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on Central Banking |
| By: | Aikman, David; Giese, Julia; Kapadia, Sujit; McLeay, Michael |
| Abstract: | This paper explores monetary-macroprudential policy interactions in a simple, calibrated New Keynesian model incorporating the possibility of a credit boom precipitating a financial crisis and a loss function reflecting financial stability considerations. Deploying the countercyclical capital buffer (CCyB) improves outcomes significantly relative to when interest rates are the only instrument. The instruments are typically substitutes, with monetary policy loosening when the CCyB tightens. We also examine when the instruments are complements and assess how different shocks, the effective lower bound for monetary policy, market-based finance and a risk-taking channel of monetary policy affect our results. JEL Classification: E52, E58, G01, G28 |
| Keywords: | countercyclical capital buffer, credit boom, financial crises, financial stability, macroprudential policy, monetary policy |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192278&r=all |
| By: | Altavilla, Carlo; C. Andreeva, Desislava; Boucinha, Miguel; Holton, Sarah |
| Abstract: | As the euro area has a predominantly bank-based financial system, changes in the composition and strength of banks’ balance sheets can have very sizeable implications for the transmission of monetary policy. This paper provides an overview of developments in banks’ balance sheets, profitability and risk-bearing capacity and analyses their relevance for monetary policy. We show that, while the transmission of standard policy interest rate cuts to firms and households was diminished during the crisis, in a context of financial market stress and weak bank balance sheets, unconventional monetary policy measures have helped to restore monetary policy transmission and pass-through to interest rates. We also document the extent to which these non-standard measures were successful in stimulating lending and which bank business models were more strongly affected. Finally, we show that the estimated impact of recent monetary policy measures on bank profitability does not appear to be particularly strong when all the effects on the macroeconomy and asset quality are taken into account. JEL Classification: G21, G20, E52, E43 |
| Keywords: | banks, credit, interest rates, monetary policy |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2019222&r=all |
| By: | Stefano Neri (Bank of Italy); Stefano Siviero (Bank of Italy) |
| Abstract: | This paper examines the challenges faced by the European Central Bank since the outbreak of the global financial crisis. From 2008 to 2014, the need to preserve the correct functioning of the monetary policy transmission mechanism and ensure the supply of credit to the private sector stretched the limits of conventional monetary policy. In 2015, the risk of deflation led the ECB to start a large scale asset purchase programme. The analysis is largely based on a review of the many studies that Banca d’Italia staff has produced on the factors that have brought inflation to unprecedented low levels in 2014 and on the effects of the asset purchase programme. |
| Keywords: | monetary policy, global financial crisis, sovereign debt crisis, deflation, asset purchases |
| JEL: | I31 I32 D63 D31 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_486_19&r=all |
| By: | Amisano, Gianni; Tristani, Oreste |
| 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 inflation expectations induced by conventional, autoregressive shocks. Long-term inflation expectations implied by our model are in line with those based on survey data over the 1980s and 1990s, but less strongly anchored in the 2000s. JEL Classification: C11, C34, E40, E43, E52 |
| Keywords: | Bayesian estimation, monetary policy rules, regime switches, term structure of interest rates, uncertainty shocks |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192279&r=all |
| By: | Sara Eugeni (Durham University Business School) |
| Abstract: | In this paper, we contribute to the debate on whether exchange rate volatility is detrimental or not for welfare by characterizing optimal monetary policies in a two-country OLG model where markets are incomplete. The equilibrium nominal exchange rate is volatile as a result of shocks against which agents are not able to insure. In a non-cooperative environment, central banks have an incentive to devaluate the domestic currency by giving monetary transfers to domestic agents. However, such policies result in higher exchange rate volatility. We show that cooperation reduces exchange rate volatility as: (1) the negative spillover effects due to the expansionary monetary policies are internalized; (2) cooperative policies smooth the effects of shocks to fundamentals on the exchange rate. For standard parameter values, the gains from cooperation are not negligible. However, for cooperation to be Pareto improving countries should be weighted differently in the social welfare function. This could explain the lack of cooperation across countries, instead of the negligible gains as previously argued. |
| Keywords: | exchange rate volatility, incomplete markets, international spillovers, gains from cooperation, OLG models |
| JEL: | D52 F31 F41 F42 |
| Date: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:dur:durham:2019_02&r=all |
| By: | Timo Henckel (Australian National University & Centre for Applied Macroeconomic Analysis); Gordon D. Menzies (University of Technology Sydney & Centre for Applied Macroeconomic Analysis); Peter Moffat (University of East Anglia); Daniel J. Zizzo (University of Queensland & Centre for Applied Macroeconomic Analysis) |
| Abstract: | We use the behavior of inflation among Eurozone countries to provide information about the degree of credibility of the European Central Bank (ECB) since 2008. We define credibility along three dimensions-official target credibility, cohesion credibility and anchoring credibility - and show in a new econometric framework that the latter has deteriorated in recent history; that is, price setters are less likely to rely on the ECB target when forming inflation expectations. |
| Keywords: | credibility; infl?ation; expectations; anchoring; monetary union; inferential expectations |
| JEL: | C51 D84 E31 E52 |
| Date: | 2019–02–21 |
| URL: | http://d.repec.org/n?u=RePEc:uts:ecowps:2019/02&r=all |
| By: | Cecilia Dassatti Camors; José-Luis Peydró; Francesc R 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 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1091&r=all |
| By: | Jorge E. Galán (Banco de España) |
| Abstract: | The credit-to-GDP gap computed under the methodology recommended by Basel Committee for Banking Supervision (BCBS) suffers of important limitations mainly regarding the great inertia of the estimated long-run trend, which does not allow capturing properly structural changes or sudden changes in the trend. As a result, the estimated gap currently yields large negative values which do not reflect properly the position in the financial cycle and the cyclical risk environment in many countries. Certainly, most countries that have activated the Countercyclical Capital Buffer (CCyB) in recent years appear not to be following the signals provided by this indicator. The main underlying reason for this might not be only related to the properties of statistical filtering methods, but to the particular adaptation made by the BCBS for the computation of the gap. In particular, the proposed one-sided Hodrick-Prescott filter (HP) only accounts for past observations and the value of the smoothing parameter assumes a much longer length of the credit cycle that those empirically evidenced in most countries, leading the trend to have very long memory. This study assesses whether relaxing this assumption improves the performance of the filter and would still allow this statistical method to be useful in providing accurate signals of cyclical systemic risk and thereby inform macroprudential policy decisions. Findings suggest that adaptations of the filter that assume a lower length of the credit cycle, more consistent with empirical evidence, help improve the early warning performance and correct the downward bias compared to the original gap proposed by the BCBS. This is not only evidenced in the case of Spain but also in several other EU countries. Finally, the results of the proposed adaptations of the HP filter are also found to perform fairly well when compared to other statistical filters and model-based indicators. |
| Keywords: | credit-to-GDP gap, cyclical systemic risk, early-warning performance, macroprudential policy, statistical filters |
| JEL: | C18 E32 E58 G01 G28 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:bde:opaper:1906&r=all |
| By: | Levrero, Enrico Sergio; Deleidi, Matteo |
| Abstract: | This paper addresses one of the central aspects of the transmission mechanism of monetary policy, namely the ability of central banks to affect the structure of interest rates. To shed light on this issue, we assess the causal relationship between short- and long-term interest rates, that is, the Effective Federal Funds Rate (FF), the Moody's Seasoned Aaa Corporate Bond Yield (AAA), and the 10-Year Treasury Constant Maturity Rate (GB10Y). We apply Structural Vector Autoregressive (SVAR) models to monthly data provided by the Federal Reserve Economic Data (FRED). Our findings – estimated for the 1954-2018 period – outline an asymmetry in the relationship between short- and long-term interest rates. In particular, although we found a bidirectional relationship when the 10-year treasury bond GB10Y was included as the long-run rate, a unidirectional relationship that moves from short- to long-term interest rates is estimated when the interest rate on corporate bonds ranked AAA is taken into consideration. Furthermore, the conclusions drawn by the impulse response functions (IRFs) are confirmed and strengthened by the Forecast Error Variance Decomposition (FEVD) which shows that monetary policy is able to permanently affect long-term interest rates over a long temporal horizon, i.e., not only in the short run but also in the long run. In this way, following the Keynesian tradition, long-term interest rates appear to be strongly influenced by the central bank. Finally, despite the fact that the Federal Fund rate (FF) is weakly affected by long-term interest rate shocks, the estimated FEVD shows that FF is mainly determined by its own shock allowing us to assume that the central bank has a certain degree of freedom in setting the levels of short-run interest rates. |
| Keywords: | Monetary policy, short- and long-term interest rates, yield curve, SVAR analysis |
| JEL: | B26 E11 E43 E52 |
| Date: | 2019–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93608&r=all |
| By: | Henri-Paul Rousseau (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | The purpose of this paper is to present a schematic of the interactions between the government as the REGULATOR of financial institutions and the government as the INSURER of financial institutions while taking into account the long-term feedback relationships between the size and the scope of the financial sector and the level of public debt resulting from financial crises over time. The analysis concludes that at certain high level of public debt and size of the expected support of the financial sector by the government, the regulator and /or the central bank may have to "stabilize" the situation, but there may be cases where the support becomes socially "unacceptable." |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-01993612&r=all |
| By: | Marco Bevilacqua (Bank of Italy); Francesco Cannata (Bank of Italy); Raffaele Arturo Cristiano (Bank of Italy); Simona Gallina (Bank of Italy); Michele Petronzi (Bank of Italy); Silvia Cardarelli (Bank of Italy) |
| Abstract: | This paper examines the evolution of the Pillar 2 framework for banks, introduced by the Basel 2 Accord, and discusses the main issues at stake in the current policy debate. The main objective of Pillar 2 was to complement the minimum requirements established by regulators (Pillar 1) with tailored supervisory measures based on a thorough assessment of banks’ risk profiles. However, its implementation coincided in most jurisdictions with the outbreak of the global financial crisis: the main policy objective became to restore the stability of the global financial system. In this context, Pillar 2 contributed significantly to enhance supervisory action, in particular by raising capital requirements. Nevertheless, a number of issues still remain. Today, in the run-up to the completion of the post-crisis regulatory reform, the debate has regained momentum and a sound supervisory framework can be finalized under more favorable conditions, to avoid that Pillar 2 loses its key properties. |
| Keywords: | Pillar 2, SREP, Single Supervisory Mechanism, Basel, Stress Test, ICAAP |
| JEL: | G21 G28 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_494_19&r=all |
| 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 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1090&r=all |
| By: | Harris Laurence; Bold Shannon |
| Abstract: | This paper investigates whether a Taylor rule accurately describes the South African Reserve Bank’s reaction function in setting interest rates using quarterly data, covering the period since inflation targeting was formally adopted in 2000. The classic Taylor rule is modified to determine whether the South African Reserve Bank takes into account inflation expectations and labour market conditions.Our findings indicate that a modified Taylor rule does describe the South African Reserve Bank’s policy rate adjustments. Our estimates of the modified rule yield two significant findings: the South African Reserve Bank’s policy rate decisions respond to expected inflation (rather than current inflation), and its relationship to real economy fluctuations is evident in measures of labour market conditions rather than output gap variables.We conclude that under inflation targeting, South Africa’s monetary policy has had a forward-looking inflation target that is pursued flexibly in the light of labour market conditions. |
| Keywords: | output gap,Taylor rule,Unemployment gap,Monetary policy,Employment,Labour |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:unu:wpaper:wp2018-43&r=all |
| By: | Ricardo Lagos; Shengxing Zhang |
| Abstract: | We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that—in contrast to current conventional wisdom in policy-oriented research in monetary economics—the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable—even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations—even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances. |
| JEL: | E31 E4 E41 E42 E43 E44 E5 E51 E52 E58 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25803&r=all |
| By: | Bluwstein, Kristina (Bank of England); Brzoza-Brzezina, Michal (Narodowy Bank Polski and SGH Warsaw School of Economics); Gelain, Paolo (Federal Reserve Bank of Cleveland); Kolasa, Marcin (Narodowy Bank Polski and SGH Warsaw School of Economics) |
| Abstract: | We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications—fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack—to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle, with weaker effects observed when house prices are high or start falling sharply. We also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks. |
| Keywords: | mortgages; fixed-rate contracts; monetary policy; |
| JEL: | E44 E51 E52 |
| Date: | 2019–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:191000&r=all |
| By: | Dominika Kolcunova; Simona Malovana |
| Abstract: | This paper studies the impact of higher additional capital requirements on growth in loans to the private sector for banks in the Czech Republic. The empirical results indicate that higher additional capital requirements have a negative effect on loan growth for banks with relatively low capital surpluses. In addition, the results confirm that the relationship between the capital surplus and loan growth is also important at times of stable capital requirements, i.e. it does not serve only as an intermediate channel of higher additional capital requirements. |
| Keywords: | Bank lending, banks' capital surplus, regulatory capital requirements |
| JEL: | C22 E32 G21 G28 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2019/2&r=all |
| By: | Sangyup Choi (Yonsei University); Chansik Yoon (Yonsei University) |
| Abstract: | What has been the effect of uncertainty shocks in the U.S. economy over the last century? What are the historical roles of the financial channel and monetary policy channel in propagating uncertainty shocks? Our empirical strategies enable us to distinguish between the effects of uncertainty shocks on key macroeconomic and financial variables transmitted through each channel. A hundred years of data further allow us to answer these questions from a novel historical perspective. This paper finds robust evidence that financial conditions have played a crucial role in propagating uncertainty shocks over the last century, supporting many theoretical and empirical studies emphasizing the role of financial frictions in understanding uncertainty shocks. However, heightened uncertainty does not amplify the adverse effect of financial shocks, suggesting an asymmetric interaction between uncertainty and financial shocks Interestingly, the stance of monetary policy seems to play only a minor role in propagating uncertainty shocks, which is in sharp contrast to the recent claim that binding zero-lower-bound amplifies the negative effect of uncertainty shocks. We argue that the contribution of constrained monetary policy to amplifying uncertainty shocks is largely masked by the joint concurrence of binding zero-lower-bound and tightened financial conditions. |
| Keywords: | uncertainty shocks; financial channel; counterfactual VARs; local projections; zero-lowerbound |
| JEL: | E31 E32 E44 G10 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2019rwp-142&r=all |
| By: | Mertens, Thomas M. (Federal Reserve Bank of San Francisco); Williams, John C. (Federal Reserve Bank of New York) |
| Abstract: | This paper uses a standard New Keynesian model to analyze the effects and implementation of various monetary policy frameworks in the presence of a low natural rate of interest and a lower bound on interest rates. Under a standard inflation-targeting approach, inflation expectations will be anchored at a level below the inflation target, which in turn exacerbates the deleterious effects of the lower bound on the economy. Two key themes emerge from our analysis. First, the central bank can eliminate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework that aims for above-target inflation during periods when policy is unconstrained. Second, dynamic strategies that raise inflation expectations by keeping interest rates “lower for longer” after periods of low inflation can both anchor expectations at the target level and further reduce the effects of the lower bound on the economy. |
| JEL: | E52 |
| Date: | 2019–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2019-14&r=all |
| By: | Marco Bottone (Bank of Italy); Alfonso Rosolia (Bank of Italy) |
| Abstract: | We empirically explore the direct and immediate response of firms’ inflation expectations to monetary policy shocks. We use the Bank of Italy’s quarterly Survey of Inflation and Growth Expectations, in operations since 2000, and compare average point inflation expectations of firms interviewed in the days following scheduled ECB Governing Council meetings with those of firms interviewed just before them; we then relate the difference we find to the change in the nominal market interest rates recorded on Governing Council meeting days, a gauge of the unanticipated component of monetary policy communications. We find that unanticipated changes in market rates are negatively correlated in a statistically significant way with the differences in inflation expectations between the two groups of firms and that this effect has become stronger since 2009. We do not find evidence that firms’ pricing plans are affected by these monetary policy shocks nor that firms perceive significant changes in the main determinants of their pricing choices. |
| Keywords: | inflation expectations, firm surveys, monetary policy, high frequency identification |
| JEL: | D22 E3 E5 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1218_19&r=all |
| By: | John H. Cochrane |
| Abstract: | Unexpected inflation devalues nominal government bonds. This change in value must correspond to a change in expected future surpluses, a change in their discount rates, or a contemporaneous change in nominal bond returns. I develop a linearized version of the government debt valuation equation, and I measure each component via a vector autoregression. I find that discount rate variation is important. Unexpected inflation corresponds entirely to a rise in discount rates, with no change in the sum of expected future surpluses. A recession shock, which lowers inflation and output, signals persistent deficits, but also lower interest rates, which raise the value of debt and account fully for the lower inflation. A monetary policy shock, defined here as a rise in interest rates with no change in expected future surpluses, raises inflation immediately and persistently. Nominal rates rise more than real rates, raising the discount factor and thus accounting for the inflation. In these calculations, the present value of surpluses changes by more than current inflation. Persistently higher inflation and nominal interest rates cause current long term bonds to fall in value, soaking up variation in the present value of surpluses. By this mechanism monetary policy spreads fiscal shocks to persistent inflation rather than price level jumps. I also decompose the value of government debt. Half of the value of debt corresponds to forecasts of future primary surpluses, and half to discount rates, driven by variation in bond expected returns. |
| JEL: | E31 E63 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25811&r=all |
| By: | Dafe, Florence |
| Abstract: | While there is a large literature on the politics of central banking its insights are difficult to translate to Sub-Saharan Africa. This article addresses gaps in this literature by considering how the interests of those who control financial resources sway African central banks. Case studies of Kenya, Nigeria and Uganda demonstrate that variation in the sources of capital on which countries rely to finance investment helps to account for the pattern of variation in central bank policy stances. The analysis further develops and probes arguments about power derived from the control of capital in the context of developing countries. |
| JEL: | F3 G3 |
| Date: | 2017–10–08 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:84552&r=all |
| By: | Murota, Ryu-ichiro |
| Abstract: | Using a dynamic general equilibrium model, this paper theoretically analyzes a negative interest rate policy in a permanent liquidity trap. If the natural nominal interest rate is above the lower bound set by the presence of vault cash held by commercial banks, a reduction in the nominal rate of interest on excess bank reserves can get an economy out of the permanent liquidity trap. In contrast, if the natural nominal interest rate is below the lower bound, then it cannot do so, but instead a rise in the rate of tax on vault cash is useful for doing so. |
| Keywords: | aggregate demand, liquidity trap, negative nominal interest rate, unemployment |
| JEL: | E12 E31 E58 |
| Date: | 2019–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:93498&r=all |
| 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: | 2019–03 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1089&r=all |
| By: | Mehdi El Herradi; Aurélien Leroy |
| Abstract: | This paper examines the distributional implications of monetary pol-icy from a long-run perspective with data spanning a century of modern economic history in 12 advanced economies between 1920 and 2015. We employ two complementary empirical methodologies for estimating the dynamic responses of the top 1% income share to a monetary policy shock: vector auto-regressions and local projections. We notably exploit the implications of the macroeconomic policy trilemma to identify exogenous variations in monetary conditions. The obtained results indicate that ex-pansionary monetary policy strongly increases the share of national income held by the top one percent. Our findings also suggest that this e?ect is arguably driven by higher asset prices, and holds irrespective of the state of the economy. |
| Keywords: | Monetary policy; Income inequality; Local projections; Panel VAR |
| JEL: | D63 E62 E64 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:632&r=all |
| By: | Aquilante, Tommaso (Bank of England); Chowla, Shiv (Bank of England); Dacic, Nikola (Bank of England); Haldane, Andrew (Bank of England); Masolo, Riccardo (Bank of England); Schneider, Patrick (Bank of England); Seneca, Martin (Bank of England); Tatomir, Srdan (Bank of England) |
| Abstract: | In this paper we explore the link between monetary policy and market power. We start by establishing several facts on market power in UK markets using micro data. First, while no clear trend emerges for market concentration, market power measured by markups estimated at the firm level have clearly increased in recent years, with the rise being reasonably broad-based across sectors. Second, we show that the increase is heavily concentrated in the upper tail of the distribution — companies whose mark-ups are in, say, the top quartile. Third, internationally-oriented firms are the driving force behind the rise in markups. Fourth, following Díez et al (2018), we find some reduced-form evidence of a non-monotonic relation between markups and investment at the firm level, with high levels of markups being associated with lower investment. Having established these facts, we show that the Phillips curve becomes steeper in the textbook New Keynesian model when firms tend to have more market power, reducing the sacrifice ratio for monetary policy. As inflation becomes less costly in an economy with high market power, however, the optimal targeting rule for monetary policy also changes. A rise in both the trend and volatility of mark-ups may lead to a significant rise in inflation variability. But a secular rise in mark-ups by itself improves monetary policy’s ability to stabilise inflation without inducing large movements in output. |
| Keywords: | Markups; market power; secular trends; monetary policy; DSGE |
| JEL: | D20 D40 E31 E52 |
| Date: | 2019–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0798&r=all |