nep-cba New Economics Papers
on Central Banking
Issue of 2019‒04‒22
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Rethinking Capital Regulation: The Case for a Dividend Prudential Target By Manuel Muñoz
  2. The CSPP at work - yield heterogeneity and the portfolio rebalancing channel By Zaghini, Andrea
  3. Dynamic fiscal limits and monetary-fiscal policy interactions By Battistini, Niccolò; Callegari, Giovanni; Zavalloni, Luca
  4. Macroprudential and monetary policy: Loan-level evidence from reserve requirements By Cecilia Dassatti Camors; José-Luis Peydró; Francesc Rodriguez-Tous
  5. Should the Fed Be Constrained? By Frankel, Jeffrey A.
  6. The international bank lending channel of monetary policy rates and QE: Credit supply, reach-for-yield, and real effects By Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
  7. The Informational Effect of Monetary Policy and the Case for Policy Commitment By Jia, Chengcheng
  8. Uncertainty Shocks, Monetary Policy and Long-Term Interest Rates By Gianni Amisano; Oreste Tristani
  9. Building an effective financial stability policy framework: lessons from the post-crisis decade By Demekas, Dimitri G.
  10. Monetary Policy in a World of Cryptocurrencies By Pierpaolo Benigno
  11. Can more public information raise uncertainty? The international evidence on forward guidance By Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Strasser, Georg
  12. Negative monetary policy rates and portfolio rebalancing: Evidence from credit register data By Margherita Bottero; Camelia Minoiu; José-Luis Peydró; Andrea Polo; Andrea F. Presbitero; Enrico Sette
  13. Assessing Macroeconomic Tail Risk By Francesca Loria; Christian Matthes; Donghai Zhang
  14. Monetary policy spillovers, capital controls and exchange rate flexibility, and the financial channel of exchange rates By Georgiadis, Georgios; Zhu, Feng
  15. What Option Prices tell us about the ECBs Unconventional Monetary Policies By Stan Olijslagers; Annelie Petersen; Nander de Vette; Sweder van Wijnbergen
  16. The rise of shadow banking: evidence from capital regulation By Rustom M. Irani; Rajkamal Iyer; Ralf R. Meisenzahl; José-Luis Peydró
  17. Impact of targeted credit easing by the ECB. Bank-level evidence By Joost Bats; Tom Hudepohl
  18. The portfolio theory of inflation (and policy effectiveness) By Bossone, Biagio
  19. Does Inflation Targeting Always Matter for the ERPT? A robust approach By Antonia Lopez Villavicencio; Marc Pourroy
  20. Animal spirits, risk premia and monetary policy at the zero lower bound By Proaño Acosta, Christian; Lojak, Benjamin
  21. Hedger of last resort: evidence from Brazilian FX interventions, local credit, and global financial cycles By Rodrigo Barbone Gonzalez; Dmitry Khametshin; José-Luis Peydró; Andrea Polo
  22. Inflation Expectations Curve in Japan By Toshitaka Maruyama; Kenji Suganuma
  23. Capital Controls as Macro-prudential Policy in a Large Open Economy By Davis, J. Scott; Devereux, Michael B.
  24. The benefits and costs of adjusting bank capitalisation: evidence from euro area countries By Budnik, Katarzyna; Affinito, Massimiliano; Barbic, Gaia; Ben Hadj, Saiffedine; Chretien, Edouard; Dewachter, Hans; Gonzalez, Clara Isabel; Hu, Jenny; Jantunen, Lauri; Jimborean, Ramona; Manninen, Otso; Martinho, Ricardo; Mencía, Javier; Mousarri, Elena; Naruševičius, Laurynas; Nicoletti, Giulio; O’Grady, Michael; Ozsahin, Selcuk; Pereira, Ana Regina; Rivera-Rozo, Jairo; Trikoupis, Constantinos; Venditti, Fabrizio; Velasco, Sofia
  25. Does informality facilitate inflation stability? By Enrique Alberola-Ila; Carlos Urrutia
  26. Market-Based Monetary Policy Uncertainty By Bauer, Michael D.; Lakdawala, Aeimit K.; Mueller, Philippe
  27. How Does the Strength of Monetary Policy Transmission Depend on Real Economic Activity? By Horacio Sapriza; Judit Temesvary
  28. Monetary policy implications of state-dependent prices and wages By James Costain; Anton Nakov; Borja Petit

  1. By: Manuel Muñoz
    Abstract: The paper investigates the effectiveness of dividend-based macroprudential rules in complementing capital requirements to promote bank soundness and sustained lending over the cycle. First, some evidence on bank dividends and earnings in the euro area is presented. When shocks hit their profits, banks adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then, a DSGE model with key financial frictions and a banking sector is developedto assess the virtues of what shall be called dividend prudential targets. Welfare-maximizing dividend-based macroprudential rules are shown to have importantproperties: (i) they are effective in smoothing the financial cycle by means of lessvolatile bank retained earnings, (ii) they induce welfare gains associated to a BaselIII-type of capital regulation, (iii) they mainly operate through their cyclical component,ensuring that long-run dividend payouts remain unaffected, (iv) they are flexible enough so as to allow bank managers to optimally deviate from the target, and (v) they act as an insurance scheme for the real economy. Keywords : macroprudential regulation, capital requirements, dividend prudential target, financial stability, bank dividends
    JEL: E44 E61 G21 G28 G35
  2. By: Zaghini, Andrea
    Abstract: We assess the impact of the corporate sector purchase programme (CSPP), the corporate arm of the ECB's quantitative easing, over its first year of activity (June 2016 - June 2017). Focusing on the primary bond market, we find evidence of a significant impact of the CSPP on yield spreads, both directly on purchased and targeted bonds and indirectly on all other bonds. The magnitude and the timing of the changes in yield spreads, coupled with the evolution of bond placements, are fully consistent with the proper unfolding the portfolio rebalancing channel. JEL Classification: G15, G32, G38
    Keywords: bond yields, market segmentation., Quantitative easing, unconventional monetary policy
    Date: 2019–04
  3. By: Battistini, Niccolò; Callegari, Giovanni; Zavalloni, Luca
    Abstract: This paper analyzes the impact of monetary policy on public debt sustainability through the lens of a general equilibrium model with fiscal limits. We find that the mere possibility of a binding ZLB may have detrimental effects on debt sustainability, as a kink in the Laffer curve induces a dead-weight loss in the present discounted value of future primary surpluses. Moreover, debt sustainability improves with monetary policy activeness, that is, with the elasticity of the interest rate to changes in inflation and the output gap. On this basis, we assess the trade-off between economic stabilization and debt sustainability depending on the monetary policy environment. In normal times, large public spending shocks may engender perverse debt dynamics and cause economic contractions. At the ZLB, a muted trade-off between stabilization and sustainability instead expands the fiscal margin, especially if coupled with a commitment to a more active monetary policy during normal times. JEL Classification: E52, E61, E63
    Keywords: fiscal sustainability, monetary policy, ZLB
    Date: 2019–04
  4. By: Cecilia Dassatti Camors; José-Luis Peydró; Francesc Rodriguez-Tous
    Abstract: We analyze the impact of reserve requirements on the supply of credit to the real sector. For identification, we exploit a tightening of reserve requirements in Uruguay during a global capital inflows boom, where the change affected more foreign liabilities, in conjunction with its credit register that follows all bank loans granted to non-financial firms. Following a difference-in-differences approach, we compare lending to the same firm before and after the policy change among banks differently affected by the policy. The results show that the tightening of the reserve requirements for banks lead to a reduction of the supply of credit to firms. Importantly, the stronger quantitative results are for the tightening of reserve requirements to bank liabilities stemming from non-residents. Moreover, more affected banks increase their exposure into riskier firms, and larger banks mitigate the tightening effects. Finally, the firm-level analysis reveals that the cut in credit supply in the loan-level analysis is binding for firms. The results have implications for global monetary and financial stability policies.
    JEL: E51 E52 G21 G28
    Date: 2019–03
  5. By: Frankel, Jeffrey A. (Harvard Kennedy School)
    Abstract: Two distinct questions are of interest. (1) To what extent should the central bank be constrained, versus being allowed full discretion? (2) To whatever extent it is constrained by a rule, what should that rule be? With respect to the second question, a good argument for Nominal GDP targeting is that it is robust with respect to supply shocks, whereas CPI targets, for example, are vulnerable to them. But with respect to the first question, I am increasingly convinced that the constraint--whether a NGDP target or something else--must be very loose. Even the most sincere of central bankers will often fail to hit their targets, due to unforeseen shocks. I therefore propose only a mild innovation: the FOMC could include nominal GDP in its Summary of Economic Projections. I also offer a final thought regarding a different kind of constraint: if Fed independence from political influence is compromised, monetary policy will likely become more pro-cyclical.
    Date: 2019–01
  6. By: Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
    Keywords: monetary policy, financial globalization, quantitative easing (QE), credit supply, risk-taking, foreign banks.
    JEL: E52 E58 G01 G21 G28
    Date: 2018–10
  7. By: Jia, Chengcheng (Federal Reserve Bank of Cleveland)
    Abstract: I explore how asymmetric information between the central bank and the private sector changes the optimal conduct of monetary policy. I build a New Keynesian model in which private agents have imperfect information about underlying shocks, while the central bank has perfect information. In this environment, private agents extract information about the underlying shocks from the central bank’s interest-rate decisions. This informational effect weakens the direct effect of monetary policy: When the central bank adjusts the interest rate to offset the effects of underlying shocks, the interest rate also reveals information about the realization of underlying shocks. Because private agents have more precise information about the shocks and consequently react more aggressively to it, the economy becomes harder to stabilize with monetary policy. I show that committing to the optimal state-contingent policy rule alleviates this problem by controlling the information revealed through the interest rate.
    Keywords: Monetary Policy; Policy Rule;
    JEL: D83 E43 E52 E58
    Date: 2019–04–17
  8. By: Gianni Amisano; Oreste Tristani
    Abstract: We study the relationship between monetary policy and long-term rates in a structural, general equilibrium model estimated on both macro and yields data from the United States. Regime shifts in the conditional variance of productivity shocks, or "uncertainty shocks", are an important model ingredient. First, they account for countercyclical movements in risk premia. Second, they induce changes in the demand for precautionary saving, which affects expected future real rates. Through changes in both risk-premia and expected future real rates, uncertainty shocks account for about 1/2 of the variance of long-term nominal yields over long horizons. The remaining driver of long-term yields are changes in in ation expectations induced by conventional, autoregressive shocks. Long-term in ation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less dogmatically anchored in the 2000s.
    Keywords: Monetary policy rules ; Uncertainty shocks ; Term structure of interest rates ; Regime switches ; Bayesian estimation
    JEL: E40 C11 E43 E52 C34
    Date: 2019–04–11
  9. By: Demekas, Dimitri G.
    Abstract: A decade after the global financial crisis, the task of building a financial stability policy framework has unfinished business. Fundamental questions about the goal of financial stability and the policies to achieve it were sidelined by the excessive focus on the minutiae of macroprudential policy. Increased responsibilities were given to central banks without a proper discussion about the right degree of delegation and accountability. A comprehensive framework for financial stability should have three pillars: macroprudential policy, microprudential supervision, and financial safety nets. Sufficient operational independence should be given to the agency(ies) responsible for financial stability but determining the goal, institutional architecture, and agency assignments, resolving any policy tradeoffs, and ensuring accountability should be a political responsibility. Even with the best framework, however, given the variety of structural, behavioral, and political economy factors affecting financial stability and our limited understanding of the financial system, securing this goal will remain a challenge.
    Keywords: financial stability; macroprudential policy; banks; policy design; governance
    JEL: G10 G18 G20 G28 G38
    Date: 2019–04
  10. By: Pierpaolo Benigno (LUISS and EIEF)
    Abstract: Can currency competition affect central banks' control of interest rates and prices? Yes, it can. In a two-currency world, the growth rate of the cryptocurrency sets an upper bound on the nominal interest rate and the attainable inflation rate, if the government currency is to retain its role as medium of exchange. In a world of multiple competing currencies issued by profit-maximizing agents, the nominal interest rate and inflation are both determined by structural factors, and thus not subject to manipulation, a result hailed by the proponents of currency competition. The article also proposes some fixes for the classical problem of indeterminacy of exchange rates.
    Date: 2019
  11. By: Ehrmann, Michael; Gaballo, Gaetano; Hoffmann, Peter; Strasser, Georg
    Abstract: Central banks have used different types of forward guidance, where the forward guidance horizon is related to a state contingency, a calendar date or left open-ended. This paper reports cross-country evidence on the impact of these different types of forward guidance on the sensitivity of bond yields to macroeconomic news, and on forecaster disagreement about the future path of interest rates. We show that forward guidance mutes the response to macroeconomic news in general, but that calendar-based forward guidance with a short horizon counterintuitively raises it. Using a model where agents learn from market signals, we show that the release of more precise public information about future rates lowers the informativeness of market signals and, as a consequence, may increase uncertainty and amplify the reaction of expectations to macroeconomic news. However, when the increase in precision of public information is sufficiently large, uncertainty is unambiguously reduced. JEL Classification: D83, E43, E52, E58
    Keywords: central bank communication, disagreement, forward guidance, heterogeneous beliefs, macroeconomic news
    Date: 2019–04
  12. By: Margherita Bottero; Camelia Minoiu; José-Luis Peydró; 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: negative interest rates, portfolio rebalancing, bank lending channel of monetary policy, liquidity management, Eurozone crisis.
    JEL: E52 E58 G01 G21 G28
    Date: 2019–02
  13. By: Francesca Loria; Christian Matthes; Donghai Zhang
    Abstract: What drives macroeconomic tail risk? To answer this question, we borrow a definition of macroeconomic risk from Adrian et al. (2019) by studying (left-tail) percentiles of the forecast distribution of GDP growth. We use local projections (Jordà, 2005) to assess how this measure of risk moves in response to economic shocks to the level of technology, monetary policy, and financial conditions. Furthermore, by studying various percentiles jointly, we study how the overall economic outlook-as characterized by the entire forecast distribution of GDP growth-shifts in response to shocks. We find that contractionary shocks disproportionately increase downside risk, independently of what shock we look at.
    Keywords: Macroeconomic risk ; Shocks ; Local projections
    JEL: C21 C53 E17 E37
    Date: 2019–04–15
  14. By: Georgiadis, Georgios; Zhu, Feng
    Abstract: We assess the empirical validity of the trilemma (or impossible trinity) in the 2000s for a large sample of advanced and emerging economies. To do so, we estimate Taylor-rule type monetary policy reaction functions, relating the local policy rate to real-time forecasts of domestic fundamentals, global variables, as well as the base-country policy rate. In the regressions, we explore variations in the sensitivity of local to base-country policy rates across different degrees of exchange rate flexibility and capital controls. We find that the data are in general consistent with the predictions from the trilemma: Both exchange rate flexibility and capital controls reduce the sensitivity of local to base-country policy rates. However, we also find evidence that is consistent with the notion that the financial channel of exchange rates highlighted in recent work reduces the extent to which local policymakers decide to exploit the monetary autonomy in principle granted by flexible exchange rates in specific circumstances: The sensitivity of local to base-country policy rates for an economy with a flexible exchange rate is stronger when it exhibits negative foreign-currency exposures which stem from portfolio debt and bank liabilities on its external balance sheet and when base-country monetary policy is tightened. The intuition underlying this finding is that it may be optimal for local monetary policy to mimic the tightening of base-country monetary policy and thereby mute exchange rate variation because a depreciation of the local currency would raise the cost of servicing and rolling over foreign-currency debt and bank loans, possibly up to a point at which financial stability is put at risk. JEL Classification: F42, E52, C50
    Keywords: financial globalisation, monetary policy autonomy, spillovers, trilemma
    Date: 2019–04
  15. By: Stan Olijslagers; Annelie Petersen; Nander de Vette; Sweder van Wijnbergen
    Abstract: We use a series of different approaches to extract information about crash risk from option prices for the Euro-Dollar exchange rate, with each step sharpening the focus on extracting more specific measures of crash risk around dates of ECB measures of Unconventional Monetary Policy. Several messages emerge from the analysis. Announcing policies in general terms without precisely describing what exactly they entail does not instantly move asset markets or actually increases crash risk. Also, policies directly focused on changing relative asset supplies do seem to have an impact, while measures aiming at easing financing costs of commercial banks do not.
    Keywords: Quantitative Easing; Unconventional Monetary Policies; Exchange Rate Crash Risk; risk reversals; mixed diffusion jump risk models
    JEL: E44 E52 E58 E65 G12 G13 G14
    Date: 2019–04
  16. By: Rustom M. Irani; Rajkamal Iyer; Ralf R. Meisenzahl; José-Luis Peydró
    Abstract: We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed-effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention and nonbanks step in, particularly among loans with higher capital requirements and at times when capital is scarce. This reallocation has important spillovers: loans funded by nonbanks with fragile liabilities experience greater sales and price volatility during the 2008 crisis.
    Keywords: Shadow banks; risk-based capital regulation; Basel III; interactions between banks and nonbanks; trading by banks; distressed debt
    JEL: G01 G21 G23 G28
    Date: 2018–04
  17. By: Joost Bats; Tom Hudepohl
    Abstract: The interest rate in the second series of ECB targeted longer-term refinancing operations is conditional on a participant-specific lending benchmark. The restrictiveness of this benchmark varies between banks. We employ fixed effects estimations on a unique micro-dataset and investigate the relationship between the benchmark restrictiveness and net bank lending. We find that a more restrictive benchmark is associated with more total net lending and net lending to non-financial corporates by relatively large banks. Banks that are relatively large and face the most restrictive benchmark increase their lending to the real economy with 9 to 17 percent. We find no significant effects on net lending by relatively small banks. Furthermore, the restrictiveness of the benchmark does not affect net lending to households. Our findings suggest that the design of targeted lending benchmarks influences bank credit flows and that a more binding benchmark would have been even more effective in stimulating bank lending.
    Keywords: central bank; monetary policy; refinancing operations; credit easing; bank credit
    JEL: C23 E51 E58 G21
    Date: 2019–04
  18. By: Bossone, Biagio
    Abstract: The Portfolio Theory of Inflation (PIT) proposed in this study investigates the role of global financial markets in determining the effectiveness of macroeconomic policy in open and fully financial integrated economies. The PIT adopts a modified version of the portfolio balance approach to exchange rate determination and incorporates intertemporal optimal choices from global investors. These investors allocate resources across national economies based on local investment opportunities and policy credibility: when a country's credibility is low, they hold its economy to a tighter intertemporal budget constraint and the issuance of what they deem as "excess" public sector liabilities causes the country's currency to depreciate and inflation to rise due to a large exchange rate pass-through, with limited or no impact on output. On the other hand, high credibility creates space for effective and noninflationary macro policies but, if such space is abused, credibility gets dissipated and higher inflation reflects such dissipation.
    Keywords: credibility,exchange rate,financial integration,global investor,interest rate,intertemporal budget constraint,money, bonds and assets,pass-through
    JEL: E31 E4 E5 E62 F31 G15 H3
    Date: 2019
  19. By: Antonia Lopez Villavicencio (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique); Marc Pourroy (CRIEF - Centre de Recherche sur l'Intégration Economique et Financière - Université de Poitiers)
    Abstract: This paper estimates the effects of different forms of inflation targeting (IT) in the exchange rate pass-through (ERPT). To this end, we first estimate the ERPT for a large sample of countries using state-space models. We then consider the adoption of an inflation targeting framework by a country as a treatment to find suitable counterfactuals to the actual targeters. By controlling for self-selection bias and endogeneity of the monetary policy regime, we confirm that the ERPT tends to be lower for countries adopting explicit IT. However, we uncover that older regimes, adopting a range or point with tolerance band and keeping inflation close to the target, outperform other IT regimes. We also show that IT is effective even with a relatively high inflation target or low central bank independence.
    Keywords: state-space model,propensity score matching,exchange rate pass-through,inflation targeting
    Date: 2019–03–28
  20. By: Proaño Acosta, Christian; Lojak, Benjamin
    Abstract: In this paper we investigate the risk-related effects of monetary policy both in normal times, as well as in periods where the zero lower bound (ZLB) binds, in a stylized macroeconomic model with boundedly rational beliefs. In our model, financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an "implicit Taylor rule" that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the ZLB. In such a case, conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy. We propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality.
    Keywords: Behavioral Macroeconomics,Monetary Policy,Zero Lower Bound,Bounded Rationality
    Date: 2019
  21. By: Rodrigo Barbone Gonzalez; Dmitry Khametshin; José-Luis Peydró; Andrea Polo
    Abstract: We show that local central bank policies attenuate global financial cycle (GFC)’s spillovers. For identification, we exploit GFC shocks and Brazilian interventions in FX derivatives using three matched administrative registers: credit, foreign credit flows to banks, and employer-employee. After U.S. Federal Reserve Taper Tantrum (with strong Emerging Markets FX depreciation and volatility increase), Brazilian banks with larger ex-ante reliance on foreign debt strongly cut credit supply, thereby reducing firm-level employment. However, Brazilian FX large intervention supplying derivatives against FX risks—hedger of last resort—halves the negative effects. Finally, a 2008-2015 panel exploiting GFC shocks and local policies confirm the results.
    Keywords: foreign exchange, monetary policy, central bank, bank credit, hedging
    JEL: E5 F3 G01 G21 G28
    Date: 2018–10
  22. By: Toshitaka Maruyama (Bank of Japan); Kenji Suganuma (Bank of Japan)
    Abstract: In this paper, we estimate "inflation expectations curve" - a term structure of inflation expectations - combining forecast data of various agents. We use a state-space model which considers consistency among expectations at different horizons, and for relationships between inflation rate, real growth rate and nominal interest rate. We find that the slope of the curve in Japan is positive in almost all periods since the 1990s. In addition, looking at the estimated inflation expectations in time series, the inflation expectations at all horizons rose in the mid-2000s and from late 2012 to 2013, after the downward trend from the early 1990s to the early 2000s. Short-term inflation expectations in particular have tended to shift upwards since the launch of Quantitative and Qualitative Monetary Easing, while being affected by fluctuations in the import price. Finally, a structural VAR analysis shows that the estimated inflation expectations in Japan are largely adaptive, meaning their formation is affected by actual inflation rates.
    Keywords: Inflation expectations; Term structure; State-space model
    JEL: C32 D84 E31 E43 E52
    Date: 2019–04–09
  23. By: Davis, J. Scott (Federal Reserve Bank of Dallas); Devereux, Michael B. (University of British Columbia)
    Abstract: The literature on optimal capital controls for macro-prudential policy has focused on capital controls in a small open economy. This ignores the spillover effects to the rest of the world. This paper re-examines the case for capital controls in a large open economy, where domestic financial constraints may bind following a large negative shock. There is a tension between the desire to tax inflows to manipulate the terms of trade and tax outflows for macro-prudential purposes. Non-cooperative capital controls are ineffective as macro-prudential policy. Cooperative policy will ignore terms-of-trade manipulation and thus cooperative capital controls yield more effective macro-prudential policy.
    Keywords: Capital controls; large open economy; terms-of-trade; macroprudential; crisis management
    JEL: F40
    Date: 2019–03–27
  24. By: Budnik, Katarzyna; Affinito, Massimiliano; Barbic, Gaia; Ben Hadj, Saiffedine; Chretien, Edouard; Dewachter, Hans; Gonzalez, Clara Isabel; Hu, Jenny; Jantunen, Lauri; Jimborean, Ramona; Manninen, Otso; Martinho, Ricardo; Mencía, Javier; Mousarri, Elena; Naruševičius, Laurynas; Nicoletti, Giulio; O’Grady, Michael; Ozsahin, Selcuk; Pereira, Ana Regina; Rivera-Rozo, Jairo; Trikoupis, Constantinos; Venditti, Fabrizio; Velasco, Sofia
    Abstract: The paper proposes a framework for assessing the impact of system-wide and bank-level capital buffers. The assessment rests on a factor-augmented vector autoregression (FAVAR) model that relates individual bank adjustments to macroeconomic dynamics. We estimate FAVAR models individually for eleven euro area economies and identify structural shocks, which allow us to diagnose key vulnerabilities of national banking systems and estimate short-run economic costs of increasing banks’ capitalisation. On this basis, we run a fully-fledged cost-benefit assessment of an increase in capital buffers. The benefits are related to an increase in bank resilience to adverse shocks. Higher capitalisation allows banks to withstand negative shocks and moderates the reduction of credit to the real economy that ensues in adverse circumstances. The costs relate to transitory credit and output losses that are assessed both on an aggregate and bank level. An increase in capital ratios is shown to have a sharply different impact on credit and economic activity depending on the way banks adjust, i.e. via changes in assets or equity. JEL Classification: E51, G21, G28
    Keywords: banking system resilience, capital regulation, cost-benefit analysis, FAVAR
    Date: 2019–04
  25. By: Enrique Alberola-Ila; Carlos Urrutia
    Abstract: Informality is an entrenched structural trait in emerging market economies, despite of the progress achieved in macroeconomic management. Informality determines the behavior of labour markets, financial access and the productivity of the overall economy. Therefore it influences the transmission of shocks and also of monetary policy. This paper develops a simple general equilibrium closed economy model with nominal rigidities, labor and financial frictions. Informality is captured by a dual labour market where the share of informal workers is endogenous. Only formal sector firms have access to financing, which is instrumental in their production process. Informality has a buffering effect on the propagation of demand and supply shocks to prices; the financial feature of the model exacerbates the impact of financial shocks in the formal sector while the informal sector is in principle unaffected. As a result informality dampens the impact of demand and financial shocks on wages and inflation but heighten the impact of technology shocks. Informality also increases the sacrifice ratio of monetary policy actions. From a Central Bank perspective, the results imply that the presence of an informal sector mitigates inflation volatility for some type of shocks but makes monetary policy less effective.
    Keywords: informality, inflation, monetary policy
    JEL: E26 E31 E52
    Date: 2019–04
  26. By: Bauer, Michael D. (Federal Reserve Bank of San Francisco); Lakdawala, Aeimit K. (University of California, San Diego); Mueller, Philippe (Warwick Business School)
    Abstract: This paper investigates the role of monetary policy uncertainty for the transmission of FOMC actions to financial markets using a novel model-free measure of uncertainty based on derivative prices. We document a systematic pattern in monetary policy uncertainty over the course of the FOMC meeting cycle: On FOMC announcement days uncertainty tends to decline substantially, indicating the resolution of policy uncertainty. This decline is then reversed over the first two weeks of the intermeeting FOMC cycle. Both the level and the changes in uncertainty play an important role for the transmission of monetary policy to financial markets. First, changes in uncertainty have substantial effects on a variety of asset prices that are distinct from the effects of the conventional policy surprise measure. For example, the Fed's forward guidance announcements affected asset prices not only by adjusting the expected policy path but also by changing market-perceived uncertainty about this path. Second, at high levels of uncertainty a monetary policy surprise has only modest effects on assets, whereas with low uncertainty the impact is significantly more pronounced.
    JEL: E43 E44 E47
    Date: 2019–04–11
  27. By: Horacio Sapriza; Judit Temesvary
    Abstract: We study the relationship between the strength of the bank credit channel (BCC) of monetary policy and real GDP growth in the United States using quarterly commercial bank level data between 1986 and 2008. We find that the BCC was significantly stronger during periods of low economic growth. Monetary policy is more effective through this channel in spurring economic activity during periods of low growth, rather than in cooling the economy when growth is high. Furthermore, we find that the BCC operated through a broader range of loan categories and banks than previously documented, underscoring this channel’s economic relevance.
    Keywords: Bank balance sheet ; Bank lending channel ; GDP growth ; Monetary policy transmission
    JEL: E3 E5 G2
    Date: 2019–04–08
  28. By: James Costain (ECB and Banco de EspaÑa); Anton Nakov (ECB and CEPR); Borja Petit (CEMFI)
    Abstract: We study the effects of monetary shocks in a model of state-dependent price and wage adjustment based on “control costs”. Suppliers of retail goods and of labor are both monopolistic competitors that face idiosyncratic productivity shocks and nominal rigidities. Stickiness arises because precise decisions are costly, so agents choose to tolerate small errors in the timing of adjustments. Our simulations are calibrated to microdata on the size and frequency of price and wage changes. Money shocks have less persistent real effects in our state-dependent model than they would a time-dependent framework, but nonetheless we obtain sufficient monetary nonneutrality for consistency with macroeconomic evidence. Nonneutrality is primarily driven by wage rigidity, rather than price rigidity. State-dependent nominal rigidity implies a flatter Phillips curve as trend inflation declines, because nominal adjustments become less frequent, making short-run inflation less reactive to shocks.
    Keywords: nominal rigidity, state-dependent adjustment, logit equilibrium, near rationality, control costs
    JEL: E31 D81 C73
    Date: 2019–04

This nep-cba issue is ©2019 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.