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on Central Banking |
| By: | Egemen Eren; Semyon Malamud |
| Abstract: | We propose a "debt view" to explain the dominant international role of the dollar. We develop an international general equilibrium model in which firms optimally choose the currency composition of their nominal debt. Expansionary monetary policy in downturns prevents Fisherian debt deflation through its effects on inflation and exchange rates, and alleviates financial distress. Theoretically, the dominant currency is the one that depreciates in global downturns over horizons of corporate debt maturity. Empirically, the dollar fits this description, despite being a short-run safe-haven currency. We provide broad empirical support for the debt view. We also study the globally optimal monetary policy. |
| Keywords: | dollar debt, dominant currency, exchange rates, inflation, debt deflation |
| JEL: | E44 E52 F33 F34 F41 F42 F44 G01 G15 G32 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:783&r=all |
| By: | Marcin Kolasa (Narodowy Bank Polski); Grzegorz Wesołowski (Narodowy Bank Polski) |
| Abstract: | This paper develops a two-country model with asset market segmentation to investigate the effects of quantitative easing implemented by the major central banks on a typical small open economy that follows independent monetary policy. The model is able to replicate the key empirical facts on emerging countries’ response to large scale asset purchases conducted abroad, including inflow of capital to local sovereign bond markets, an increase in international comovement of term premia, and change in the responsiveness of the exchange rate to interest rate differentials. According to our simulations, quantitative easing abroad boosts domestic demand in the small economy, but undermines its international competitiveness and depresses aggregate output, at least in the short run. This is in contrast to conventional monetary easing in the large economy, which has positive spillovers to output in other countries. We also find that limiting these spillovers might require policies that affect directly international capital flows, like imposing capital controls or mimicking quantitative easing abroad by purchasing local long-term bonds. |
| Keywords: | quantitative easing, international spillovers, bond market segmentation, term premia |
| JEL: | E44 E52 F41 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:309&r=all |
| By: | Lukas Altermatt |
| Abstract: | I build a general equilibrium model of the transmission of monetary policy on bank lending. Bank lending is done by individual banks that face random investment opportunities by creating inside money. Banks are subject to a reserve requirement and have access to the interbank money market. The model shows that lowering the money market rate relative to the inflation rate reduces investment and welfare. This is because the money market is an outside option for banks that face bad investment opportunities. Reducing the money market rate lowers the value of this outside option, which in turn reduces banks’ willingness to acquire reserves ex-ante. This leads to less aggregate reserves, which reduces the banking system’s ability to grant credit. |
| Keywords: | Monetary policy transmission, open market operations, channel system, interest rate pass-through |
| JEL: | E4 E5 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:zur:econwp:325&r=all |
| By: | Ashima Goyal (Indira Gandhi Institute of Development Research); Prashant Parab (Indira Gandhi Institute of Development Research) |
| Abstract: | We analyze the inflation expectation formation of Indian Households using Inflation Expectations Survey of Households dataset, and draw out its implications for the effectiveness and use of the expectations channel of monetary policy transmission. Using quantitative responses we discover that households' expectations are adaptive and backward looking. They are not efficient. Food inflation has a significant short run impact but the effect of core inflation increases over the long run. There is considerable heterogeneity across households with females, daily workers, young and retired persons having higher inflation expectations than their counterparts. Unlike advanced economies, retired persons have higher expectations perhaps due to the accumulated information about higher inflation in the past, inadequate social security and underdeveloped pension schemes. Households do not overreact in comparison to the forecasts of RBI and professional forecasters. But short term reactions are significant and heterogeneous across households. The large speed of adjustment, absence of over-reaction, low response coefficients to commodity shocks in a simultaneous and impact of the RBI's forecasted path bodes well for successfully anchoring household inflation expectations in the process of inflation targeting, but requires that these forecasts are carefully made with a focused use of the expectations channel. Communications have more of an impact on inflation expectations than the interest rate. A repo rise actually raises inflation expectations pointing to the ineffectiveness of the aggregate demand channel and of aggressive rate rises. |
| Keywords: | Inflation expectations of households, rationality, heterogeneity, anchoring, inflation targeting, central bank communication |
| JEL: | C30 D83 D84 E52 E58 |
| Date: | 2019–02 |
| URL: | http://d.repec.org/n?u=RePEc:ind:igiwpp:2019-02&r=all |
| By: | Oleksiy Kryvtsov; Luba Petersen |
| Abstract: | We use controlled laboratory experiments to test the causal effects of central bank communication on economic expectations and to distinguish the underlying mechanisms of those effects. In an experiment where subjects learn to forecast economic variables, we find that central bank communication has a stabilizing effect on individual and aggregate outcomes and that the size of the effect varies with the type of communication. Announcing past interest rate changes has the largest effect, reducing individual price and expenditure forecast volatility by one- and two-thirds, respectively; cutting half of inflation volatility; and improving price-level stability. Forward-looking announcements in the form of projections and forward guidance of upcoming rate decisions have less effect on individual forecasts, especially if they do not clarify the timing of future policy changes. Our evidence does not link the effects of communication to forecasters’ ability to predict future nominal interest rates. Rather, communication is effective via simple and relatable backward-looking announcements that exert strong influence on less-accurate forecasters. We conclude that increasing the accessibility of central bank information to the general public is a promising direction for improving central bank communication. |
| Keywords: | Monetary policy implementation; Transmission of monetary policy |
| JEL: | C9 D84 E3 E52 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-21&r=all |
| By: | Sangyup Choi (Yonsei University); Davide Furceri (IMF); Prakash Loungani (IMF) |
| Abstract: | Central bankers often assert that anchoring of inflation expectations and reducing inflation uncertainty are good for economic outcomes. We test this claim and search for a relevant channel using panel data on sectoral growth for 22 manufacturing industries from 36 advanced and emerging market economies over the period 1990-2014. Our difference-in-difference strategy is based on the theoretical prediction that inflation uncertainty has larger effects in industries that are more credit constrained by increasing effective real borrowing costs. The results show that industries characterized by high external financial dependence, low asset tangibility, and high R&D intensity tend to grow faster in countries with well-anchored inflation expectations. The results are robust to controlling for the interaction between these characteristics and a broad set of macroeconomic variables over the sample period, including the level of inflation and output volatility. The results are also robust to IV techniques, using indicators of monetary policy transparency and independence as instruments. |
| Keywords: | industry-level growth; inflation anchoring; inflation uncertainty; long-run growth; credit constraints. |
| JEL: | E52 E63 O11 O43 O47 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2019rwp-143&r=all |
| By: | KEIDA Masayuki; TAKEDA Yosuke |
| Abstract: | This paper addresses the art of central bank communication, in a semantic analysis which applies a topic model to the regular press conference documents of the Bank of Japan (BOJ)'s Gov. Masaaki Shirakawa and Gov. Haruhiko Kuroda. Based on the standard method of latent Dirichlet allocation (LDA) in the statistical natural language processing literature, our research on the communication strategies that the BOJ pursued under two governorships using over 70 press conference documents indicates significant differences between the Shirakawa and Kuroda governorships in terms of topic distribution. In early 2016, when the negative interest rate policy was introduced during the era of Kuroda's governorship, the ratio of "policy goal" topics decreased dramatically, despite being an essential feature of Gov. Kuroda's vocabulary relative to Gov. Shirakawa to that point in time. Since the ambiguity in the words of the governors is contained in "discretionary" topics, which include to strengthen, to confront, to recognize, to plan and so forth, the communication strategy in the Shirakawa governorship was considered "Delphic" in that the semantic ambiguity may reveal bad fundamental conditions concerning the Japanese economy. |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:19038&r=all |
| By: | Harashima, Taiji |
| Abstract: | In this paper, I construct an inflation model in an economy where the government and households behave under a procedure based on the maximum degree of comfortability (MDC) to reach steady state. MDC indicates the state at which the combination of revenues and assets is felt most comfortable. I show that, if MDCs of the government and households are not consistent, inflation accelerates (or decelerates) because the government behaves to match the rate of increase of its real obligations with its MDC, but households and firms behave to match the real interest rate with household’s MDC. This inconsistency or contradiction must be resolved by acceleration (or deceleration) of inflation. To control inflation, therefore, a truly independent central bank is needed because MDC is a type of preference. The central bank can control the government’s MDC by forcing the government to increase its real obligations and thereby control inflation. |
| Keywords: | Capital-wage ratio; Deflation; Inflation acceleration; Law of motion for inflation; Monetary policies |
| JEL: | E31 E50 |
| Date: | 2019–05–25 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:94100&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. |
| Keywords: | Asymmetry; ECB policy surprise; Event-Study; intraday; Persistence |
| JEL: | E43 E44 E52 E58 G12 G14 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13759&r=all |
| By: | Jef Boeckx; Maarten Dossche; Alessandro Galesi; Boris Hofmann; Gert Peersman (-) |
| Abstract: | A growing empirical literature has shown, based on structural vector autoregressions (SVARs) identified through sign restrictions, that unconventional monetary policies implemented after the outbreak of the Great Financial Crisis (GFC) had expansionary macroeconomic effects. In a recent paper, Elbourne and Ji (2019) conclude that these studies fail to identify true unconventional monetary policy shocks in the euro area. In this note, we show that their findings are actually fully consistent with a successful identification of unconventional monetary policy shocks by the earlier studies and that their approach does not serve the purpose of evaluating identification strategies of SVARs. |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:rug:rugwps:19/973&r=all |
| By: | Kristina Bluwstein (Bank of England); Michał Brzoza-Brzezina (Narodowy Bank Polski); Paolo Gelain (Federal Reserve Bank of Cleveland); Marcin Kolasa (Narodowy Bank Polski) |
| Abstract: | We study the implications of multi-period 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 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:307&r=all |
| By: | Georgiadis, Georgios (European Central Bank); Zhu, Feng (Bank of International Settlements) |
| Abstract: | We assess the empirical validity of the trilemma (or impossible trinity) in the 2000s for a large sample of advanced and emerging market 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. |
| Keywords: | Trilemma; financial globalization; monetary policy autonomy; spillovers |
| JEL: | C50 E52 F42 |
| Date: | 2019–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:363&r=all |
| By: | Lamla, Michael; PJaifar, Damian; Rendell, Lea |
| Abstract: | We explore the consequences of losing confidence in the price-stability objective of central banks by quantifying the inflation and deflationary biases in inflation expectations. In a model with an occasionally binding zero-lower-bound constraint, we show that both inflation bias and deflationary bias can exist as a steady-state outcome. We assess the predictions of this model using unique individual-level inflation expectations data across nine countries that allow for a direct identification of these biases. Both inflation and deflationary biases are present and sizable, but different across countries. Even among the euro-area countries, perceptions of the European Central Bank’s objectives are very distinct. |
| Keywords: | inflation bias, deflationary bias, confidence in central banks, trust, effective lower bound, inflation expectations, microdata. |
| Date: | 2019–06–06 |
| URL: | http://d.repec.org/n?u=RePEc:esy:uefcwp:24771&r=all |
| By: | Szabolcs Deák (University of Surrey); Paul Levine (University of Surrey); Afrasiab Mirza (University of Birmingham); Joseph Pearlman (City University) |
| 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 maker first 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 problem 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 as in 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 of financial frictions. |
| JEL: | D52 D53 E44 G18 G23 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:sur:surrec:1219&r=all |
| By: | Martin Harding; Mathias Klein |
| Abstract: | This study investigates the interrelation between the household leverage cycle, collateral constraints, and monetary policy. Using data on the U.S. economy, we find that a contractionary monetary policy shock leads to a large and significant fall in economic activity during periods of household deleveraging. In contrast, monetary policy shocks only have insignificant effects during a household leveraging state. These results are robust to alternative definitions of leveraging and deleveraging periods, different ways of identifying monetary policy shocks, controlling for the state of the business cycle, the level of households debt, and financial stress. To provide a structural interpretation for these empirical findings, we estimate a monetary DSGE model with financial frictions and occasionally binding collateral constraints. The model estimates reveal that household deleveraging periods in the data on average coincide with periods of binding collateral constraints whereas constraints tend to turn slack during leveraging episodes. Moreover, the model produces an amplification of monetary policy shocks that is quantitatively comparable to our empirical estimates. These findings indicate that the state-dependent tightness of collateral constraints accounts for the asymmetric effects of monetary policy across the household leverage cycle as found in the data. |
| Keywords: | Monetary policy, household leverage, occasionally binding constraints |
| JEL: | E32 E52 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1806&r=all |
| By: | Takashi Ui (Hitotsubashi University) |
| Abstract: | In the Lucas Imperfect Information model, output responds to unanticipated monetary shocks. We incorporate more general information structures into the Lucas model and demonstrate that output also responds to (dispersedly) anticipated monetary shocks if the information is imperfect common knowledge. Thus, the real effects of money consist of the unanticipated part and the anticipated part, and we decompose the latter into two effects, an imperfect common knowledge effect and a private information effect. We then consider an information structure composed of public and private signals. The real effects disappear when either signal reveals monetary shocks as common knowledge. However, when the precision of private information is fixed, the real effects are small not only when a public signal is very precise but also when it is very imprecise. This implies that a more precise public signal can amplify the real effects and make the economy more volatile. |
| Keywords: | real effects, neutrality of money, iterated expectations, the Lucas model, imperfect common knowledge |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:upd:utmpwp:007&r=all |
| By: | Efrem Castelnuovo |
| Abstract: | How does the yield curve respond to a jump in financial uncertainty? We address this question by conducting a local projections analysis with US monthly data, period: 1962- 2018. The state-of-the-art financial uncertainty measure proposed by Ludvigson, Ma, and Ng (2019) is found to predict movements in interest rates of the entire US yield curve. Both ends of the yield curve respond negatively and significantly. The response of the short end of the yield curve is found to be stronger than that of the long end, i.e., a financial uncertainty shock causes a temporary steepening of the yield curve. This result is consistent, among other interpretations, with medium-term expectations of a recovery in real activity after a financial uncertainty shock. |
| Keywords: | Financial uncertainty shocks, yield curve, local projections, inflation dynamics, output growth. |
| JEL: | C22 E32 E52 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2019-38&r=all |
| By: | Bruno Perdigão |
| Abstract: | In this paper I use prominent models as a laboratory to analyze the performance of different identification strategies and propose the introduction of new model consistent restrictions to identify monetary policy shocks in SVARs. In particular, besides standard sign restrictions on interest rates and inflation, the inability of monetary policy to have real effects ten years after the shock is proposed as an additional identification restriction. Evidence is presented of the model consistency of this neutrality restriction both for the canonical three-equation new Keynesian model and the Smets and Wouters (2007) model. In a simple empirical application, I show that this restriction may be important to recover real effects of monetary policy. |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:494&r=all |
| By: | Ögren, Anders (Department of Economic History, Lund University) |
| Abstract: | A currency union is when several independent sovereign nations share a common currency. This has been a recurring phenomenon in monetary history. In this article I study the theoretical foundations of such unions, and discuss some important currency unions in history, most notably the case of the US. Finally I contrast the design of the EMU with economic theories and historical experiences of currency unions. |
| Keywords: | Central banks; Fiscal systems; Monetary theory; Monetary policy; Optimum Currency Areas |
| JEL: | E42 F33 N11 N13 |
| Date: | 2019–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:luekhi:0204&r=all |
| By: | Tomasz Chmielewski (Narodowy Bank Polski); Tomasz Łyziak (Narodowy Bank Polski); Ewa Stanisławska (Narodowy Bank Polski) |
| Abstract: | The aim of this paper is to test whether the risk-taking channel of monetary policy transmission mechanism is active in Poland, an emerging market economy. Based on confidential bank-level data we construct novel measures of risk taken by banks. These measures do not require access to loan-level data, nor rely on data from surveys among credit officers. We find some evidence of the risk-taking behaviour of Polish banks, however, only in the segment of large loans to non-financial corporations we are able to conclude that increased risk of new loans represent supply-side phenomenon. We show that the loosening of monetary policy has different effects depending on the initial level of interest rates – the lower the interest rate is, the larger the increase in risk that is generated by the lowering of interest rate. This response is different across banks, with stronger reaction displayed by banks that are large, with low liquidity and with deposits being the most important funding source. Our results contribute to ongoing discussion on consequences of conducting monetary policy in the low interest rate environment as currently observed in many advanced and emerging economies. |
| Keywords: | risk-taking channel, monetary policy, low interest rates |
| JEL: | E44 E52 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:nbp:nbpmis:305&r=all |
| By: | Francisco Ilabaca (Department of Economics, University of California-Irvine); Greta Meggiorini (Department of Economics, University of California-Irvine); Fabio Milani (Department of Economics, University of California-Irvine) |
| Abstract: | This paper estimates a Behavioral New Keynesian model to revisit the evidence that passive US monetary policy in the pre-1979 sample led to indeterminate equilibria and sunspot-driven fluctuations, while active policy after 1982, by satisfying the Taylor principle, was instrumental in restoring macroeconomic stability. The model assumes "cognitive discounting", i.e., consumers and firms pay less attention to variables further into the future. We estimate the model allowing for both determinacy and indeterminacy. The empirical results show that determinacy is preferred both before and after 1979. Even if monetary policy is found to react only mildly to inflation pre-Volcker, the substantial degrees of bounded rationality that we estimate prevent the economy from falling into indeterminacy. |
| Keywords: | Behavioral New Keynesian model; Cognitive discounting; Myopia; Estimation under determinacy and indeterminacy; Taylor principle; Active vs passive monetary policy |
| JEL: | E31 E32 E52 E58 |
| Date: | 2019–06 |
| URL: | http://d.repec.org/n?u=RePEc:irv:wpaper:181906&r=all |
| By: | Eduardo Levy Yeyati; Juan Francisco Gómez |
| Abstract: | Recent studies that have emphasized the costs of accumulating reserves for self-insurance purposes have overlooked two potentially important side-effects. First, the impact of the resulting lower spreads on the service costs of the stock of sovereign debt, which could substantially reduce the marginal cost of holding reserves. Second, when reserve accumulation reflects countercyclical LAW central bank interventions, the actual cost of reserves should be measured as the sum of valuation effects due to exchange rate changes and the local-to-foreign currency exchange rate differential (the inverse of a carry trade profit and loss total return flow), which yields a cost that is typically smaller than the one arising from traditional estimates based on the sovereign credit risk spreads. We document those effect s empirically to illustrate that the cost of holding reserves may have been considerably smaller than usually assumed in both the academic literature and the policy debate. |
| Keywords: | International reserves; exchange rate policy; capital flows; financial crisis |
| JEL: | E42 E52 F33 F41 |
| Date: | 2018 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpgobi:wp_gob_2018_7&r=all |
| By: | Goodhart, Charles A; Kabiri, Ali |
| Abstract: | There is a debate about the effect of the extremely low, or even negative, interest rate regime on bank profitability. On the one hand it raises demand and thereby adds to bank profits, while on the other hand it lowers net interest margins, especially at the Zero Lower Bound. In this paper we review whether the prior paper by Altavilla, Boucinha and Peydro (2018) on this question for the Eurozone can be generalized to other monetary blocs, i.e. USA and UK. While our findings have some similarity with their earlier work, we are more concerned about the possible negative effects of this regime, not only on bank profitability but also on bank credit extension more widely. |
| Keywords: | Bank profitability; credit extension; Low interest rates; Net interest margin |
| JEL: | E52 G18 G21 G28 |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13752&r=all |