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on Central Banking |
| By: | Duffy, Denise (Federal Reserve Bank of Cleveland); Haubrich, Joseph G. (Federal Reserve Bank of Cleveland); Kovner, Anna (Federal Reserve Bank of New York); Musatov, Alex (Federal Reserve Bank of Dallas); Prescott, Edward Simpson (Federal Reserve Bank of Cleveland); Rosen, Richard J. (Federal Reserve Bank of Chicago); Tallarini, Thomas D. (Federal Reserve Bank of Minneapolis); Vardoulakis, Alexandros (Federal Reserve Board); Yang, Emily (Federal Reserve Bank of New York); Zlate, Andrei (Federal Reserve Board) |
| Abstract: | This paper presents a tabletop exercise designed to analyze macroprudential policy. Several senior Federal Reserve officials were presented with a hypothetical economy as of 2020:Q2 in which commercial real estate and nonfinancial debt valuations were very high. After analyzing the economy and discussing the use of monetary and macroprudential policy tools, participants were then presented with a hypothetical negative shock to commercial real estate valuations that occurred in the second half of 2020. Participants then discussed the use of the tools during an incipient downturn. Some of the findings of the exercise were that during an asset boom, there were limits to the effectiveness of US macroprudential tools in controlling narrow risks and that changes to the fed funds rate may not always simultaneously meet macroeconomic and financial stability goals. Some other findings were that during a downturn, it would be desirable to use high-frequency indicators for deciding when to release the countercyclical capital buffer (CCyB) and that tensions exist between microprudential and macroprudential goals when using the CCyB and the stress test. |
| Keywords: | financial stability; macroprudential policy; monetary policy; tabletop exercise; |
| JEL: | E58 G01 G18 |
| Date: | 2019–05–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwq:191100&r=all |
| By: | Ampudia, Miguel; Beck, Thorsten; Beyer, Andreas; Colliard, Jean-Edouard; Leonello, Agnese; Maddaloni, Angela; Marqués-Ibáñez, David |
| Abstract: | The architecture of supervision – how we define the allocation of supervisory powers to different policy institutions – can have implications for policy conduct and for the economic and financial environment in which these policies are implemented. Theoretically, an integrated structure for monetary policy and supervision brings important benefits arising from better information flow and policy coordination. Aggregate supervisory information may significantly improve the conduct of monetary policy and the effectiveness of the lender of last resort function. As long as the process towards an integrated structure does not shrink the set of available tools, monetary policy and supervision are no less effective in pursuing their objectives than a separated structure. Additionally, an integrated structure does not seem to be correlated with more price and/or financial instability, as suggested by analysing a large global set of countries with different supervisory set-ups. A centralised structure for supervision entails significant benefits in terms of fewer opportunities for supervisory arbitrage by banks and less informational asymmetry. A large central supervisor can take advantage of economies of scale and scope in supervision and gain a broader perspective on the stability of the entire banking sector, which should result in improved financial stability. Potential drawbacks of a centralised supervisory structure are the possible lack of specialisation relative to local supervisors and the increased distance between the supervisor and the supervised institutions. We discuss the implications of our findings in the euro area context and in relation to the design of the Single Supervisory Mechanism (SSM). JEL Classification: E5, G21, G38 |
| Keywords: | central banks, lender of last resort, policy coordination, supervisory structure |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192287&r=all |
| By: | Stann, Carsten M.; Grigoriadis, Theocharis |
| Abstract: | In this paper, we argue that the ECB's unconventional monetary policy announcements have generated significant spillover effects in Russia and Eastern Europe. The hypothesis is tested using OLS estimations of event-based regressions on monetary policy event dummies and seven financial variables in eleven East European countries including Russia. Overall, the empirical results associate the ECB's unconventional policy announcements with the appreciation of East European currencies, rising stock market indices as well as falling long-term government bond yields and lower sovereign CDS spreads in Eastern Europe and Russia. Notably, bilateral integration with the eurozone is a key determinant of the strength of spillovers, with spillovers strongest in non-euro EU countries and weakest in non-EU East European countries. Interestingly, we find differentiated strength of spillovers to Russia compared to other non-EU East European countries, which we attribute to its fixed exchange rate regime. Lastly, we test for the presence of the portfolio rebalancing and confidence transmission channels. |
| Keywords: | monetary policy transmission,spillovers,European Central Bank,transmission channels,Eastern Europe,Russia |
| JEL: | E52 E58 F34 F37 F42 P51 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fubsbe:20196&r=all |
| By: | Todd Keister; Yuliyan Mitkov |
| Abstract: | We study the interaction between a government’s bailout policy during a bank- ing crisis and individual banks’ willingness to impose losses on (or “bail in†) their investors. Banks in our model hold risky assets and are able to write complete, state-contingent contracts with investors. In the constrained efficient allocation, banks experiencing a loss immediately bail in their investors and this bail-in removes any incentive for investors to run on the bank. In a competitive equi- librium, however, banks may not enact a bail-in if they anticipate being bailed out. In some cases, the decision not to bail in investors provokes a bank run, creating further distortions and leading to even larger bailouts. We ask what macroprudential policies are useful when bailouts crowd out bail-ins. |
| Keywords: | Financial Fragility, Bailouts, Bail-ins, Limited Commitment |
| JEL: | E61 G21 G28 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2019_091&r=all |
| By: | Lorella Fatone; Francesca Mariani |
| Abstract: | We consider the problem of governing systemic risk in an assets-liabilities dynamical model of banking system. In the model considered each bank is represented by its assets and its liabilities.The capital reserves of a bank are the difference between assets and liabilities of the bank. A bank is solvent when its capital reserves are greater or equal to zero otherwise the bank is failed.The banking system dynamics is defined by an initial value problem for a system of stochastic differential equations whose independent variable is time and whose dependent variables are the assets and the liabilities of the banks.The banking system model presented generalizes those discussed in [4],[3] and describes a homogeneous population of banks. The main features of the model are a cooperation mechanism among banks and the possibility of the (direct) intervention of the monetary authority in the banking system dynamics. We call systemic risk or systemic event in a bounded time interval the fact that in that time interval at least a given fraction of the banks fails. The probability of systemic risk in a bounded time interval is evaluated using statistical simulation. The systemic risk governance pursues the goal of keeping the probability of systemic risk in a bounded time interval between two given thresholds.The monetary authority is responsible for the systemic risk governance.The governance consists in the choice of the assets and of the liabilities of a kind of "ideal bank" as functions of time and in the choice of the rules that regulate the cooperation mechanism among banks.These rules are obtained solving an optimal control problem for the pseudo mean field approximation of the banking system model. The governance induces the banks of the system to behave like the "ideal bank". Shocks acting on the assets or on the liabilities of the banks are simulated. |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1905.12431&r=all |
| By: | Michael S. Lee-Browne (The George Washington University) |
| Abstract: | This paper presents an approach for empirically estimating long-run monetary policy rules in small open economies. The approach utilizes the cointegrated VAR methodology and statistical tests on long- and short-run relations, and investigates policy responses. An application is presented for the case of Trinidad and Tobago. The analysis reveals an empirically supported long-run monetary policy rule for the nominal exchange rate, and provides empirical evidence that oil price shocks are transmitted through the TT economy in part via the effects on US prices. Dynamic specification of the nominal exchange rate reveals significant adjustment towards the target equilibrium level, and significant effects from foreign and domestic variables save for the exchange rate. Forecast analysis reveals the significance of oil-price forecasts, and forecast-errors, on monetary policy. The parsimonious model and its parameter estimates are empirically constant and generate reliable forecasts that provide important implications for using estimated policy rules. |
| Keywords: | Cointegration, exogeneity, Fisher open parity, forecast-encompassing, monetary policy, PPP, small open economies, Trinidad and Tobago, UIP |
| JEL: | C51 C52 E52 E58 F31 F41 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:gwc:wpaper:2019-001&r=all |
| By: | Anindya Banerjee (University of Birmingham); Victor Bystrov (University of Lodz); Paul Mizen (University of Nottingham) |
| Abstract: | In this paper we examine the influence of monetary policy at the ECB on mortgage and business lending rates offered by banks in the major euro area countries (Germany, France, Italy and Spain). Since there are many different policy measures that have been undertaken, we utilise a dynamic factor model, which allows examination of impulse responses to policy shocks conditioned by structurally identified latent factors. The distinct feature of this paper is that it explores the effects of three channels of policy transmission - short-term rates, long-term rates and perceived risk - ultimately directed towards bank lending rates. The analysis of the pass through is carried out in pre-crisis and post-crisis sub-samples after the financial crisis to demonstrate the changing influence of different policy measures on lending rates. |
| Keywords: | monetary policy, dynamic factor models, interest rates, pass through |
| JEL: | C32 C53 E43 E4 |
| Date: | 2019–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:ann:wpaper:1/2019&r=all |
| By: | Zakipour-Saber, Shayan (Central Bank of Ireland) |
| Abstract: | Are monetary policy regimes state-dependent? To answer the question this paper estimates New Keynesian general equilibrium models that allow the state of the economy to influence the monetary authority’s stance on inflation. I take advantage of recent developments in solving rational expectations models with state-dependent parameter drift to estimate three models on U.S. data between 1965-2009. In these models, the probability of remaining in a monetary policy regime that is relatively accommodative towards inflation, varies over time and depends on endogenous model variables; in particular, either deviations of inflation or output from their respective targets or a monetary policy shock. The main contribution of this paper is that it finds evidence of state-dependent monetary policy regimes. The model that allows inflation to influence the monetary policy regime in place, fits the data better than an alternative model with regime changes that are not state-dependent. This finding points towards reconsidering how changes in monetary policy are modeled. |
| Keywords: | Markov-Switching DSGE, State-dependence, Bayesian Estimation |
| JEL: | C13 C32 E42 E43 |
| Date: | 2019–04 |
| URL: | http://d.repec.org/n?u=RePEc:cbi:wpaper:4/rt/19&r=all |
| By: | Adrian, Tobias (International Monetary Fund); Duarte, Fernando M. (Federal Reserve Bank of New York); Grinberg, Federico (International Monetary Fund); Mancini-Griffoli, Tommaso (International Monetary Fund) |
| Abstract: | Loose financial conditions forecast high output growth and low output volatility up to six quarters into the future, generating time-varying downside risk to the output gap, which we measure by GDP-at-Risk (GaR). This finding is robust across countries, conditioning variables, and time periods. We study the implications for monetary policy in a reduced-form New Keynesian model with financial intermediaries that are subject to a Value at Risk (VaR) constraint. Optimal monetary policy depends on the magnitude of downside risk to GDP, as it impacts the consumption-savings decision via the Euler constraint, and financial conditions via the tightness of the VaR constraint. The optimal monetary policy rule exhibits a pronounced response to shifts in financial conditions for most countries in our sample. Welfare gains from taking financial conditions into account are shown to be sizable. |
| Keywords: | monetary policy; financial conditions; financial stability |
| JEL: | E52 |
| Date: | 2019–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:890&r=all |
| By: | Samuel Huber; Jaehong Kim; Alessandro Marchesiani |
| Abstract: | We develop a dynamic general equilibrium model to analyze the relationship between monetary policy, money demand, and unemployment. Our model succeeds in replicating the empirical fact of a downward sloping Phillips curve for low infl ation rates and an upward sloping curve for high inflation rates. The reason is that low in flation rates make saving, as opposed to consumption, more attractive. Less consumption is associated with less output and therefore higher unemployment. To the contrary, when inflation exceeds a certain threshold, money is too costly to hold, which results in a decrease in output and an increase in unemployment. |
| Keywords: | Money, infl ation, overlapping generations, unemployment |
| JEL: | D90 E31 E41 E50 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:324&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: | E52, E43, G01, G21, G28 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bge:wpaper:1101&r=all |
| By: | Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik |
| Abstract: | How far should capital requirements be raised in order to ensure a strong and resilient banking system without imposing undue costs on the real economy? Capital requirement increases make banks safer and are beneficial in the long run but also entail transition costs because their imposition reduces credit supply and aggregate demand on impact. In the baseline scenario of a quantitative macro-banking model, 25% of the long-run welfare gains are lost due to transitional costs. The strength of monetary policy accommodation and the degree of bank riskiness are key determinants of the trade-off between the short-run costs and long-run benefits from changes in capital requirements. JEL Classification: E3, E44, G01, G21 |
| Keywords: | default risk, effective lower bound, macroprudential policy, transitional dynamics |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192286&r=all |
| By: | Deak, S.; Levine, P.; Mirza, A.; Pearlman, J. |
| Abstract: | How should a forward-looking policy maker conduct monetary policy when she has a finite set of models at her disposal, none of which are believed to be the true data generating process? In our approach, the policy makerfirst assigns weights to models based on relative forecasting performance rather than in-sample fit, consistent with her forward-looking objective. These weights are then used to solve a policy design prob-lem that selects the optimized Taylor-type interest-rate rule that is robust to model uncertainty across a set of well-established DSGE models with and without financial frictions. We find that the choice of weights has a significant impact on the robust optimized rule which is more inertial and aggressive than either the non-robust single model counterparts or the optimal robust rule based on backward-looking weights asin the common alternative Bayesian Model Averaging. Importantly, we show that a price-level rule has excellent welfare and robustness properties, and therefore should be viewed as a key instrument for policy makers facing uncertainty over the nature offinancial frictions. |
| JEL: | H |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:cty:dpaper:19/11&r=all |
| By: | Ingolf G. A. Pernice; Sebastian Henningsen; Roman Proskalovich; Martin Florian; Hermann Elendner; Bj\"orn Scheuermann |
| Abstract: | The price volatility of cryptocurrencies is often cited as a major hindrance to their wide-scale adoption. Consequently, during the last two years, multiple so called stablecoins have surfaced---cryptocurrencies focused on maintaining stable exchange rates. In this paper, we systematically explore and analyze the stablecoin landscape. Based on a survey of 24 specific stablecoin projects, we go beyond individual coins for extracting general concepts and approaches. We combine our findings with learnings from classical monetary policy, resulting in a comprehensive taxonomy of cryptocurrency stabilization. We use our taxonomy to highlight the current state of development from different perspectives and show blank spots. For instance, while over 91% of projects promote 1-to-1 stabilization targets to external assets, monetary policy literature suggests that the smoothing of short term volatility is often a more sustainable alternative. Our taxonomy bridges computer science and economics, fostering the transfer of expertise. For example, we find that 38% of the reviewed projects use a combination of exchange rate targeting and specific stabilization techniques that can render them vulnerable to speculative economic attacks - an avoidable design flaw. |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1905.11905&r=all |
| By: | Żochowski, Dawid; Franch, Fabio; Nocciola, Luca |
| Abstract: | We analyse the cross-border propagation of prudential regulation in the euro area. Using the Prudential Instruments Database (Cerutti et al., 2017b) and a unique confidential database on balance sheets items of euro-area financial institutions we estimate panel models for 248 banks from 16 euro-area countries. We find that domestic banks reduce lending after the tightening of capital requirements in other countries, while they increase lending when loan-to-value (LTV) limits or reserve requirements are tightened abroad. We also find that foreign affiliates increase lending following the tightening of sector-specific capital buffers in the countries where their parent banks reside and that bank size and liquidity play a role in determining the magnitude of cross-border spillovers. JEL Classification: G21, F34, F36 |
| Keywords: | cross-border spillovers, international banking, prudential policy |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192285&r=all |
| By: | Marek Dabrowski |
| Abstract: | Twenty years of euro history confirms the euro’s stability and position as the second global currency. It also enjoys the support of majority of the euro area population and is seen as a good thing for the European Union. The European Central Bank has been successful in keeping inflation at a low level. However, the European debt and financial crisis in the 2010s created a need for deep institutional reform and this task remains unfinished. |
| Keywords: | European Union, Economic and Monetary Union, common currency area, monetary policy, fiscal policy |
| JEL: | E58 E62 E63 F33 H62 H63 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:sec:report:0497&r=all |
| By: | Maddaloni, Angela; Scopelliti, Alessandro |
| Abstract: | Prior to the financial crisis, prudential regulation in the EU was implemented non-uniformly across countries, as options and discretions allowed national authorities to apply a more favorable regulatory treatment. We exploit the national implementation of the CRD and derive a country measure of regulatory flexibility (for all banks in a country) and of supervisory discretion (on a case-by-case basis). Overall, we find that banks established in countries with a less stringent prudential framework were more likely to require public support during the crisis. We instrument some characteristics of bank balance sheets with these prudential indicators to investigate how they affect bank resilience. The share of non-interest income explained by the prudential environment is always associated with an increase in the likelihood of financial distress during the crisis. Prudential frameworks also explain banks’ liquidity buffers even in absence of a specific liquidity regulation, which points to possible spillovers across regulatory instruments. JEL Classification: G01, G21, G28 |
| Keywords: | banking union, cross-country heterogeneities, European banking, prudential regulation and supervision, rules versus discretion |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192284&r=all |
| By: | Alexey Ponomarenko (Bank of Russia, Russian Federation) |
| Abstract: | When a central bank accumulates foreign reserves, there are two possible ways of balance of payments adjustment: (1) decreasing commercial banks’ net foreign assets and (2) decreasing the non-banking sector’s net foreign assets and/or increasing the current account surplus. In the latter case, money is created. It does not matter whether the central bank sterilizes the bank reserves that it supplied to the money market and prevents the interest rate change – money will be created anyway (although sterilization may prevent further money creation through credit extension). Our empirical analysis shows that for emerging markets the type (2) adjustment is more common than type (1). Therefore, the accumulation of foreign reserves is likely to create money even when sterilized (i.e. it does not lead to lower money market interest rates). |
| Keywords: | Money supply, credit, foreign exchange interventions, foreign exchange reserves, emerging markets. |
| JEL: | E51 E58 F31 G21 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bkr:wpaper:wps40&r=all |
| By: | Markus K. Brunnermeier; Dirk Niepelt |
| Abstract: | We develop a generic model of money and liquidity that identifies sources of liquidity bubbles and seignorage rents. We provide sufficient conditions under which a swap of monies leaves the equilibrium allocation and price system unchanged. We apply the equivalence result to the "Chicago Plan,'' cryptocurrencies, the Indian de-monetization experiment, and Central Bank Digital Currency (CBDC). In particular, we show why CBDC need not undermine financial stability. |
| JEL: | E40 E41 E42 E44 E51 E52 E58 G21 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:25877&r=all |
| By: | Chakrabarti, Anindya S.; Kumar, Sudarshan |
| Abstract: | Central banks of different countries are some of the largest economic players at the global scale and they are not static in their monetary policy stances. They change their policies substantially over time in response to idiosyncratic or global factors affecting the economies. A very prominent and empirically documented feature arising out of central banks’ actions, is that the relative importance assigned to inflation vis-a-vis output fluctuations evolve substantially over time. We analyze the leading and lagging behavior of central banks of various countries in terms of adopting low inflationary environment vis-a-vis high weight assigned to counteract output fluctuations, in a completely data-driven way. To this end, we propose a new methodology by combining complex Hilbert principle component analysis with state-space models in the form of Kalman filter. The CHPCA mechanism is non-parametric and provides a clean identification of leading and lagging behavior in terms of phase differences of time series in the complex plane. We show that the methodology is useful to characterize the extent of coordination (or lack thereof), of monetary policy stances taken by central banks in a cross-section of developed and developing countries. In particular, the analysis suggests that US Fed led other countries central banks in the pre-crisis period in terms of pursuing low-inflationary regimes. |
| Date: | 2019–06–03 |
| URL: | http://d.repec.org/n?u=RePEc:iim:iimawp:14608&r=all |
| By: | Jonathan Chiu; Mohammad Davoodalhosseini; Janet Hua Jiang; Yu Zhu |
| Abstract: | Many central banks are considering whether to issue a new form of electronic money that would be accessible to the public. This new form is usually called a central bank digital currency (CBDC). Issuing a CBDC would have implications on the financial system and more broadly on the wider economy. The effects of a CBDC on the banking sector, output and welfare depend crucially on the level of competition in the market for bank deposits. We show that when banks have no market power, issuing a deposit-like CBDC (that people can use like a debit card in transactions) would crowd out private banking. It would shift deposits away from the banking system, reducing bank lending. However, in a more realistic scenario, when banks have market power in the deposit market, issuing a deposit-like CBDC with a proper interest rate would encourage banks to pay higher interest or offer better services to keep their customers. They can do so because they earn a positive profit. As a result, banks would attract more deposits and extend more loans. In this case, issuing a CBDC would not necessarily crowd out private banking. In fact, the CBDC would serve as an outside option for households, thus limiting banks’ market power, and improve the efficiency of bank intermediation. We show quantitatively that the effects of a CBDC on lending, deposits, output and welfare can be sizable. We also analyze how different designs of a CBDC affect our results, including whether the CBDC is deposit-like or cash-like and whether the CBDC can be used to satisfy banks’ reserve requirements. |
| Keywords: | Digital Currencies and Fintech; Market structure and pricing; Monetary Policy; Monetary policy framework |
| JEL: | E50 E58 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-20&r=all |
| By: | Mucai Lin; Linlin Niu |
| Abstract: | This paper examines the spillover effects of announcements of quantita- tive easing (QE) conducted by the central banks of U.S., U.K., Eurozone, and Japan on Chinese Treasury yield curve. Despite China’s firewall of cap- ital control and managed exchange rate regime, the QE announcements of U.S. move the Chinese yield curve immediately with significance, through the channels of signaling as well as portfolio balancing. The U.S. QE impact is particularly strong. The results are robust across a variety of event analy- sis methods. Using the heteroskedasticity assumption for identification and allowing for existence of alternative sources of shocks, we find the U.S. QE impact is sizable even compared to China’s own monetary policy shocks. |
| Keywords: | QE announcements, Spillover, Signaling Effects, Portfolio Balancing Effects, Yield Curve |
| JEL: | E43 E52 |
| Date: | 2019–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:wyi:wpaper:002405&r=all |