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on Central Banking |
| By: | Elien Meuleman; Rudi Vander Vennet (-) |
| Abstract: | This paper investigates the effectiveness of macroprudential policy to contain the systemic risk of European banks between 2000 and 2017. We use a new database (MaPPED) collected by experts at the ECB and national central banks with narrative information on a broad range of instruments which are tracked over their life cycle. Using a dynamic panel framework at a monthly frequency enables us to assess the impact of macroprudential tools and their design on the banks’ systemic risk both in the short and the long run. We furthermore decompose the systemic risk measure in an individual bank risk component and a systemic linkage component. This is of particular interest because microprudential policy focuses on the tail risk of an individual bank while macroprudential policy targets systemic risk by addressing the interlinkages and common exposures across banks. On average, all banks benefit from macroprudential tools in terms of their individual risk. We find that credit growth tools and exposure limits exhibit the most pronounced downward effect on the individual risk component. However, we find evidence for a risk-shifting effect which is more pronounced for retail-oriented banks. The effects are heterogeneous across banks with respect to the systemic linkage component. Liquidity tools and measures aimed at increasing the resilience of banks decrease the systemic linkage of banks. However, these tools appear to be most effective for distressed banks. Our results have implications for the optimal design of macroprudential instruments. |
| Keywords: | European banks, macroprudential policy, systemic risk |
| JEL: | E58 G18 G28 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:19/971&r=all |
| By: | Pavon-Prado, David |
| Abstract: | Unlike the standard and erroneous practice of using the federal funds rate or another intermediate target to measure the monetary policy stance, a new procedure is developed using the actual Federal Reserve’s instruments and the spread between short-term rates and the discount rate. Accordingly, I estimate a time-varying coefficient Bayesian SVAR for the interwar period and 1958- 2007. The new technique unveils a new mechanism operating between Fed’s policies and the real economy. The results show that monetary policy was mostly irrelevant for the interwar period, but the situation changed after 1958. For this last case, however, the new mechanism, which focuses on the cost at which banks obtain reserves, explains that positive spreads between the federal funds rate and the discount rate contributed to increasing inflation, revealing that the “price puzzle” is non-existent. |
| Keywords: | Federal Reserve; monetary policy |
| JEL: | E58 E52 E51 E43 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:cte:whrepe:28342&r=all |
| By: | Előd Takáts; Judit Temesvary |
| Abstract: | We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant. |
| Keywords: | monetary policy, macroprudential policy, cross-border claims, diff-in-diff analysis |
| JEL: | F34 F42 G21 G38 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:782&r=all |
| By: | Fabio Canetg; Daniel Kaufmann |
| Abstract: | We identify the dynamic causal effects of interest rate floor shocks, exploiting regular auctions of Swiss central bank debt securities (SNB Bills). A theoretical model shows that variation in the volume of, and yield on, central bank debt changes the interest rate floor. In addition, the model establishes the equivalence between central bank debt and interest-bearing reserves when reserves are ample. Based on these insights, the empirical analysis identifies an interest rate floor shock in a dynamic event study of SNB Bill auctions. A restrictive interest rate floor shock causes an increase in the money market rate, a persistent appreciation of the Swiss franc, a decline in long-term interest rates, and a decline in stock prices. We then perform policy experiments under various identifying assumptions in which the central bank raises the interest rate floor from 0% to 0.25%. Such a policy change causes a 3-6% appreciation of the Swiss franc and a 5-20% decline in stock prices. |
| Keywords: | Exit strategies, interest rate floors, central bank debt securities, interest on reserves, monetary policy shocks, identification through heteroscedasticity |
| JEL: | E41 E43 E44 E52 E58 C32 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:irn:wpaper:19-02&r=all |
| By: | Kevin Clinton; R. S Craig; Douglas Laxton; Hou Wang |
| Abstract: | Adoption of inflation targeting by the Bank of Korea (BOK) in 1998 contributed to low and stable inflation. However, after the global financial crisis (GFC) monetary policy faced more challenging conditions. Inflation slipped below the target range in 2012 and remains below it despite a cut in the target to 2 percent in 2016. Policy also became more complex with the addition of financial stability to the central bank’s mandate. To address these challenges, this paper proposes a two-pronged approach to strengthen the effectiveness with which monetary policy can meet its objectives: first, enhanced communication on how the target will be achieved over the medium-term, building on a forecasting and policy analysis system; and, second, by clarifying the complementary role of macroprudential policy in containing financial stability risks so that monetary policy can focus on the inflation target. Simulation of a macro model calibrated to Korea illustrates how it can be used to provide this greater medium-term focus on achieving the inflation target and strengthen communication. |
| Date: | 2019–05–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/103&r=all |
| By: | Aakriti Mathur (IHEID, Graduate Institute of International and Development Studies, Geneva); Rajeswari Sengupta (Indira Gandhi Institute of Development Research (IGIDR)); |
| Abstract: | In this paper we quantitatively analyse monetary policy statements of the Reserve Bank of India (RBI) from 1998 to 2017, across the regimes of five governors. We first ask whether the content and focus of the statements have changed with the adoption of inflation-targeting as a framework for conducting monetary policy. Next, we study the influence of various aspects of monetary policy communication on financial markets. Using natural language processing tools, we construct measures of linguistic and structural complexity that capture governor-specific trends in communication. We find that while RBI’s monetary policy communication is linguistically complex on average, the length of monetary policy statements has gone down and readability has improved significantly in the recent years. We also find that there has been a persistent semantic shift in RBI’s monetary policy communication since the adoption of inflation-targeting. Finally, using a simple regression model we find that lengthier and less readable statements are linked to both higher trading volumes and higher returns volatility in the equity markets, though the effects are not persistent. |
| Keywords: | Monetary policy, central bank communication, linguistic complexity, financial markets, textual analysis, natural language processing |
| JEL: | E52 E58 G12 G14 |
| Date: | 2019–05–22 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heidwp08-2019&r=all |
| By: | Carlo Altavilla; Miguel Boucinha; José-Luis Peydró |
| Abstract: | We analyse the impact of standard and non-standard monetary policy on bank profitability. We use both proprietary and commercial data on individual euro area bank balance-sheets and market prices. Our results show that a monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Accommodative monetary conditions asymmetrically affect the main components of bank profitability, with a positive impact on loan loss provisions and non-interest income offsetting the negative one on net interest income. A protracted period of low monetary rates has a negative effect on profits that, however, only materialises after a long time period and is counterbalanced by improved macroeconomic conditions. Monetary policy easing surprises during the low interest rate period improve bank stock prices and CDS. |
| Keywords: | bank profitability, monetary policy, lower bound, quantitative easing, negative rates |
| JEL: | E52 E43 G01 G21 G28 |
| Date: | 2017–10 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1655&r=all |
| By: | Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe |
| Abstract: | We study the information flow from the ECB on policy dates since its inception, using tick data. We show that three factors capture about all of the variation in the yield curve but that these are different factors with different variance shares in the window that contains the policy decision announcement and the window that contains the press conference. We also show that the QE-related policy factor has been dominant in the recent period and that Forward Guidance and QE effects have been very persistent on the longer-end of the yield curve. We further show that broad and banking stock indices’ responses to monetary policy surprises depended on the perceived nature of the surprises. We find no evidence of asymmetric responses of financial markets to positive and negative surprises, in contrast to the literature on asymmetric real effects of monetary policy. Lastly, we show how to implement our methodology for any policy-related news release, such as policymaker speeches. To carry out the analysis, we construct the Euro Area Monetary Policy Event-Study Database (EA-MPD). This database, which contains intraday asset price changes around the policy decision announcement as well as around the press conference, is a contribution on its own right and we expect it to be the standard in monetary policy research for the euro area. JEL Classification: E43, E44, E52, E58, G12, G14 |
| Keywords: | asymmetry, ECB policy surprise, event-study, intraday, persistence |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192281&r=all |
| By: | Masami Imai; Tetsuji Okazaki; Michiru Sawada |
| Abstract: | The interwar Japanese economy was unsettled by chronic banking instability, and yet the Bank of Japan (BOJ) restricted access to its liquidity provision to a select group of banks, i.e. BOJ correspondent banks, rather than making its loans widely available "to merchants, to minor bankers, to this man and to that man" as prescribed by Bagehot (1873). This historical episode provides us with a quasi-experimental setting to study the impact of Lender of Last Resort (LOLR) policies on financial intermediation. We find that the growth rate of deposits and loans was notably faster for BOJ correspondent banks than the other banks during the bank panic phase of the Great Depression from 1931-1932, whereas it was not faster before the bank panic phase. Furthermore, BOJ correspondent banks were less likely to be closed during the bank panics. To address possible selection bias, we also instrument a bank's corresponding relationship with the BOJ with its geographical proximity to the nearest branch or the headquarters of the BOJ, which was a major determinant of a bank's transaction relationship with the BOJ at the time. This instrumental variable specification yields qualitatively same results. Taken together, Japan's historical experience suggests that central banks' liquidity provisions play an important backstop role in supporting the essential financial intermediation services in time of financial stringency. |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:tcr:wpaper:e129&r=all |
| 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: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1098&r=all |
| By: | Habib, Maurizio Michael; Venditti, Fabrizio |
| Abstract: | In this paper, we study the effects of structural shocks that influence global risk – the main factor behind a “global capital flows cycle” – and how risk, in turn, is transmitted to capital flows. Our results show that not all the risk shocks driving the global financial cycle have the same effects on capital flows. Changes in global risk caused by pure financial shocks have the largest impact on the global configuration of capital flows, followed by US monetary policy shocks. As regards the transmission of risk to capital flows, we uncover a traditional “trilemma”, as countries more financially open and adopting a strict peg are more sensitive to global risk. This “trilemma” is mainly driven by one category of cross-border flows, “other investment”, confirming the importance of cross-border banking loans in the narrative of the global financial cycle. JEL Classification: E42, E52, F31, F36, F41 |
| Keywords: | capital flows, global financial cycle, global risk, international spillover, monetary policy |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192280&r=all |
| By: | Demiralp, Selva; Eisenschmidt, Jens; Vlassopoulos, Thomas |
| Abstract: | Negative monetary policy rates are associated with a particular friction because the remuneration of retail deposits tends to be floored at zero. We investigate whether this friction affects banks’ reactions when the policy rate is lowered to negative levels, compared to a standard rate cut in the euro area. We exploit the cross-sectional variation in banks’ funding structures jointly with that in their excess liquidity holdings. We find evidence that banks highly exposed to the policy tend to grant more loans. This confirms studies that point to higher risk taking by banks as a reaction to negative rates. It, however, contrasts some earlier research associating negative rates with a contraction in loans. We illustrate that the difference is likely driven by the broader coverage of our loan data, longer time span of our sample and, importantly, the explicit consideration of the role of excess liquidity in our analysis. JEL Classification: E43, E52, G11, G21 |
| Keywords: | bank balance sheets, monetary transmission mechanism, negative rates |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192283&r=all |
| By: | Stephen G. Hall; Heather D. Gibson; Pavlos Petroulas; George S. Tavlas |
| Abstract: | We examine the impact of Emergency Liquidity Assistance (ELA) on bank lending in eleven euro area countries. With the intensification of the financial crisis, ELA came to take on an almost systemic role in some countries (notably Greece), with either the whole or large parts of national banking systems depending on it. Despite this crucial role, assessments of the quantitative impact of ELA in the literature are non-existent. This paper aims to fill this gap. We estimate a structural panel model for the determination of bank lending, which includes the amount of ELA received by each bank, allowing us to investigate the direct effect of ELA on bank lending. Our model corrects a key mis-specification found in the prototype model used in the literature on bank lending. We then undertake a VAR analysis, which allows us to address the effect of ELA on GDP. Finally, we examine spillover effects among banks. Our results suggest that the provision of ELA generated positive spillovers to other banks. |
| Keywords: | Euro area financial crisis, Emergency Liquidity Assistance (ELA), European banks, spatial panel model |
| JEL: | E3 G01 G14 G21 |
| Date: | 2019–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:19/01&r=all |
| By: | Ruchir Agarwal; Miles Kimball |
| Abstract: | The experience of the Great Recession and its aftermath revealed that a lower bound on interest rates can be a serious obstacle for fighting recessions. However, the zero lower bound is not a law of nature; it is a policy choice. The central message of this paper is that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future to end recessions within a short time. This paper demonstrates that a subset of these tools can have a big effect in enabling deep negative rates with administratively small actions on the part of the central bank. To that end, we (i) survey approaches to enable deep negative rates discussed in the literature and present new approaches; (ii) establish how a subset of these approaches allows enabling negative rates while remaining at a minimum distance from the current paper currency policy and minimizing the political costs; (iii) discuss why standard transmission mechanisms from interest rates to aggregate demand are likely to remain unchanged in deep negative rate territory; and (iv) present communication tools that central banks can use both now and in the event to facilitate broader political acceptance of negative interest rate policy at the onset of the next serious recession. |
| Date: | 2019–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/84&r=all |
| By: | Sami Ben Naceur; Bertrand Candelon; Quentin Lajaunie |
| Abstract: | This paper assesses whether and how financial development triggers the occurrence of banking crises. It builds on a database that includes financial development as well as financial access, depth and efficiency for almost 100 countries. Through estimation of a dynamic logit panel model, it appears that financial development, from an institutional dimension and to a lesser extent from a market dimension, triggers financial instability within a one- to two-year horizon. Additionally, whereas financial access is destabilizing for advanced countries, it is stabilizing for emerging and low income ones. Both results have important implications for macroprudential policies and financial regulations. |
| Date: | 2019–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/94&r=all |
| By: | Jean-Marc Natal; Nicolas Stoffels |
| Abstract: | We argue that strong globalization forces have been an important determinant of global real interest rates over the last five decades, as they have been key drivers of changes in the natural real interest rate—i.e. the interest rate consistent with output at its potential and constant inflation. An important implication of our analysis is that increased competition in goods and labor market since the 1970s can help explain both the large increase in real interest rates up to the mid-1980s and—as globalization forces mature and may even go into reverse, leading to incrementally rising market power—its subsequent and protracted decline accompanied by lower inflation. The analysis has important implications for monetary policy and the optimal pace of normalization. |
| Date: | 2019–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/95&r=all |
| By: | Elie Bouri (USEK Business School, Holy Spirit University of Kaslik, Jounieh, Lebanon); Konstantinos Gkillas (Department of Business Administration , University of Patras, University Campus, Rio, P.O. Box 1391, 26500 Patras, Greece.); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Clement Kyei (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa.) |
| Abstract: | We analyze the role of monetary policy uncertainty in predicting volatility jumps in nine advanced equity markets. The standard linear Granger causality test detects weak evidence of monetary policy uncertainty causing volatility jumps. But given the strong evidence of nonlinearity between jumps and monetary policy uncertainty, we next use a nonparametric causality-in-quantiles test, since the linear model is misspecified. Using this data-driven robust approach we find strong evidence of the role of monetary policy uncertainty in predicting volatility jumps, especially towards the lower end of the conditional distribution. |
| Keywords: | Stock Market Volatility Jumps, Monetary Policy Uncertainty |
| JEL: | C22 G10 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201939&r=all |
| By: | Arina Wischnewsky; David-Jan Jansen; Matthias Neuenkirch |
| Abstract: | This paper retraces how financial stability considerations interacted with U.S. monetary policy before and during the Great Recession. Using text-mining techniques, we construct indicators for financial stability sentiment expressed during testimonies of four Federal Reserve Chairs at Congressional hearings. Including these text-based measures adds explanatory power to Taylor-rule models. In particular, negative financial stability sentiment coincided with a more accommodative monetary policy stance than implied by standard Taylor-rule factors, even in the decades before the Great Recession. These findings are consistent with a preference for monetary policy reacting to financial instability rather than acting pre-emptively to a perceived build-up of risks. |
| Keywords: | monetary policy; financial stability; Taylor rule; text mining |
| JEL: | E52 E58 N12 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:633&r=all |