nep-cba New Economics Papers
on Central Banking
Issue of 2019‒04‒15
twenty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Effective Monetary Stimulus: Measuring the stance of monetary policy in New Zealand By Jamie Culling; Michael Callaghan; Adam Richardson
  2. Managing the Expectations and Monetary Policy effectiveness: Role of Inflation Targeting By khan, sajawal
  3. Macroprudential policy in a monetary union with cross-border banking By Darracq Pariès, Matthieu; Kok, Christoffer; Rancoita, Elena
  4. Does liquidity regulation impede the liquidity profile of collateral? By Schmidt, Kirsten
  5. "An Institutional Analysis of China's Reform of their Monetary Policy Framework" By He Zengping; Jia Genliang
  6. Does international reserve accumulation crowd out domestic private investment? By Wishnu Mahraddika
  7. Dominant Currency Debt By Egemen Eren; Semyon Malamud
  8. The effects of macroeconomic, fiscal and monetary policy announcements on sovereign bond spreads: an event study from the EMU By António Afonso; João Tovar Jalles; Mina Kazemi
  9. Inflation target and (a)symmetries in the oil price pass-through to inflation By Antonia Lòpez-Villavicencio; Marc Pourroy
  10. The effect of news shocks and monetary policy By Luca Gambetti; Christoph Görtz; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
  11. Pricing under Fairness Concerns By Erik Eyster; Kristof Madarasz; Pascal Michaillat
  12. Monetary Policy, Growth and Employment in Developing Areas: A Review of the Literature By Junankar, Pramod N. (Raja)
  13. Sticky Price versus Sticky Information Price: Empirical Evidence in the New Keynesian Setting By Drissi, Ramzi; Ghassan, Hassan B.
  14. Negative Interest Rate Policy and the Influence of Macroeconomic News on Yields By Fatum, Rasmus; Hara, Naoko; Yamamoto, Yohei
  15. Text Data Analysis Using Latent Dirichlet Allocation: An Application to FOMC Transcripts By Hali Edison; Hector Carcel
  16. On the credit and exchange rate channels of central bank asset purchases in a monetary union By Darracq Pariès, Matthieu; Papadopoulou, Niki
  17. Gains from Anchoring Inflation Expectations: Evidence from the Taper Tantrum Shock By Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss
  18. Digging Deeper--Evidence on the Effects of Macroprudential Policies from a New Database By Zohair Alam; Adrian Alter; Jesse Eiseman; R. G Gelos; Heedon Kang; Machiko Narita; Erlend Nier; Naixi Wang
  19. Tax Rules to Prevent Expectations-driven Liquidity Trap By Yoichiro Tamanyu
  20. A Baseline Medium-Scale NK DSGE Model for Policy Analysis By Xu, Wenli
  21. Comment on "Michelson-Morley, Fisher, and Occam: the radical implications of stable quiet inflation at the zero bound" By Reis, Ricardo
  22. Taylor-rule consistent estimates of the natural rate of interest By Brand, Claus; Mazelis, Falk

  1. By: Jamie Culling; Michael Callaghan; Adam Richardson (Reserve Bank of New Zealand)
    Abstract: The Reserve Bank of New Zealand sets monetary policy using the Official Cash Rate (OCR) as its policy tool to target price stability and maximum sustainable employment. However, the Reserve Bank’s monetary policy stance is also set by its communication of what might happen to the OCR in the future. To set monetary policy appropriately, the Reserve Bank must assess overall financial conditions and their implications for inflation and employment. To do this, the Reserve Bank must take account of the range of interest rates at each borrowing horizon (i.e. the yield curve). This is because how household and firms view the outlook for interest rates can also have an effect on today’s business activity, wage and price setting behaviour, and eventually inflation – it is not just the level of current interest rates that matters for economic activity and price setting. For example, a homeowner taking out a mortgage, or a firm taking out a loan, often borrow at longer terms and therefore consider current interest rates and the likely evolution of future interest rates when making decisions. The Reserve Bank uses a range of tools to assess financial conditions in New Zealand. In particular, the Reserve Bank attempts to gauge how stimulatory or contractionary monetary policy needs to be to stabilise the economy. One tool to help in a broad assessment of monetary conditions – how stimulatory interest rates are – is the effective monetary stimulus (EMS) measure. The EMS is a summary statistic that takes account of the (nominal) neutral interest rate and interest rate outlook. It provides a snapshot of the interest rates faced by businesses and households across the yield curve, and assesses whether these interest rates are stimulatory or contractionary for the economy. The EMS is, of course, just one summary of overall monetary/financial conditions. The Reserve Bank also takes account of other influences when assessing overall conditions. For example, exchange rates, credit spreads, and uncertainty indicators are all monitored as part of the Bank’s policy assessment. It is that total assessment, rather than the EMS or yield curve alone, that is taken into account when considering the appropriate OCR setting to achieve the macroeconomic outcomes. In this Note, we show how the EMS is constructed for New Zealand. We also show that the EMS measure is a useful indicator of the stance of monetary conditions. Lastly, the EMS measure also fits with the Reserve Bank’s narrative of the stance of monetary policy through history.
    Date: 2019–05
  2. By: khan, sajawal
    Abstract: Abstract Effectiveness of monetary policy, to ensure the macroeconomic stability, depends on its capability to anchor the expectations of different markets’ players. This requires better understanding of the process through which expectations affect the economy and monetary policy stance affects the expectations. In a modern economy, full of complexities and uncertainties, rational agents take into account all possible unraveling of future economic events while making their decisions. Due to significant role of expectations in economic decisions, the expectations channel emerged as an effective mechanism to achieve monetary policy objectives. This paper discusses the best practices used by the central banks to anchor expectations and their application in emerging/developing economies to achieve the monetary policy goals of low inflation and stable economic growth.
    Keywords: Expectations, Inflation Targeting, Developing Countries
    JEL: E58
    Date: 2018–11–15
  3. By: Darracq Pariès, Matthieu; Kok, Christoffer; Rancoita, Elena
    Abstract: We analyse the interaction between monetary and macroprudential policies in the euro area by means of a two-country DSGE model with financial frictions and cross-border spillover effects. We calibrate the model for the four largest euro area countries (i.e. Germany, France, Italy, and Spain), with particular attention to the calibration of cross-country financial and trade linkages and country specific banking sector characteristics. We find that countercyclical macroprudential interventions are supportive of mon-etary policy conduct through the cycle. This complementarity is significantly reinforced when there are asymmetric financial cycles across the monetary union, which provides a case for targeted country-specific macroprudential policies to help alleviate the burden on monetary policy. At the same time, our findings point to the importance of taking into account cross-border spillover effects of macroprudential measures within the Monetary Union. JEL Classification: E32, E44, E52, F36, F41
    Keywords: banking, DSGE, macroprudential policy, monetary policy
    Date: 2019–03
  4. By: Schmidt, Kirsten
    Abstract: We analyze the pledging behavior of Euro area banks during the introduction of the liquidity coverage ratio (LCR). The LCR considers only a subset of central bank eligible assets and thereby offers banks an arbitrage opportunity to improve their regulatory ratio by altering their collateral pledging with the European Central Bank. We use the existence of national liquidity requirements to proxy for banks’ incentives to exploit this differential treatment of central bank eligible assets. Using security-level information on collateral pledged with the central bank, we find that banks without a preceding national liquidity requirement pledge more and less liquid collateral than banks with a preceding national liquidity requirement after the LCR introduction. We attribute the difference across banks to a preparation effect of the liquidity regulation on the national level. JEL Classification: G21, G28, E42, E52, E58
    Keywords: central bank refinancing operations, liquidity regulation, monetary policy
    Date: 2019–03
  5. By: He Zengping; Jia Genliang
    Abstract: This paper traces the history of China's reform of its monetary policy framework and analyzes its success and problems. In the context of financial marketization and the failure of the quantity-targeting framework, the People's Bank of China transformed its monetary policy framework toward one that targets interest rates. The reform includes two important institutional changes: establishing an interest rate corridor and decreasing the difficulty the Open Market Operations room faces in estimating the market demand for reserves. The new monetary policy framework successfully stabilizes the interbank offered rate. However, this does not mean that the new framework is sufficient. One important problem remaining to be solved is how to manage the effects of fiscal activities on monetary policy operations. This paper analyzes the fiscal effects on reserves in China's Treasury Single Account system. The missing role of the Treasury in monetary policy operations increases the difficulty for the central bank to achieve its interest rate target. A further reform is therefore needed to provide a coordination mechanism between the Treasury and the People's Bank of China.
    Keywords: China; Monetary Policy Framework; Interest Rate Target; Fiscal Effects on Reserves
    JEL: E42 E52 E58 P24
    Date: 2019–04
  6. By: Wishnu Mahraddika
    Abstract: Foreign exchange reserve accumulation is one of the preferred strategies to protect against susceptibility to financial crises. At the same time, maintaining a healthy international reserve position has the potential to promote domestic investment by reducing the cost of foreign borrowing through improving international creditworthiness. However, contractionary monetary policy in the form of sterilization operations implemented as part of reserve accumulation strategy could crowd out financing for domestic investment. This study examines the relationship between foreign reserve accumulation and domestic private investment by undertaking a dynamic panel data econometric analysis covering 58 countries over the period 2000–2014. The findings suggest that reserve accumulation is positively associated with domestic private investment in the long run.
    Keywords: Reserves; Investment; Panel ARDL estimator
    JEL: E2 E5 F30 F4 G15
    Date: 2019
  7. By: Egemen Eren (Bank for International Settlements (BIS) - Monetary and Economic Department); Semyon Malamud (Ecole Polytechnique Federale de Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)
    Abstract: Why is the dollar the dominant currency for debt contracts and what are its macroeconomic implications? We develop an international general equilibrium model where firms optimally choose the currency composition of their debt. We show that there always exists a dominant currency debt equilibrium, in which all firms borrow in a single dominant currency. It is the currency of the country that effectively pursues aggressive expansionary monetary policy in global downturns, lowering real debt burdens of firms. We show that the dollar empirically fits this description, despite its short term safe haven properties. We provide further modern and historical empirical support for our mechanism across time and currencies. We use our model to study how the optimal monetary policy differs if the Federal Reserve reacts to global versus domestic conditions.
    Keywords: dollar debt, dominant currency, exchange rates, inflation
    JEL: E44 E52 F33 F34 F41 F42 F44 G01 G15 G32
    Date: 2018–08
  8. By: António Afonso; João Tovar Jalles; Mina Kazemi
    Abstract: We assess the impact of announcements corresponding to different fiscal and monetary policy measures on the 10-year sovereign bond yield spreads (relative to Germany) of the 10 EMU countries during the period 01:1999 - 07:2016. Implementing pooled and country-fixed effects OLS regressions, we find that the European Commission’s (EC) releases of the excessive deficit procedure significantly affect the yield spreads. The EC releases of higher debt and better budget balance forecasts contribute to the rise and the decline of spreads, respectively. Moreover, we find that the announcements of the ECB’s key interest rates together with the longer-term refinancing operations (LTROs) and the first covered bond purchase programme (CBPP1) negatively affect sovereign yield spreads in our sample of EMU countries.
    Date: 2019
  9. By: Antonia Lòpez-Villavicencio (UL2 - Université Lumière - Lyon 2, GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique); Marc Pourroy (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers, Faculté de Sciences Economiques - Université de Poitiers - Université de Poitiers)
    Abstract: In this paper we employ state-space models to estimate the pass-through of oil price changes to consumer prices for a large sample of countries from 1970 to 2017. By controlling for self-selection bias and endogeneity and allowing for different responses to positive and negative price changes, we asses the differences between explicit inflation targeting (IT) countries and a control group. Surprisingly perhaps, our results suggest that the pass-through is higher for IT countries. Our main contribution is to show that these is mainly due to IT countries having a significant higher pass-through than non-IT countries when the oil price decreases: a 10% drop in oil price leads about a 0.11% drop in inflation in ITers (of which 4pp are explained by the monetary regime). Importantly, we show that adopting IT reduces the asymmetry of the pass-through. We run several robustness checks and conclude that falling oil prices are more welcomed by the central banks with an IT framework, in particular during deflationary episodes or when inflation is above the target. JEL Classification: E31; E42; Q43.
    Keywords: oil price,pass-through,inflation targeting,state-space model,propensity score matching
    Date: 2019–05
  10. By: Luca Gambetti; Christoph Görtz; Dimitris Korobilis; John D. Tsoukalas; Francesco Zanetti
    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
  11. By: Erik Eyster; Kristof Madarasz; Pascal Michaillat
    Abstract: This paper proposes a theory of pricing consistent with two well-documented patterns: customers care about fairness, and firms take these concerns into account when they set prices. The theory assumes that customers find a price unfair when it carries a high markup over cost, and that customers dislike unfair prices. Since markups are not observable, customers must extract them from prices. The theory assumes that customers infer less than rationally: when a price rises after an increase in marginal cost, customers partially misattribute the higher price to a higher markup---which they find unfair. Firms anticipate this response and trim their price increases, which reduces the passthrough of marginal costs into prices below one: prices are somewhat rigid. Embedded in a New Keynesian model---as a replacement of Calvo pricing---our theory produces monetary nonneutrality. When monetary policy loosens and inflation rises, customers misperceive markups as higher and feel unfairly treated; firms mitigate the perceived unfairness of prices by reducing their markups, which in general equilibrium leads to higher output.
    Date: 2019–04
  12. By: Junankar, Pramod N. (Raja) (University of New South Wales)
    Abstract: In this paper we review the literature on the impact that monetary policy has on growth and employment in developing countries. Much of the literature focusses on the impact of monetary policy on inflation levels and inflation volatility, and sometimes on output (GDP) levels and volatility of output. This survey of the literature on Monetary policy and growth shows that money plays a small role in developing countries and that monetary policy is not a very important influence on growth but may have some impact on inflation. Although there is much discussion about the merits of keeping inflation levels and volatility low, there is very little literature on studying the impact of low rates of steady inflation on the levels of private investment and technological change and hence on economic growth and on employment. There is very little research about the direct links between monetary policy and employment. The impact of growth on employment depends on what are the main drivers of economic growth and the initial state of the economy. Although growth may lead to increasing employment (formal and informal) there is little evidence showing that growth leads to an increase in "decent employment".
    Keywords: monetary policy, role of money, growth, employment, development
    JEL: E52 J4 O11 O17 O47
    Date: 2019–03
  13. By: Drissi, Ramzi; Ghassan, Hassan B.
    Abstract: In order to model the inflation dynamics, we investigated various combinations of nominal rigidities. For this purpose, we analyze two adjustment-of-prices hypotheses as in the new Keynesian literature, namely the price stickiness and the sticky information, within a Dynamic Stochastic General Equilibrium (DSGE) model. For each model, we compare the responses of inflation and output to shocks. We found that sticky information modeling correctly reproduces some important stylized facts after monetary shocks, but with hump-shaped responses. The sticky price model, considering that some fixed prices lead to that Phillips curve, does not correctly reproduce the dynamic inflation response to monetary shocks. We show that single indexation does not add persistence to the two specifications, and the choice of rigidity structure appears to be more important than the presence or absence of lagged values of inflation in the dynamics.
    Keywords: DSGE model; Phillips curve; Sticky information; Sticky prices; Inflation
    JEL: C11 E31 E32
    Date: 2018–03
  14. By: Fatum, Rasmus (University of Alberta); Hara, Naoko (Bank of Japan); Yamamoto, Yohei (Hitotsubashi University)
    Abstract: We consider the influence of domestic and U.S. macroeconomic news surprises on daily bond yields over the January 1999 to January 2018 period for four advanced Negative Interest Rate Policy (NIRP) economies – Germany, Japan, Sweden and Switzerland. Our results suggest that the influence of macroeconomic news surprises is for all four countries under study during the NIRP period non-existent or noticeably weaker than during the preceding Zero Interest Rate Policy (ZIRP) period. Our results are consistent with the suggestion that NIRP is characterized by a lower bound that is no less constraining than the zero lower bound that characterizes ZIRP.
    Keywords: NIRP; Bond Yields; Macroeconomic News
    JEL: E43 E52 E58
    Date: 2019–01–27
  15. By: Hali Edison (Williams College); Hector Carcel (Bank of Lithuania)
    Abstract: This paper applies Latent Dirichlet Allocation (LDA), a machine learning algorithm, to analyze the transcripts of the U.S. Federal Open Market Committee (FOMC) covering the period 2003 – 2012, including 45,346 passages. The goal is to detect the evolution of the different topics discussed by the members of the FOMC. The results of this exercise show that discussions on economic modelling were dominant during the Global Financial Crisis (GFC), with an increase in discussion of the banking system in the years following the GFC. Discussions on communication gained relevance toward the end of the sample as the Federal Reserve adopted a more transparent approach. The paper suggests that LDA analysis could be further exploited by researchers at central banks and institutions to identify topic priorities in relevant documents such as FOMC transcripts.
    Keywords: FOMC, Text data analysis, Transcripts, Latent Dirichlet Allocation
    JEL: E52 E58 D78
    Date: 2019–04–05
  16. By: Darracq Pariès, Matthieu; Papadopoulou, Niki
    Abstract: Through the euro area crisis, financial fragmentation across jurisdictions became a prime concern for the single monetary policy. The ECB broadened the scope of its instruments and enacted a series of non-standard measures to engineer an appropriate degree of policy accommodation. The transmission of these measures through the currency union remained highly dependent on the financial structure and conditions prevailing in various regions. This paper explores the country-specific macroeconomic transmission of selected non-standard measures from the ECB using a global DSGE model with a rich financial sector: we extend the six-region multi-country model of Darracq Pariès et al. (2016), introducing credit and exchange rate channels for central bank asset purchases. The portfolio rebalancing frictions are calibrated to match the sovereign yield and exchange rate responses after ECB's Asset Purchase Programme (APP) first announcement. The domestic transmission of the APP through the credit intermediation chain is significant and quite heterogenous across the largest euro area countries. The introduction of global portfolio frictions on euro area government bond holdings by international investors opens up for a larger depreciation of the euro. The interaction between international and domestic channels affect the magnitude and the cross-country distribution of the APP impact. JEL Classification: E4, E5, F4
    Keywords: banking, bank lending rates, cross-country spillovers, DSGE models, financial regulation, non-standard measures
    Date: 2019–03
  17. By: Rudolfs Bems; Francesca G Caselli; Francesco Grigoli; Bertrand Gruss
    Abstract: Many argue that improvements in monetary policy frameworks in emerging market economies over the past few decades, have made them more resilient to external shocks. This paper exploits the May 2013 taper tantrum in the United States to study the reaction of 18 large emerging markets to an external shock, conditioning on their degree of inflation expectations' anchoring. We fi nd that while the tapering announcement negatively affected growth prospects regardless of the level of anchoring, countries with weakly anchored inflation expectations experienced larger exchange rate pass-through to consumer prices, hence comparatively higher inflation. We conclude that efforts to improve the extent of anchoring of inflation expectations in emerging markets pay off, as they ease the trade-off that central banks face when external shocks weaken growth prospects and trigger currency depreciations.
    Date: 2019–03–28
  18. By: Zohair Alam; Adrian Alter; Jesse Eiseman; R. G Gelos; Heedon Kang; Machiko Narita; Erlend Nier; Naixi Wang
    Abstract: This paper introduces a new comprehensive database of macroprudential policies, which combines information from various sources and covers 134 countries from January 1990 to December 2016. Using these data, we first confirm that loan-targeted instruments have a significant impact on household credit, and a milder, dampening effect on consumption. Next, we exploit novel numerical information on loan-to-value (LTV) limits using a propensity-score-based method to address endogeneity concerns. The results point to economically significant and nonlinear effects, with a declining impact for larger tightening measures. Moreover, the initial LTV level appears to matter; when LTV limits are already tight, the effects of additional tightening on credit is dampened while those on consumption are strengthened.
    Keywords: Mortgages;Exchange rate policy;Reserve requirements;Household credit;Credit booms;Macroprudential policy;loan-to-value ratios;propensity score;LTV;policy action;reverse causality;endogeneity;appendix IV
    Date: 2019–03–22
  19. By: Yoichiro Tamanyu (Graduate School of Economics, Keio University)
    Abstract: This paper demonstrates that a simple Ricardian tax policy responding to inflation can prevent expectations-driven liquidity trap (ELT) using a standard New Keynesian model. I show that the extent to which tax rates must respond to inflation is affected by the persistence of remaining at the ELT and higher persistence requires larger response to inflation. I further find that if the ELT is assumed to be recurrent, the tax rate needs to respond to inflation by a larger extent compared to the case where the targeted regime is assumed to be absorbing. This last finding indicates that it is crucial for the fiscal authority to entertain the possibility of moving back to the ELT when it sets their policy parameters.
    Keywords: Expectations-driven Liquidity Trap, Fiscal Policy, Monetary Policy, Regime Switching, Zero Lower Bound
    JEL: E61 E62 E63
    Date: 2019–01–29
  20. By: Xu, Wenli
    Abstract: A Baseline Medium-Scale NK DSGE Model for Policy Analysis
    Keywords: DSGE Model ,Fiscal Policy ,Monetary Policy
    JEL: E6
    Date: 2019–04–08
  21. By: Reis, Ricardo
    Abstract: This chapter is a comment on Michelson-Morley, Fisher, and Occam: The Radical Implications of Stable Quiet Inflation at the Zero Bound, John H. Cochrane
    JEL: J1
    Date: 2018–05–16
  22. By: Brand, Claus; Mazelis, Falk
    Abstract: We estimate the natural rate of interest for the US and the euro area in a semi-structural model comprising a Taylor rule. Our estimates feature key elements of Laubach and Williams (2003), but are more consistent with using conventional policy rules: we model inflation to be stationary, with the output gap pinning down deviations of inflation from its objective (rather than relative to a random walk). We relax some constraints on the correlation of latent factor shocks to make the original unobserved-components framework more amenable to structural interpretation and to reduce filtering uncertainty. We show that resulting natural rate metrics are more consistent with estimates from structural models. JEL Classification: C11, E32, E43, E52
    Keywords: Bayesian estimation, Beveridge-Nelson decomposition, equilibrium real rate, natural rate of interest, Taylor rule, unobserved components
    Date: 2019–03

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