nep-cba New Economics Papers
on Central Banking
Issue of 2019‒04‒08
thirty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Inflation Targeting. Institutional features of the strategy in practice By Joanna Niedźwiedzińska
  2. Sovereigns and Financial Intermediaries Spillovers By Hamid R Tabarraei; Abdelaziz Rouabah; Olivier Pierrard
  3. Identifying and Estimating the Effects of Unconventional Monetary Policy in the Data: How to Do It and What Have We Learned? By Barbara Rossi
  4. Thirty years of inflation targeting in New Zealand: The origins, evolution and influence of a monetary policy innovation. By Buckle, Robert A.
  5. Robust Monetary Policy Under Uncertainty About the Lower Bound By Peter Tillmann
  6. After the Bazooka a Bonanza from Heaven – „Helicopter Money“ Now? By Ansgar Belke
  7. The Response of European Energy Prices to ECB Monetary Policy By Torró, Hipòlit
  8. The Effects of Conventional and Unconventional Monetary Policy: A New Approach By Atsushi Inoue; Barbara Rossi
  9. FX intervention and domestic credit: evidence from high-frequency micro data By Boris Hofmann; Hyun Song Shin; Mauricio Villamizar-Villegas
  10. Event studies, the random walk hypothesis and risk spreads: What role for central bank sovereign bond purchases in the Euro area? By Ansgar Belke; Daniel Gros
  11. Inflation Expectations as a Policy Tool? By Olivier Coibion; Yuriy Gorodnichenko; Saten Kumar; Mathieu Pedemonte
  12. Monetary Easing, Investment and Financial Instability By Viral Acharya; Guillaume Plantin
  13. Macroprudential Policies in the EAGLE FLI Model Calibrated for Hungary By Gábor Fukker; Lóránt Kaszab
  14. The Impact of QE on Liquidity: Evidence from the UK Corporate Bond Purchase Scheme By Boneva, L.; Elliott, D.; Kaminska, I.; Linton, O.; McLaren, N.; Morley, B.
  15. The next SSM term: Supervisory challenges ahead By Götz, Martin; Tröger, Tobias; Wahrenburg, Mark
  16. Limited Participation, Capital Accumulation and Optimal Monetary Policy By Xavier Ragot
  17. Bank Capital Forbearance By Martynova, Natalya; Perotti, Enrico C; Suarez, Javier
  18. Inefficiency and Regulation of Private Liquidity By Benigno, Pierpaolo; Robatto, Roberto
  19. Exploring trend inFLation dynamics in Euro Area countries By Mónica Correa-López; Matías Pacce; Kathi Schlepper
  20. Negative Monetary Policy Rates and Portfolio Rebalancing: Evidence from Credit Register Data By Margherita Bottero; Camelia Minoiu; José-Luis Peydro; Andrea Polo; Andrea F Presbitero; Enrico Sette
  21. Inflation targeting and the pass-through effect: The case of Mongolia By Taguchi, Hiroyuki
  22. What anchors for the natural rate of interest? By Claudio Borio; Piti Disyatat; Phurichai Rungcharoenkitkul
  23. The Impact of Monetary Conditions on Bank Lending to Households By Gyöngyösi,; Ongena, Steven; Schindele, Ibolya
  24. How Effective is Macroprudential Policy? Evidence from Lending Restriction Measures in EU Countries By Tigran Poghosyan
  25. Cash Use Across Countries and the Demand for Central Bank Digital Currency By Tanai Khiaonarong; David Humphrey
  26. The impact of the excess reserves of the banking sector on interest rates and money supply in Poland By Mariusz Kapuściński; Ilona Pietryka
  27. Kalecki’s critique of wicksellianism and the miss-specification of negative interest rates By Jan Toporowski
  28. Sovereign Default and Liquidity: the Case for a World Safe Asset By François Le Grand; Xavier Ragot
  29. Monetary Policy and Exchange Rate Returns: Time-Varying Risk Regimes By Charles W. Calomiris; Harry Mamaysky
  30. The Dynamic Effects of Monetary Policy and Government Spending Shocks on Unemployment in the Peripheral Euro Area Countries By Pietro Dallari; Antonio Ribba

  1. By: Joanna Niedźwiedzińska (Narodowy Bank Polski)
    Abstract: New Zealand was the first country to introduce a monetary strategy known as inflation targeting (IT) in 1989. Since then, many other countries have adopted an inflation targeting regime. The paper discusses in detail the key institutional features of an IT strategy, as practiced by central banks. It includes an overview of mandates, inflation targets, decisionmaking processes and accountability mechanisms of inflation targeters. Instead of only describing the current state of IT, in many instances the paper indicates changes introduced in the past years to central banks’ practices. The historical perspective relates to such aspects as reformulations of inflation targets and the evolution of decision-making processes. The paper analyses more than 40 IT central banks and indicates similarities and differences among advanced and emerging market economies. The main finding is that the reviewed institutional features have not been homogenous – neither across time, nor across central banks. In particular, when comparing advanced and emerging market inflation targeters, while in many aspects there is hardly any difference to be noted, in some cases the approach of advanced economies differs significantly from that of emerging market economies. This holds especially for the key feature of the strategy – namely defining the inflation target.
    Keywords: Monetary Policy, Central Banking, Policy Design
    JEL: E31 E52 E58 E61
    Date: 2018
  2. By: Hamid R Tabarraei; Abdelaziz Rouabah; Olivier Pierrard
    Abstract: We examine the spillover effects between sovereigns and banks in a model with a heterogeneous banking system. An increase in sovereign’s default risk affects financial intermediaries through two channels in this model. First, banks’ funding costs might increase, inducing higher interest rates on loans and bonds and a cut back in these assets. Second, financial regulator’s risk-weighted asset framework would assign higher weights to lower quality assets, implying a portfolio rebalancing and more deleveraging. While capital adequacy requirements weaken the impact of shocks emerging from the real economy, they amplify the effect of shocks on banks’ balance sheets.
    Keywords: Central banks;Interest rates on loans;Bank capital;Market interest rates;Bank liquidity;Sovereign risk;Contagion;Interbank market;interbank;deposit rate;leverage ratio;order condition;bank 's balance
    Date: 2019–02–27
  3. By: Barbara Rossi
    Abstract: How should one identify monetary policy shocks in unconventional times? Are unconventional monetary policies as effective as conventional ones? And has the transmission mechanism of monetary policy changed in the zerolower bound era? The recent Önancial crisis led Central banks to lower their interest rates in order to stimulate the economy, and interest rates in many advanced economies hit the zero lower bound. As a consequence, the traditional approach to the identification and the estimation of monetary policy faces new econometric challenges in unconventional times. This article aims at providing a broad overview of the recent literature on the identification of unconventional monetary policy shocks and the estimation of their effects on both financial as well as macroeconomic variables. Given that the prospects of slow recoveries and long periods of very low interest rates are becoming the norm, many economists believe that we are likely to face unconventional monetary policy measures often in the future. Hence, these are potentially very important issues in practice.
    Keywords: shock identification, VARs, zero lower bound, unconventional monetary policy, monetary policy, external instruments, forward guidance
    JEL: E4 E52 E21 H31 I3 D1
    Date: 2019–01
  4. By: Buckle, Robert A.
    Abstract: Nearly thirty years ago New Zealand ushered in a revolutionary approach to monetary policy. This was formalised by the Reserve Bank of New Zealand Act 1989 which specified price stability as the primary function of monetary policy and provided operational independence for New Zealand’s central bank. This innovation spawned the spread of more central banks around the world with a mandate to prioritise inflation targeting. This paper explains the historical origins of the RBNZ Act, its design and the ideas that influenced its design. It reviews how the practice of inflation targeting and the choice of policy instruments have evolved. The paper includes a review of research evaluating the impact of inflation targeting in New Zealand and concludes with a discussion of contemporary issues including a proposal before the New Zealand Parliament to introduce significant changes to the Act which could have important implications for future monetary policy.
    Keywords: Monetary policy, Inflation targeting, Central bank governance,, Accountability, Transparency, Credibility, Sustainability,
    Date: 2018
  5. By: Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Central banks face uncertainty about the true location of the effective lower bound (ELB) on nominal interest rates. We model optimal discretionary monetary policy during a liquidity trap when the central bank designs policy that is robust with respect to the location of the ELB. If the central bank fears the worst-case location of the ELB, monetary conditions will be more expansionary before the liquidity trap occurs.
    Keywords: optimal monetary policy, discretion, robust control, uncertainty, liquidity trap
    JEL: E31 E32 E58
    Date: 2019
  6. By: Ansgar Belke
    Abstract: Helicopter money has once been proposed as a theoretical thought experiment by Milton Friedman in order to elucidate the effect of money injections into the macroeconomy over time. However, some Euro area member states nowadays consider helicopter money, i.e. permanent Quantitative Easing (QE), as a permanent ingredient of future EMU governance. We set helicopter money apart from QE monetary policy measures and also distinguish it from a traditional fiscal stimulus. We then deal with and critically assess further developments of the helicopter money idea à la Bernanke und Buiter. Furthermore, the paper then comes up with three practical variants of helicopter money, basically available for the European Central Bank. Taking this as a starting point, the pros and cons of helicopter money and its closely defined implementation conditions are discussed. Finally, we derive some implications of helicopter money implementation for the monetary system as a whole.
    Keywords: economic stimulus programmes, full reserve banking, helicopter money, interest rate, joint analysis of fiscal and monetary policy, Quantitative Easing
    JEL: E52 E58 E63
    Date: 2018–02
  7. By: Torró, Hipòlit
    Abstract: To our knowledge, this paper is the first to discuss the response of European energy commodity prices to unexpected monetary policy surprises from the European Central Bank. Using the Rigobon (2003) identification through heteroscedasticity method, we find a significant and positive response during the crisis period for Brent and coal. Similar results are obtained by other authors for European financial assets in this period. This result reinforces the idea that during this period, financial assets and some commodities positively responded to conventional and unconventional expansionary monetary policy measures, increasing confidence about the survival of the European monetary union. The remaining European energy commodities (electricity, EUAs, and natural gas prices) seem to be unaffected by monetary policy actions. We think these results are of interest to those economic agents and institutions involved in European energy markets and are especially important for the European Central Bank in order to predict the consequences of its monetary policy on the inflation objective.
    Keywords: Research Methods/ Statistical Methods
    Date: 2018–03–12
  8. By: Atsushi Inoue; Barbara Rossi
    Abstract: We propose a new approach to analyze economic shocks. Our new procedure identifies economic shocks as exogenous shifts in a function; hence, we call the "functional shocks". We show how to identify such shocks and how to trace their effects in the economy via VARs using a procedure that we call "VARs with functional shocks". Using our new procedure, we address the crucial question of studying the effects or monetary policy by identifying monetary policy shocks as shifts in the whole term structure of government bond yields in a narrow window of time around monetary policy announcements. Our identification sheds new light on the effects of monetary policy shocks, both in conventional and unconventional periods, and shows that traditional identification procedures may miss important effects. We find that, overall, unconventional monetary policy has similar effects to conventional expansionary monetary policy, leading to an increase in both output growth and inflation; the response is hump-shaped; peaking around one year to one year and a half after the shock. The new procedure has the advantage of identifying monetary policy shocks during both conventional and unconventional monetary policy periods in a unified manner and can be applied more generally to other economic shocks.
    Keywords: shock identification, VARs, zero-lower bound, unconventional monetary policy, forward guidance
    JEL: E4 E52 E21 H31 I3 D1
    Date: 2019–10
  9. By: Boris Hofmann; Hyun Song Shin; Mauricio Villamizar-Villegas (Banco de la República de Colombia)
    Abstract: We employ a rarely available high-frequency micro dataset to study the impact of foreign exchange intervention on domestic credit growth. We find that sterilised purchases of dollars by the central bank dampens the flow of new domestic corporate loans in Colombia. Slowing the pace of currency appreciation plays a key role in dampening credit expansion. Our analysis sheds light on the role of FX intervention as part of the financial stability-oriented policy response to credit booms associated with capital inflow surges. **** RESUMEN: En este trabajo utilizamos datos panel de frecuencia diaria, para estudiar el impacto de las intervenciones cambiarias sobre el crédito comercial. Para el caso colombiano, encontramos que las compras (esterilizadas) de divisas ayudaron a frenar el crecimiento del crédito, sobre todo en momentos donde hubo fuertes entradas de capital. Nuestros hallazgos también indican que la devaluación de la moneda jugó un papel fundamental en la disminución del crédito. Nuestro análisis resalta el papel de la intervención cambiaria como herramienta de estabilidad financiera.
    Keywords: FX intervention, credit registry, emerging markets, financial channel of exchange rates, Intervención cambiaria, créditos comerciales, países emergentes, canal financiero de tasa de cambio
    JEL: E58 F31 F33 F41 G20
    Date: 2019–03
  10. By: Ansgar Belke; Daniel Gros
    Abstract: The asset purchase program of the Euro area, active between 2015 and 2018, constitutes an interesting special case of Quantitative Easing (QE) because the ECB’s (Public Sector Purchase Program) PSPP program involved the purchase of the bonds of peripheral Euro area governments, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases of the bonds of the own sovereign by the national central bank should increase the risk for the remaining private bond holders. This might seem incompatible with the observation that risk spreads on peripheral bonds fell when the Euro area’s QE was announced. However, the initial fall in risk premia might have been due to the expectation of the bond being effective in lowering risk free rates. When these expectations were disappointed risk premia went back to their initial level. Formal statistical test confirm that indeed risk premia on peripheral bonds did not follow a random walk (contrary to what is assumed in event studies). Nor did the announcements of bond buying change the stochastics of these premia. One should thus not expect the impact effect to have been permanent.
    Keywords: European Central Bank, Quantitative Easing, unconventional monetary policies, spreads, structural breaks, time series econometrics
    JEL: E43 E58 G12 G15
    Date: 2019–01
  11. By: Olivier Coibion (UT Austin and NBER); Yuriy Gorodnichenko (UC Berkeley); Saten Kumar (Auckland University of Technology); Mathieu Pedemonte (UC Berkeley)
    Abstract: We assess whether central banks may use inflation expectations as a policy tool for stabilization purposes. We review recent work on how expectations of agents are formed and how they affect their economic decisions. Empirical evidence suggests that inflation expectations of households and firms affect their actions but the underlying mechanisms remain unclear, especially for firms. Two additional limitations prevent policy-makers from being able to actively manage inflation expectations. First, available surveys of firms’ expectations are systematically deficient, which can only be addressed through the creation of large, nationally representative surveys of firms. Second, neither households’ nor firms’ expectations respond much to monetary policy announcements in low-inflation environments. We provide suggestions for how monetary policy-makers can pierce this veil of inattention through new communication strategies. At this stage, there remain a number of implementation issues and open research questions that need to be addressed to enable central banks to use inflation expectations as a policy tool.
    Keywords: survey, inflation expectations, firms, managers
    JEL: E31 C83 D84
    Date: 2018–06
  12. By: Viral Acharya (Reserve Bank of India); Guillaume Plantin (Département d'économie)
    Abstract: This paper studies a model of the interest-rate channel of monetary policy in which a low policy rate lowers the cost of capital for firms thereby spurring investment, but also induces destabilizing “carry trades” against their assets. If the public sector does not have sufficient fiscal capacity to cope with the large resulting private borrowing, then carry trades and productive investment compete for scarce funds, and so the former crowd out the latter. Below an endogenous lower bound, monetary easing generates only limited investment at the cost of large and socially wasteful financial risk taking.
    Keywords: Monetary policy; Financial stability; Shadow banking; Carry trades
    JEL: E52 E58 G01 G21 G23 G28
    Date: 2019–02
  13. By: Gábor Fukker (Magyar Nemzeti Bank (Central Bank of Hungary)); Lóránt Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In this paper we develop the Hungarian version of the EAGLE FLI (Euro Area GLobal Economy model with Financial LInkages) model which is the EAGLE model enriched with financial frictions and country-specific banking sector. The EAGLE FLI features the intermediation of loanable funds (ILF) view in banking whereby the creation of new loans requires banks to collect additional deposits. Households and firms borrow in the model using housing as collateral. We find that macroprudential policies such as an increase in capital requirements, decreases in the loan-to-value ratio or loan-to-income ratio of borrower households (and firms) limits banks’ credit creation with negative spillover effects to the real economy due to the financial accelerator mechanism in the model. On the other hand, these policies strengthen banks’ capital and limit the vulnerability of households and firms to negative financial shocks.
    Keywords: macroprudential policy, multi-country DSGE, capital requirements, loan-to-value ratio, loan-to-income ratio
    JEL: E12 E13 E52 E58 F11 F41
    Date: 2019
  14. By: Boneva, L.; Elliott, D.; Kaminska, I.; Linton, O.; McLaren, N.; Morley, B.
    Abstract: In August 2016, the Bank of England (BoE) announced a Corporate Bond Purchase Scheme (CBPS) to purchase up to $10bn 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: G12 G23 E52 E58
    Date: 2019–03–29
  15. By: Götz, Martin; Tröger, Tobias; Wahrenburg, Mark
    Abstract: In this note, we first highlight different developments for banks under direct ECB supervision within the SSM that may prompt further investigation by supervisors. We find that banks that were weakly capitalized at the start of direct ECB supervision (1) still face elevated levels of non-performing loans, (2) are less cost-efficient and (3) reduced their share of subordinated debt financing over the last years. We then stress the importance of continuous and ongoing cost-benefit analysis regarding banking supervision in Europe. We also encourage processes to question existing supervisory practices to ensure a lean and efficient banking supervision. Finally, we underline the need of continuous and intensified coordination among regulatory bodies in the Banking Union since the efficacy of European bank supervision rests on its interplay with many different institutions.
    Keywords: SSM,Banking Union,ECB supervision
    Date: 2019
  16. By: Xavier Ragot (Département d'économie)
    Abstract: Motivated by recent empirical findings on money demand, the paper presents a general equilibrium model where agents have limited participation in financial markets and use money to smooth consumption. In such setup, investment is not optimal because only a fraction of households participate in financial markets in each period. Optimal monetary policy substantially increases welfare by changing investment decisions over the business cycle, but adverse redistributive effects limit the scope for an active monetary policy. Recent developments in the heterogeneous-agents literature are used to develop a tractable framework with aggregate shocks, where optimal monetary policy can be analyzed.
    Keywords: Limited participation; Incomplete markets; Optimal policy
    JEL: E41 E52 E32
    Date: 2018
  17. By: Martynova, Natalya; Perotti, Enrico C; Suarez, Javier
    Abstract: We analyze the strategic interaction between undercapitalized banks and a supervisor who may intervene by preventive recapitalization. Supervisory forbearance emerges because of a commitment problem, reinforced by fiscal costs and constrained capacity. Private incentives to comply are lower when supervisors have lower credibility, especially for highly levered banks. Less credible supervisors (facing higher cost of intervention) end up intervening more banks, yet producing higher forbearance and systemic costs of bank distress. Importantly, when public intervention capacity is constrained, private recapitalization decisions become strategic complements, leading to equilibria with extremely high forbearance and high systemic costs of bank failure.
    Keywords: Bank Recapitalization; bank supervision; Forbearance
    JEL: G21 G28
    Date: 2019–03
  18. By: Benigno, Pierpaolo; Robatto, Roberto
    Abstract: We propose a simple model to study the efficiency of liquidity creation by financial intermediaries, which can take the form of either safe or risky debt. Liquidity crises arise when risky debt is defaulted on and stops providing liquidity services. Owing to a novel externality related to liquidity premia and the cost of issuing safe debt, the laissez-faire equilibrium is inefficient, characterized by an excessive supply of risky debt. However, the optimal policy requires the regulation of safe debt as well. Capital requirements targeting risky debt alone have unintended welfare-reducing consequences.
    Date: 2019–03
  19. By: Mónica Correa-López (Banco de España); Matías Pacce (Banco de España); Kathi Schlepper (Deutsche Bundesbank)
    Abstract: This paper analyzes the inflation processes of twelve Euro Area countries over the period 1984:q1-2017:q4. The stylized features of inflation uncover its changing nature and cross-country heterogeneity, in terms of mean, volatility and persistence. After estimation of a wide array of unobserved components models, we isolate trend inflation rates in a framework that allows for time-varying inflation gap persistence and stochastic volatility in both the trend and transitory components. On average, a sizeable share of overall inflation dynamics is accounted for by movements in the trend. In explaining trend dynamics, we consistently find a signficant role for short-term inflation expectations, economic slack, and openness variables. However, the cumulated impacts of these are fairly small, except in certain, sustained episodes. This is of policy relevance since the monetary authority might want to respond to shocks that are prone to affect the inflation trend in order to ensure that long-term inflation expectations remain anchored.
    Keywords: trend inflation, inflation dynamics, UCSV models, monetary policy
    JEL: E31 E52
    Date: 2019–03
  20. By: Margherita Bottero; Camelia Minoiu; José-Luis Peydro; Andrea Polo; Andrea F Presbitero; Enrico Sette
    Abstract: We study negative interest rate policy (NIRP) exploiting ECB's NIRP introduction and administrative data from Italy, severely hit by the Eurozone crisis. NIRP has expansionary effects on credit supply-- -and hence the real economy---through a portfolio rebalancing channel. NIRP affects banks with higher ex-ante net short-term interbank positions or, more broadly, more liquid balance-sheets, not with higher retail deposits. NIRP-affected banks rebalance their portfolios from liquid assets to credit—especially to riskier and smaller firms—and cut loan rates, inducing sizable real effects. By shifting the entire yield curve downwards, NIRP differs from rate cuts just above the ZLB.
    Keywords: Bank credit;Reserve requirements;Interest rates on loans;Central banks;Bank liquidity;Negative interest rates;portfolio rebalancing;bank lending channel;liquidity management;Eurozone crisis;interbank;credit supply;ex-ante;rebalance;negative rate
    Date: 2019–02–28
  21. By: Taguchi, Hiroyuki
    Abstract: This paper aims to provide empirical evidence on the relationship between inflation targeting and the pass-through effect from exchange rate to consumer prices, focusing on the case of Mongolia. The study estimates a vector-autoregressive model, and examines the impulse responses of consumer prices to the shock of exchange rate for the pre-inflation targeting period and the post-inflation targeting period. The empirical analysis identified the existence of the pass-through effect during the pre-inflation targeting period and the loss of the pass-through during the post-inflation targeting period. It was speculated that the loss of the pass-through comes from the “forward-looking” monetary policy rule in Mongolian inflation targeting, so that it can work on the expectations of domestic agents such that they are less inclined to change prices in response to a given exchange rate shock.
    Keywords: Inflation Targeting; Pass-through Effect; Mongolia; Vector Autoregressive Model; Forward-looking Rule
    JEL: E52 F31 O53
    Date: 2019–03
  22. By: Claudio Borio; Piti Disyatat; Phurichai Rungcharoenkitkul
    Abstract: The paper takes a critical look at the conceptual and empirical underpinnings of prevailing explanations for low real (inflation-adjusted) interest rates over long horizons and finds them incomplete. The role of monetary policy, and its interaction with the financial cycle in particular, deserve greater attention. By linking booms and busts, the financial cycle generates important path dependencies that give rise to intertemporal policy trade-offs. Policy today constrains policy tomorrow. Far from being neutral, the policy regime can exert a persistent influence on the economy’s evolution, including on the real interest rate. This raises serious conceptual and practical questions about the use of the natural interest rate as a monetary policy guidepost. In developing the analysis, the paper also provides a specific critique of the safe asset shortage hypothesis – a hypothesis that has gained considerable popularity in recent years.
    Keywords: Real interest rate, natural interest rate, saving, investment, inflation, monetary policy, safe asset shortage hypothesis
    JEL: E32 E40 E44 E50 E52
    Date: 2019–03
  23. By: Gyöngyösi,; Ongena, Steven; Schindele, Ibolya
    Abstract: We study the impact of monetary conditions on the supply of mortgage credit by banks to households. Using comprehensive credit register data from Hungary, we first establish a "bank-lending-to-households" channel by showing that monetary conditions affect the supply of mortgage credit in volume. We then study the impact of monetary conditions on the composition of mortgage credit along its currency denomination and borrower risk. We find that expansionary domestic monetary conditions increase the supply of mortgage credit to all households in the domestic currency and to risky households in the foreign currency. Because most households are unhedged, bank lending in multiple currencies may involve additional risk taking. Changes in foreign monetary conditions affect lending in the foreign currency more than in the domestic currency, and also differ in their compositional impact along firm risk.
    Keywords: bank balance-sheet channel; Foreign currency lending; household lending; monetary policy
    JEL: E51 F3 G21
    Date: 2019–03
  24. By: Tigran Poghosyan
    Abstract: This paper assesses the effectiveness of lending restriction measures, such as loan-to-value and debt-service-to-income ratios, in affecting developments in house prices and credit. We use data on 99 lending standard restrictions implemented in 28 EU countries over 1990–2018. The results suggest that lending restriction measures are generally effective in curbing house prices and credit. However, the impact is delayed and reaches its peak only after three years. In addition, the impact is asymmetric, with tightening measures having weaker association with target variables compared to loosening measures. The association is stronger in countries outside of euro area and for legally-binding measures and measures involving sanctions. The results have practical implications for macroprudential authorities.
    Keywords: Monetary policy instruments;Exchange rate policy;Central banks;Monetary policy;Monetary expansion;macroprudential regulation;financial stability;credit;house price;Kleibl;target variable;type of measure;real GDP growth;dependent variable
    Date: 2019–03–01
  25. By: Tanai Khiaonarong; David Humphrey
    Abstract: The level and trend in cash use in a country will influence the demand for central bank digital currency (CBDC). While access to digital currency will be more convenient than traveling to an ATM, it only makes CBDC like a bank debit card—not better. Demand for digital currency will thus be weak in countries where cash use is already very low, due to a preference for cash substitutes (cards, electronic money, mobile phone payments). Where cash use is very high, demand should be stronger, due to a lack of cash substitutes. As the demand for CBDC is tied to the current level of cash use, we estimate the level and trend in cash use for 11 countries using four different measures. A tentative forecast of cash use is also made. After showing that declining cash use is largely associated with demographic change, we tie the level of cash use to the likely demand for CBDC in different countries. In this process, we suggest that one measure of cash use is more useful than the others. If cash is important for monetary policy, payment instrument competition, or as an alternative payment instrument in the event of operational problems with privately supplied payment methods, the introduction of CBDC may best be introduced before cash substitutes become so ubiquitous that the viability of CBDC could be in doubt.
    Keywords: Bank credit;Central banks;Central bank policy;Central bank accounting;Bank accounting;digital cash;e-money;physical cash;non-cash;giro
    Date: 2019–03–01
  26. By: Mariusz Kapuściński (SGH Warsaw School of Economics); Ilona Pietryka (Nicolaus Copernicus University in Torun)
    Abstract: In this study we aim to analyse the effects of leaving excess reserves in the banking sector by the central bank on the level and the variability of interest rates, as well as on money supply. To this end, we use mainly data for Poland, but in some cases, for robustness, also for a panel of Poland, the euro area, the Czech Republic and Hungary, as there had only been a limited variability in some policy variables in our sample for Poland. We estimate the parameters of GARCH, (P)VAR and (panel) linear regression models. We find that excess reserves affect the level and the variability of an overnight money market interest rate. However, the variability of the overnight money market interest rate, shaped to a large extent by excess reserves, does not affect the level of longer-term interest rates, and we find little evidence of its impact on their variability. Neither do excess reserves translate into higher money supply. Our results imply that the current monetary policy operational framework in Poland is adequate to ensure the transmission of the central bank policy rate to money market interest rates. Furthermore, it appears unlikely that raising the amount of excess reserves left, as proposed by some policymakers, would affect money supply. Instead, it would lower the money multiplier and the overnight money market interest rate, as well as increase its volatility.
    Keywords: excess reserves; interest rate pass through; money multiplier; GARCH; VAR; panel data models
    JEL: E52 E43 E51 C32 C33
    Date: 2019
  27. By: Jan Toporowski (Faculty of Law & Social Sciences SOAS, University of London)
    Abstract: This paper examines the logic of the arguments for negative interest rates. These arise from a Wicksellian theoretical framework that attributes low investment to a ‘natural’ or ‘real’ rate of interest (that is the rate of profit on real investments) that is below the money rate of interest. At near zero money rates of interest the low investment is presumed to be caused by a negative natural rate of interest. The paper outlines Kalecki’s reasons for believing that in fact the rate of profit for the economy as a whole is in general positive and, in any case, the rate of profit is differentiated in the economy by industry and firm. This removes the Wicksellian rationale for negative interest rates.
    Keywords: Kalecki, monetary theory, rate of interest
    JEL: E12 E32 E43 E52
    Date: 2018
  28. By: François Le Grand (EMLYON Business School); Xavier Ragot (Département d'économie)
    Abstract: We present a general equilibrium model of the world economy where sovereigns face idiosyncratic risks and can default on their debt. In this model, the world interest rate is determined through the global financial market equilibrium, the amount of safe asset is endogenous and determines international risk sharing. Non-trivial multiple equilibria naturally arise, due to the endogeneity of the interest rate. These equilibria can be ranked according to their aggregate welfare, such that equilibria with a higher quantity of safe assets correspond to higher welfare. Due to a shortage in the safe asset supply, even the equilibrium with the highest welfare is not constrained-efficient. Finally, we prove that a world fund issuing a safe asset can reach the constrained-efficient aggregate welfare. With a standard calibration, the size of the fund is found to be around 4.1% of the world GDP. Its relationship with the Special Drawing Rights of the IMF is discussed.
    Date: 2017–10
  29. By: Charles W. Calomiris; Harry Mamaysky
    Abstract: We develop an empirical model of exchange rate returns, applied separately to samples of developed and developing economies’ currencies against the dollar. We incorporate into this model natural-language-based measures of the monetary policy stances of the large global central banks, and show that these become increasingly important in the post-crisis era. We find an important spillover effect from the monetary policy of the Bank of England, the Bank of Japan and the ECB to the exchange rate returns of other currencies against the dollar. Furthermore, we find that the relation between a developed country’s interest rate differential relative to the dollar (carry) and the future returns from investing in its currency switches sign from the pre- to the post-crisis subperiod, while for emerging markets the carry variable is never a significant predictor of returns. The high profit from the carry trade for emerging market currencies reflects persistent country characteristics likely reflective of risk rather than the interest differential per se. While measures of global monetary policy stance forecast exchange rate returns against the dollar, they do not predict exchange rate returns against other base currencies. Results regarding returns from carry, however, are insensitive to the choice of the base currency. We construct a no-arbitrage pricing model which reconciles many of our empirical findings.
    JEL: E4 F31 F34 G15
    Date: 2019–03
  30. By: Pietro Dallari; Antonio Ribba
    Abstract: In this paper we study the response of unemployment to monetary policy and fiscal shocks in the peripheral Euro-area countries. By applying the structural near-VAR methodology, we jointly model Euro area-wide and national variables while preserving the invariance of the set of Euro-area common shocks. Our main finding is that fiscal multipliers vary across countries and the results are consistent with the prediction of the standard New Keynesian model only in Italy and Greece. Instead, the multipliers exhibit a nonKeynesian sign in Ireland, Portugal and Spain. These results seem to be robust to alternative identification strategies. As far as the monetary policy shock is concerned, we find that it plays an important role, jointly with the other Euro-area wide shocks, as a long-term driver of national unemployment.
    Keywords: Business Cycles; Fiscal Shocks; Unemployment; Euro area; Near-Structural VARs
    JEL: E32 E62 C32
    Date: 2019–02

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