging markets are historically affected by global risk-off shocks is through a sharp rise in long rates, the unconventional monetary policy phase has been relatively benign to emerging markets during these episodes, especially for those economies with solid macroeconomic fundamentals and deep domestic financial markets. We also show that unconventional monetary policy in the US had strong effects on long interest rates in most economies in the Asia-Pacific region (which helps during risk-off events but may be destabilizing otherwise -we do not take a stand on this tradeoff).
    Keywords: risk-off, conventional and unconventional monetary policy, policy-puts, spillovers, macroeconomic fundamentals, developed and emerging markets, Asia-Pacific region
    JEL: E40 E44 E52 E58 F30 F41 F44 G01
    Date: 2019–03
  3. By: Anna Samarina; Anh D.M. Nguyen
    Abstract: This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999-2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy.
    Keywords: income inequality: monetary policy; euro area
    JEL: D63 E50 E52
    Date: 2019–03
  4. By: Youngjoon Lee (School of Business, Yonsei University); Soohyon Kim (Economic Research Institute, Bank of Korea); Ki Young Park (School of Economics, Yonsei University)
    Abstract: We propose a novel approach to measure monetary policy shocks using sentiment analysis. We quantify the tones of 24,079 news articles around 152 dates of Monetary Policy Board (MPB) meetings of the Bank of Korea (BOK) from March 2005 to November 2017. We then measure monetary policy surprises using the changes of those tones following monetary policy announcements and estimate the impact of monetary policy surprises on asset prices. Our measure of monetary policy surprises better explains changes in long-term rates, while changes in the Bank of Korea's base rate are more closely associated with changes in short-term rates (maturity of one year less). Our results strongly suggest that using a text mining approach to measure monetary policy surprises sheds light on information related to forward guidance and market expectations on future monetary policy.
    Keywords: Monetary policy; Text mining; Central banking; Bank of Korea
    JEL: E43 E52 E58
    Date: 2019–03–06
  5. By: Michael Stiefel (Department of Economics, University of Zurich); Rémi Vivès (Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE)
    Abstract: The sovereign debt literature emphasizes the possibility of avoiding a self-fulfilling default crisis if markets anticipate the central bank to act as lender of last resort. This paper investigates the extent to which changes in belief about an intervention of the European Central Bank (ECB) explain the sudden reduction of government bond spreads for the distressed countries in summer 2012. We study Twitter data and extract belief using machine learning techniques. We find evidence of strong increases in the perceived likelihood of ECB intervention and show that those increases explain subsequent decreases in the bond spreads of the distressed countries.
    Keywords: self-fulfilling default crisis, unconventional monetary policy, Twitter data
    JEL: E44 E58 D83 F34
    Date: 2019–02
  6. By: van Riet, Ad
    Abstract: The sharp rise in public debt-to-GDP ratios in the aftermath of the financial crisis of 2008 posed serious challenges for fiscal policy in the euro area countries and culminated for some member states in a sovereign debt crisis. This note examines the public policy responses to the euro area crisis through the lens of financial repression with a particular focus on how they contributed to easing government budget constraints. Financial repression is defined in this context as the government’s strategy – supported by monetary and financial policies – to gain privileged access to capital markets at preferential credit conditions and divert resources to the state with the aim to secure and, if necessary, enforce public debt sustainability. Following a narrative approach, this note finds that public debt management and resolution, European financial legislation, EMU crisis support and ECB monetary policy have significantly contributed to relieving sovereign liquidity and solvency stress and generated fiscal space through non-standard means. The respective authorities have in fact applied the tools of financial repression to restore stability after the euro area crisis.
    Keywords: fiscal sustainability, public debt management, financial regulation, monetary policy, financial repression, euro area crisis
    JEL: E63 G18 G28 H12 H63
    Date: 2018–05–23
  7. By: Dodge Cahan; Luisa Dörr; Niklas Potrafke
    Abstract: We examine the extent to which government ideology has influenced monetary policy in OECD countries since the 1970s. In line with important changes in the global econ-omy and differences across countries, regression results yield heterogeneous infer-ences depending on the time period and the exchange rate regime/central bank de-pendence of the countries in the sample. Over the 1972-2010 period, Taylor rule speci-fications do not suggest a relationship between government ideology and monetary policy as measured by the short-term nominal interest rate or the rate of monetary expansion minus GDP trend growth. Monetary policy was, however, associated with government ideology in the 1990s: short-term nominal interest rates were lower under leftwing than rightwing governments when central banks depended on the directives of the government and exchange rates were flexible. Very independent central banks, however, raised interest rates when leftwing governments were in office. We describe the historical evidence for several individual countries.
    Keywords: Government ideology, monetary policy, partisan politics, panel data
    JEL: D72 E52 E58 C23
    Date: 2019
  8. By: Weiske, Sebastian
    Abstract: Population growth rates have fallen considerably in most developed countries. An important question for monetary policy is whether this has led to a fall in the natural rate of interest. In representative agent models, the response of the natural rate to a fertility shock crucially depends on the preference parameter determining how households weight generations of different size. Estimating a medium-scale model of the US-economy featuring fertility shocks, I find that declining population growth has lowered both the natural rate and inflation by about 0.4 percentage points in recent decades.
    Keywords: inflation,business cycles,monetary policy,natural rate of interest,demographic transition
    JEL: D64 D91 E31 E32 E52 J11
    Date: 2019
  9. By: Demir, Ishak
    Abstract: While Federal Reserve continues to normalize its monetary policy on the back of a strengthening U.S. economy, the possibility of mimicking U.S. policy actions and so the debate of monetary autonomy has been particularly heated in the most of developing countries, even in advanced economies. We analyse the role played by country-specific characteristics in domestic monetary policy autonomy to set short-term interest rates in the face of spillovers from of U.S. monetary policy as global external shocks. First, we extricate the non-systematic (non-autonomous) component of domestic interest rates which is related to business cycle synchronisation across countries. Then we employ an interacted panel VAR model, which allows impulse response functions to vary by country characteristics for a broad sample of countries. We find strong empirical evidence for the role of exchange rate flexibility, capital account openness in line with trilemma, but also a significant role for other country characteristics, such as dollarisation in the financial system, the presence of a global bank, use of macroprudential policies, and the credibility of fiscal and monetary policy.
    Keywords: monetary policy autonomy,global financial cycle,international spillovers,trilemma,country-specific characteristics,cross-country difference,dilemma
    JEL: C38 E43 E52 E58 F42 G12
    Date: 2019
  10. By: Krahnen, Jan Pieter
    Abstract: Recently, Fuest and Sinn (2018) have demanded a change of rules for the Eurozone's Target 2 payment system, claiming it would violate the Statutes of the European System of Central Banks and of the European Central Bank. The authors present a stylized model based on a set of macro-economic assumptions, and show that Target 2 may lead to loss sharing among national central banks (NCBs), thus violating the no risk-sharing requirement laid out by the Eurosystem Statutes. In this note, I present an augmented model that incorporates essential features of the micro- and macroprudential regulatory and supervisory regime that today is hard-wired into Europe's banking system. The model shows that the original no-risk-sharing principle is not necessarily violated during a financial crisis of a member state. Moreover, it shows that under a banking union regime, financial crisis asset value losses at or below the 99.9th percentile are borne by private investors, not by taxpayers, and particularly not by central banks. Therefore, policy conclusions from the micro-founded model differ significantly from those suggested by Fuest and Sinn (2018).
    Keywords: Target 2,payment system,central banks,Eurosystem
    Date: 2019
  11. By: Grégory Levieuge; Yannick Lucotte; Florian Pradines-Jobet
    Abstract: This paper empirically investigates how the stringency of macroeconomic policy frameworks impacts the unconditional cost of banking crises. We consider monetary, fiscal and exchange rate policies. A restrictive policy framework may promote stronger banking stability, by enhancing discipline and credibility, and by giving financial room to policymakers. At the same time though, tying the hands of policymakers may be counterproductive and procyclical, especially if it prevents them from responding properly to financial imbalances and crises. Our analysis considers a sample of 146 countries over the period 1970-2013, and reveals that extremely restrictive policy frameworks are likely to increase the expected cost of banking crises. By contrast, by combining discipline and flexibility, some policy arrangements such as budget balance rules with an easing clause, intermediate exchange rate regimes or an inflation targeting framework may significantly contain the cost of banking crises. As such, we provide evidence on the benefits of “constrained discretion” for the real impact of banking crises.
    Keywords: Banking crises, Fiscal rules, Monetary policy, Exchange rate regime, Constrained discretion.
    JEL: E44 E58 E61 E62 G01
    Date: 2019
  12. By: O'Brien, Eoin (Central Bank of Ireland); O'Brien, Martin (Central Bank of Ireland); Velasco, Sofia (Central Bank of Ireland)
    Abstract: Following a number of years where the activation of the countercyclical capital buffer was limited, it is now becoming an increasingly relevant and actively used macroprudential policy tool across Europe. Against this background, this Note describes the high-level approach taken by the Central Bank of Ireland in setting the countercyclical capital buffer rate applicable to Irish exposures. In addition, the Note discusses issues around the identification of cyclical systemic risk in Ireland, and in particular the role of the credit-to-GDP gap as an appropriate reference indicator for countercyclical capital buffer rate decisions. The Note introduces work within the Central Bank of Ireland to develop a potential alternative reference indicator for informing countercyclical capital buffer decisions. In particular, an alternative measure of the national credit gap which looks to account for structural shifts in the economy and informs the estimation of the cycle through additional variables. This semi-structural measure of cyclical systemic risk addresses some of the main drawbacks of purely statistical methods such as excessively persistent trends, a feature that is particularly desirable in post-crisis circumstances.
    Date: 2018–07
  13. By: Luca Gambetti (Universita di Torino); Christoph Görtz (University of Birmingham); Dimitris Korobilis (University of Essex); John Tsoukalas (University of Glasgow); Francesco Zanetti (University of Oxford)
    Abstract: A VAR model estimated on U.S. data before and after 1980 documents systematic differences in the response of short- and long-term interest rates, corporate bond spreads and durable spending to news TFP shocks. Interest rates across the maturity spectrum broadly increase in the pre-1980s and broadly decline in the post-1980s. Corporate bond spreads decline significantly, and durable spending rises significantly in the post-1980 period while the opposite short-run response is observed in the pre-1980 period. Measuring expectations of future monetary policy rates conditional on a news shock suggests that the Federal Reserve has adopted a restrictive stance before the 1980s with the goal of retaining control over inflation while adopting a neutral/accommodative stance in the post-1980 period.
    Keywords: News shocks, business cycles, VAR models
    JEL: E20 E32 E43 E52
    Date: 2019–02
  14. By: Young Sik Kim (Department of Economics, Seoul National University); Ohik Kwon (Economic Research Institute, Bank of Korea)
    Abstract: We examine the implications of central bank digital currency (CBDC) for financial stability using a monetary general equilibrium model in which (i) banks provide liquidity in the form of fiat currency, and (ii) commercial bank deposits compete with the central bank deposits in CBDC account. CBDC is a national currency-denominated, interest-bearing and account-based claim on the central bank. People have access to CBDC via direct deposit at the central bank. Claims on specific agents cannot be traded across locations due to limited communication and hence in the event of relocation an agent needs to withdraw deposits in the form of universally verified paper currency. Claims on interest-bearing CBDC is not subject to limited communication problem in the sense that it is also universally verified across locations as an account-based legal tender. The introduction of deposits in CBDC account essentially decreases supply of private credit by commercial banks, which raises the nominal interest rate and hence lowers a commercial bank's reserve-deposit ratio. This has negative effects on financial stability by increasing the likelihood of bank panic in which commercial banks are short of cash reserves to pay out to depositors. However, once the central bank can lend all the deposits in CBDC account to commercial banks, an increase in the quantity of CBDC which does not require reserve holdings can enhance financial stability by essentially increasing supply of private credit and hence lowering nominal interest rate.
    Keywords: banking, central bank, digital currency, liquidity
    JEL: E31 E42 F33
    Date: 2019–02–08
  15. By: Harrison, Richard (Bank of England); Thomas, Ryland (Bank of England)
    Abstract: Recent results suggesting that monetary financing is more expansionary than bond financing in standard New Keynesian models rely on a duality between policy rules for the rate of money growth and the short-term bond rate, rather than a special role for money. We incorporate two features into a simple sticky-price model to generalize these results. First, that money may earn a strictly positive rate of return, motivated by recent debates on the introduction of central bank digital currencies and the introduction of interest-bearing reserves. This allows money-financed transfers to be used as a policy instrument at the effective lower bound, without giving up the ability to use the short-term bond rate to stabilize the economy in normal times. Second, a simple financial friction generates a wealth effect on household spending from government liabilities. Though temporary money-financed transfers to households can stimulate spending and inflation when the short-term bond rate is constrained by a lower bound, similar effects could be achieved by bond-financed tax cuts. So our results do not provide compelling reasons to choose monetary financing rather than bond financing.
    Keywords: Monetary financing; zero lower bound; interest-bearing money; digital currency
    JEL: E43 E52 E62
    Date: 2019–03–08
  16. By: Jungu Yang (Economic Research Institute, Bank of Korea)
    Abstract: This paper provides a theoretical model to explain how securitization affects the overall liquidity and welfare of an economy, an under-discussed area in the literature. By applying an overlapping generations model with random-relocation shocks, the effects of securitization are analyzed in three different hypothetical situations: 1. only one region of the economy issues securities, 2. all regions issue securities with the same capital productivity, and 3. all regions issue securities, but capital productivity is disparate across regions. Asset securitization plays a role in supplying alternative liquid assets (fiat money). As the economy can invest its resources more efficiently in high-yielding illiquid assets (capital) due to securitization, both consumption and welfare increase overall. Optimal monetary policy follows the Friedman rule in cases 1. and 2. However, the rule does not apply in case 3.
    Keywords: Securitization, Liquidity, Friedman Rule, Monetary Policy
    JEL: E52 G11 G12
    Date: 2019–02–20
  17. By: de Grauwe, Paul; Ji, Yuemei
    Abstract: Dynamic stochastic general equilibrium models are still dominant in mainstream macroeconomics, but they are only able to explain business cycle fluctuations as the result of exogenous shocks. This paper uses concepts from behavioural economics and discusses a New Keynesian macroeconomic model that generates endogenous business cycle fluctuations driven by animal spirits. Our discussion includes two applications. One is on the optimal level of inflation targeting under a zero lower bound constraint. The other is on the role of animal spirits in explaining the synchronization of business cycles across countries.
    Keywords: Animal spirits Behavioural macroeconomics Monetary policy Inflation target Zero lower bound Business cycles
    JEL: E32 E58 F42
    Date: 2018–03–14
  18. By: Lucas Herrenbrueck (Simon Fraser University)
    Abstract: The Euler equation of a representative consumer is at the heart of modern macroeconomics. But in empirical applications, it is badly misapplied: it prices a bond that is short-term, perfectly safe, yet perfectly illiquid. Such a bond does not exist. Real-world safe assets are highly tradable or pledgeable as collateral, hence their prices reflect their moneyness as much as their dividends. Indeed, I estimate the return on a hypothetical illiquid bond, for the postwar United States, via inflation and consumption growth, and show that it behaves very differently from the return on safe and liquid assets. I also argue that this distinction helps resolve a great number of puzzles associated with the Euler equation (or its long-run counterpart, the Fisher equation), and points to a better way of understanding how monetary policy affects the economy.
    Keywords: Euler equation; liquid assets; monetary policy; Fisher interest rate
    JEL: E43 E44 E52
    Date: 2019–02

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