nep-cba New Economics Papers
on Central Banking
Issue of 2019‒07‒08
25 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The Asset Purchase Programmes of the ESCB - an interdisciplinary evaluation By Siekmann, Helmut
  2. Analysing monetary policy statements of the Reserve Bank of India By Aakriti Mathur; Rajeswari Sengupta
  3. Federal Reserve Structure, Economic Ideas, and Monetary and Financial Policy By Bordo, Michael D.; Prescott, Edward Simpson
  4. Monetary Policy and Macroeconomic Stability Revisited By Hirose, Yasuo; Van Zandweghe, Willem; Kurozumi, Takushi
  5. Impact of higher capital buffers on banks’ lending and risk-taking: evidence from the euro area experiments By Cappelletti, Giuseppe; Peeters, Jonas; Budrys, Žymantas; Varraso, Paolo; Marques, Aurea Ponte
  6. The effectiveness of monetary policy in China: Evidence from a Qual VAR By Hongyi Chen; Kenneth Chow; Peter Tillmann
  7. Rethinking capital regulation: the case for a dividend prudential target By Muñoz, Manuel
  8. Monetary policy, inflation target and the great moderation: An empirical investigation By Qazi Haque
  9. Financial Stability Implications of Policy Mix in a Small Open Commodity-Exporting Economy By Irina Kozlovtceva; Alexey Ponomarenko; Andrey Sinyakov; Stas Tatarintsev
  10. Inflation Expectations and Monetary Policy Surprises By Snezana Eminidou; Marios Zachariadis; Elena Andreou
  11. Banking Crises, Bail-ins and Money Holdings By Martin Brown; Ioanna S. Evangelou; Helmut Stix
  12. Banks’ Business Model and Credit Supply in Chile: The Role of a State-Owned Bank By Biron Miguel; Felipe Córdova; Antonio Lemus
  13. Investigating fiscal and monetary policies coordination and public debt in Kenya: Evidence from regime-switching and self-exciting threshold autoregressive models By Ng'ang'a, William Irungu; Chevallier, Julien; Ndiritu, Simon Wagura
  14. Quantities and Prices in China’s Monetary Policy Transmission From Window Guidance to Interbank Rates By Naoyuki Yoshino; Stefan Angrick
  15. The Reversal Interest Rate By Markus K. Brunnermeier; Yann Koby
  16. What does peer-to-peer lending evidence say about the risk-taking channel of monetary policy? By Huang, Yiping; Li, Xiang; Wang, Chu
  17. The broad policy toolkit for financial stability: Foundations, fences, and fire doors By Etienne Lepers; Caroline Mehigan
  18. Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects By Lewis, Daniel J.
  19. Measuring euro area monetary policy By Altavilla, Carlo; Brugnolini, Luca; Gürkaynak, Refet S.; Motto, Roberto; Ragusa, Giuseppe
  20. A Factor Model Analysis of the Australian Economy and the Effects of Inflation Targeting By Hartigan, Luke; Morley, James
  21. Public Support for the Euro and Trust in the ECB. The First Two Decades of the Common Currency By Roth, Felix; Jonung, Lars
  22. Does one size fit all in the Euro Area? Some counterfactual evidence By Destefanis, Sergio; Fragetta, Matteo; Gasteiger, Emanuel
  23. Bank asset quality and monetary policy pass-through By Kelly, Robert; Byrne, David
  24. Inflation and Social Welfare in a New Keynesian Model: The Case of Japan and the U.S. By Tomohide Mineyama; Wataru Hirata; Kenji Nishizaki
  25. Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s? By Qazi Haque; Nicolas Groshenny; Mark Weder

  1. By: Siekmann, Helmut
    Abstract: In the course of the crisis, the European System of Central Banks (ESCB) has acted several times to support the EU Member States and banking systems in financial distress by purchasing debt instruments: Covered Bonds Programmes (CBP), Securities Market Programmes (SMP), Long Term Refinancing Operations (LTRO), and Targeted Long Term Refinancing Operations (TLTRO), followed by the Outright Monetary Transactions (OMT) and then the Extended Asset Purchase Programmes (EAPP) - colloquially labelled as Quantitative Easing (QE). Initially, the support measures of the ESCB might have to be judged as monetary policy but the selectivity of OMT and - even more - SMP in conjunction with the transfer of risks to the ESCB speak against it.
    Date: 2019
  2. By: Aakriti Mathur (The Graduate Institute of International and Development Studies, Geneva); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    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 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
  3. By: Bordo, Michael D. (Rutgers University); Prescott, Edward Simpson (Federal Reserve Bank of Cleveland)
    Abstract: The decentralized structure of the Federal Reserve System is evaluated as a mechanism for generating and processing new ideas on monetary and financial policy. The role of the Reserve Banks starting in the 1960s is emphasized. The introduction of monetarism in the 1960s, rational expectations in the 1970s, credibility in the 1980s, transparency, and other monetary policy ideas by Reserve Banks into the Federal Reserve System is documented. Contributions by Reserve Banks to policy on bank structure, bank regulation, and lender of last resort are also discussed. We argue that the Reserve Banks were willing to support and develop new ideas due to internal reforms to the FOMC that Chairman William McChesney Martin implemented in the 1950s. Furthermore, the Reserve Banks were able to succeed at this because of their private-public governance structure, a structure set up in 1913 for a highly decentralized Federal Reserve System, but which survived the centralization of the System in the Banking Act of 1935. We argue that this role of the Reserve Banks is an important benefit of the Federal Reserve’s decentralized structure and contributes to better policy by allowing for more competition in ideas and reducing groupthink.
    Keywords: Federal Reserve System; monetary policy; financial regulation; governance;
    JEL: B0 E58 G28 H1
    Date: 2019–06–21
  4. By: Hirose, Yasuo (Keio University); Van Zandweghe, Willem (Federal Reserve Bank of Cleveland); Kurozumi, Takushi (Bank of Japan)
    Abstract: A large literature has established that the Fed’ change from a passive to an active policy response to inflation led to US macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature’s view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The model empirically outperforms canonical New Keynesian models that confirm the literature’s view. Our estimated model shows an active policy response to inflation even during the Great Inflation. More importantly, a more active policy response to inflation alone does not suffice for explaining the US macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. This extends the literature by emphasizing the importance of the changes in other aspects of monetary policy in addition to its response to inflation.
    Keywords: Monetary policy; Great Inflation; Indeterminacy; Trend inflation; Sequential Monte Carlo;
    JEL: C11 C52 C62 E31 E52
    Date: 2019–06–27
  5. By: Cappelletti, Giuseppe; Peeters, Jonas; Budrys, Žymantas; Varraso, Paolo; Marques, Aurea Ponte
    Abstract: We study the impact of higher bank capital buffers, namely of the Other Systemically Important Institutions (O-SII) buffer, on banks' lending and risk-taking behaviour. The O-SII buffer is a macroprudential policy aiming to increase banks' resilience. However, higher capital requirements associated with the policy may likely constrain lending. While this may be a desired effect of the policy, it could, at least in the short-term, pose costs for economic activity. Moreover, by changing the relative attractiveness of different asset classes, a higher capital requirement could also lead to risk-shifting and therefore promote the build-up (or deleverage) of banks' risk-taking. Since the end of 2015, national authorities, under the EBA framework, started to identify banks as O-SII and impose additional capital buffers. The identification of the O-SII is mainly based on a cutoff rule, ie. banks whose score is above a certain threshold are automatically designated as systemically important. This feature allows studying the effects of higher capital requirements by comparing banks whose score was close to the threshold. Relying on confidential granular supervisory data, between 2014 and 2017, we find that banks identified as O-SII reduced, in the short-term, their credit supply to households and financial sectors and shifted their lending to less risky counterparts within the non-financial corporations. In the medium-term, the impact on credit supply is defused and banks shift their lending to less risky counterparts within the financial and household sectors. Our findings suggest that the discontinuous policy change had limited effects on the overall supply of credit although we find evidence of a reduction in the credit supply at the inception of the macroprudential policy. This result supports the hypothesis that the implementation of the O-SII's framework could have a positive disciplining effect by reducing banks' risk-taking while having only a reduced adverse impact JEL Classification: E44, E51, E58, G21, G28
    Keywords: bank capital-based measures, bank risk-shifting, credit supply, macroprudential policy, systemic risk
    Date: 2019–06
  6. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Kenneth Chow (Hong Kong Monetary Authority); Peter Tillmann (Justus Liebig University Giessen)
    Abstract: Analyzing monetary policy in China is not straightforward because the People's Bank of China (PBoC) implements policy by using more than one instrument. In this paper we use a Qual VAR, a conventional VAR system augmented with binary policy announcements, to extract a latent indicator of tightening and easing pressure, respectively, for China. The model acknowledges that policy announcements are endogenous and summarizes policy by a single indicator. The Qual VAR allows us to study the impact of monetary policy in terms of unexpected changes in these latent variables, which we identify using sign restrictions. We show that the transmission of monetary policy impulses to the rest of the economy is similar to the transmission process in advanced economies in terms of both output growth and inflation despite a very different monetary policy framework. We find that bank loans are not sensitive to policy changes, which implies that window guidance is still a necessary policy tool. We also find that the impact of monetary policy shocks is asymmetric in terms of asset prices, that is, the asset price reactions differ in their sensitivity to tightening shocks and easing shocks, respectively. In particular, an easing of monetary conditions boosts stock prices while a tightening shock leaves stock prices unaffected. This shows that monetary policy is not a suitable tool to stabilize asset prices, which raises implications for financial stability and macroprudential policy.
    Keywords: China, monetary policy, Qual VAR, transmission mechanism, asset prices, financial stability
    JEL: E4 E5 C3
  7. By: Muñoz, Manuel
    Abstract: The paper investigates the effectiveness of dividend-based macroprudential rules in complementing capital requirements to promote bank soundness and sustained lending over the cycle. First, some evidence on bank dividends and earnings in the euro area is presented. When shocks hit their profits, banks adjust retained earnings to smooth dividends. This generates bank equity and credit supply volatility. Then, a DSGE model with key financial frictions and a banking sector is developed to assess the virtues of what shall be called dividend prudential targets. Welfare-maximizing dividend-based macroprudential rules are shown to have important properties: (i) they are effective in smoothing the financial and the business cycle by means of less volatile bank retained earnings, (ii) they induce welfare gains associated to a Basel III-type of capital regulation, (iii) they mainly operate through their cyclical component, ensuring that long-run dividend payouts remain unaffected, (iv) they are flexible enough so as to allow bank managers to optimally deviate from the target (conditional on the payment of a sanction), and (v) they are associated to a sanctions regime that acts as an insurance scheme for the real economy. JEL Classification: E44, E61, G21, G28, G35
    Keywords: bank dividends, capital requirements, dividend prudential target, financial stability, macroprudential regulation
    Date: 2019–07
  8. By: Qazi Haque
    Abstract: This paper estimates a New Keynesian model with trend inflation and contrasts Taylor rules featuring fixed versus time-varying inflation target while allowing for passive monetary policy. The estimation is conducted over the Great Inflation and the Great Moderation periods. Time-varying inflation target empirically fits better and active monetary policy prevails in both periods, thereby ruling out sunspots as an explanation of the Great Inflation episode. Counterfactual simulations suggest that the decline in inflation volatility since the mid-1980s is mainly driven by monetary policy, while the reduction in output growth variability is explained by the reduced volatility of technology shocks.
    Keywords: Monetary policy, Trend Inflation, Inflation Target, Indeterminacy, Great Inflation, Great Moderation, Sequential Monte Carlo
    JEL: C11 C52 C62 E31 E32 E52
    Date: 2019–06
  9. By: Irina Kozlovtceva (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation); Stas Tatarintsev (Bank of Russia, Russian Federation)
    Abstract: In this paper, we study how systematic monetary policy under inflation targeting in a commodity-exporting economy not fully isolated from commodity price volatility by fiscal policy may contribute to financial instability by fueling the credit cycle when commodity prices increase or by amplifying the credit crunch when commodity prices decline. We report several empirical observations that illustrate the potential procyclicality (relative to credit developments) of inflation targeting policy where commodity price fluctuations are the main drivers of macroeconomic developments. Namely, we find that relative prices in commodity-exporting economies are much more volatile than in other countries. The length of periods when relative prices grow or decline is comparable to the monetary policy horizon of most inflation targeters (2-3 years). Note that the central banks that target inflation, including those of the commodity-exporting countries, usually target the headline CPI. This index accommodates relative price changes by design. We proceed with formal statistical testing using panel structural VARs and local projection models. The tests support the procyclicality of inflation targeting, but only in a group of emerging market economies, which in practice have more procyclical fiscal policy than advanced economies: monetary policy eases in response to a higher price of an exported commodity while real credit grows. Counterfactual exercises show that endogenous monetary policy responses to commodity shocks explain around 20% on average of the real credit growth in a group of commodity exporting countries for which the reaction of policy rates to commodity shocks is statistically significant. We cross-check the empirical findings by reviewing a collection of papers with estimated DSGE models and analysing impulse responses of real policy rates to commodity price changes. We also conduct a theoretical analysis and compare stabilization properties (while accounting for financial stability risks) of the inflation-targeting policy rule and the ‘leaning against the wind’ policy rules. Notably, we do this exercise conditionally on the role of commodity price shocks for the economy. For this purpose, we use the DSGE with financial frictions and a banking sector estimated basing for the Russian economy and measure the efficiency of policy results with different sensitivity to credit developments (the ‘leaning against the wind’ rules) under different variance of oil price shocks (which may be interpreted also as different efficiency of fiscal policy in insulating the economy from a given oil price volatility). Results show that when commodity price volatility is relatively high (fiscal policy is not countercyclical), leaning against the wind outperforms pure inflation targeting, thus supporting our empirical findings. Interestingly, even when the financial stability risks associated with the volatility of credit developments are negligible, a moderate leaning against the wind policy is still preferable. As policy implication, we point that a commodity-exporting economy should have countercyclical fiscal policy for inflation targeting to become countercyclical in a commodity cycle.
    Keywords: systematic monetary policy, optimal central bank policy, inflation targeting, macroprudential policy, relative prices, credit cycle, financial frictions, leaning against the wind, commodity prices
    JEL: E31 E52 E58 F41 F47
    Date: 2019–06
  10. By: Snezana Eminidou (University of Cyprus); Marios Zachariadis (University of Cyprus); Elena Andreou (University of Cyprus)
    Abstract: We use monthly data across 15 euro area economies for the period 1985:1-2015:3 to obtain monetary policy changes that can be regarded as surprises for different types of consumers. A novel feature of our empirical approach is the estimation of monetary policy surprises based on changes in monetary policy that were unanticipated according to consumers’ stated beliefs about the economy. We look at how these surprises affect consumers’ inflation expectations. We find that such monetary policy surprises can have the opposite impact on inflation expectations to those obtained under the assumption that consumers are well-informed about a set of macroeconomic variables describing the state of the economy. When we relax the latter assumption and focus instead on consumers’ stated beliefs about the economy, unanticipated increases in the interest rate raise inflation expectations before the crisis. This is consistent with imperfect information theoretical settings where unanticipated increases in interest rates are interpreted as positive news about the state of the economy by consumers that know policymakers have relatively more information. This impact changes sign since the crisis and varies, e.g. across low versus high-income consumers in a manner consistent with the latter becoming rationally attentive in a period during which signal extraction is presumably more difficult and the incentive to extract information greater.
    Keywords: Imperfect information, rational inattention, shocks, beliefs, crisis
    Date: 2018–03
  11. By: Martin Brown (University of St.Gallen); Ioanna S. Evangelou (Central Bank of Cyprus); Helmut Stix (Oesterreichische Nationalbank)
    Abstract: We study changes in deposit and cash holdings by households following the 2013 banking crisis in Cyprus. During this crisis the two largest banks in the country were resolved involving a bail-in of uninsured depositors and debt holders. Our analysis is based on anonymized survey data covering households with differential exposures to the resolved banks: uninsured deposits, subordinated debt and equity holdings. In line with the portfolio theory of money demand, we find that in the intermediate aftermath of the crisis households significantly reduced their holding of bank deposits and increased their cash holdings. This flight to cash was much stronger for clients which experienced a bail-in of deposits or subordinated debt than for households which held equity in the resolved banks or did not suffer any financial loss. In the medium term, however, there was no difference in depositor confidence or money holdings between households which suffered a bail-in and those which did not.
    Keywords: Financial crises, bank resolution, bail-in, deposits, cash, money demand.
    JEL: E41 G01 G11 G21 G28
    Date: 2018–01
  12. By: Biron Miguel; Felipe Córdova; Antonio Lemus
    Abstract: During the recent financial crisis, banks suffered losses on a scale not witnessed since the Great Depression, partly due to two structural developments in the banking industry; deregulation combined with financial innovation. The regulatory response concentrated on the Basel III recommendations, affected banks’ business model and funding patterns. Consequently, these changes have had implications on how banks grant loans, how they react to monetary policy shocks, and on how they respond to global shocks. We find evidence of significant interactions between banks’ lending and both monetary and global shocks in Chile. In particular, these interactions have been significantly shaped by the counter-cyclical behavior of the state-owned bank. The good governance of this institution along with a sound legal and economic environment, have propitiated this result.
    Keywords: bank lending channel, global factors, Banco Estado
    JEL: E40 E44 E51 E52 E58 G21
    Date: 2019
  13. By: Ng'ang'a, William Irungu; Chevallier, Julien; Ndiritu, Simon Wagura
    Abstract: This study explored the nature of fiscal and monetary policy coordination and its impact on long-run sustainability in Kenya. The study employed annual time series data from 1963 to 2014. Two objectives were investigated. (i) The determinants ofmonetary and fiscal policy rules under different policy regimes. (ii) The nature of fiscal and monetary policy regimes coordination in Kenya. Markov switching models were used to determine fiscal and monetary policy regimes endogenously. The fiscal policy regime was regarded as passive if the coefficient of debt in the MS model was significant and negative. This fiscal policy regime is regarded as unsustainable since the rise in debt is associated with a deterioration of the fiscal balance. On the other hand, the active monetary policy is synonymous with contractionary monetary policy since real in interest rate reacts positively to an increase in inflation. Robust analysis conducted using self-exciting threshold models confirms that monetary and fiscal policy reaction functions are nonlinear. The study findings show that passive or unsustainable fiscal regime was more dominant over the study period. There is evidence to support coordination between fiscal and monetary policy. There is a tendency for monetary policy to actively and prudently respond to unsustainable fiscal policy. Secondly, monetary policy sequentially responds to fiscal policy. The study recommended the adoption of systematic monetary response to a periodic deviation of fiscal policy from a long-run sustainability path.
    Keywords: policy regimes,fiscal and monetary policy management,Markov-switching,SETAR
    JEL: E62 F30 H61
    Date: 2019
  14. By: Naoyuki Yoshino (Asian Development Bank Institute); Stefan Angrick (Keio University)
    Abstract: Whereas monetary policy in most major economies is conducted by an independent central bank manipulating the interbank overnight interest rate to achieve a price stability target, monetary policy in China is influenced by multiple actors and char- acterised by both quantity-based and price-based instruments and targets. Chinese monetary policy is further exercised through non-public practices such as “window guidance”, a policy by which authorities seek to guide commercial banks’ lending volumes by persuasion. The resulting complex interplay of these different factors is the subject of this study, which investigates the transmission mechanism of Chinese monetary policy for the period 2000–2015 in order to determine the effectiveness of different policy instruments and, subsequently, the effect of bank financing on the broader macroeconomy. Towards this end, a qualitative institutional analysis is con- ducted, followed by quantitative econometric analyses based on exogeneity tests and Structural Vector Autoregression models. The study explicitly accounts for the in- fluence of window guidance by incorporating information from a text-based analysis of People’s Bank of China reports in the tradition of Romer & Romer (1989). To trace the evolution of each instrument, estimations are also applied to subsamples as indicated by a Chow test for structural breaks. Results indicate that window guid- ance has played an important role in Chinese monetary policymaking in the period up to the Global Financial Crisis. Since then, the interbank overnight rate appears to have become more influential and exogenous. The study concludes by providing suggestions for further strengthening this interest rate channel, the stated goal of the People’s Bank of China.
    Keywords: monetary policy, China, SVAR, narrative approach, window guidance
    JEL: E52 E58
  15. By: Markus K. Brunnermeier (Department of Economics, Princeton University (E-mail:; Yann Koby (Department of Economics, Princeton University (E-mail:
    Abstract: The reversal interest rate is the rate at which accommodative monetary policy reverses and becomes contractionary for lending. Its determinants are 1) banks' fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of pass-through to deposit rates, and 4) the initial capitalization of banks. Quantitative easing increases the reversal interest rate and should only be employed after interest rate cuts are exhausted. Over time the reversal interest rate creeps up since asset revaluation fades out as fixed-income holdings mature while net interest income stays low. We calibrate a New Keynesian model that embeds our banking frictions.
    Keywords: Monetary Policy, Lower Bound, Negative Rates, Banking
    JEL: E43 E44 E52 G21
    Date: 2019–06
  16. By: Huang, Yiping; Li, Xiang; Wang, Chu
    Abstract: This paper uses loan application-level data from a Chinese peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.
    Keywords: monetary policy,risk-taking,non-bank financial institution,search-for-yield,risk-shifting
    JEL: E52 G23
    Date: 2019
  17. By: Etienne Lepers; Caroline Mehigan
    Abstract: The post financial crisis period has been associated with increased countercyclical use of various financial policies, including residency-based measures. This paper analyses in a single analytical framework the relative effectiveness of three types of financial policies – macroprudential (foundations), currency-based (fences), and residency-based measures (fire doors). The findings in this paper are based on a granular quarterly database of adjustments in these policies that covers both advanced and emerging economies from 2000 to 2015. The results show that residency-based measures on bonds and credit reduce capital inflows but provide limited support for a credit-mitigation role. While no evidence emerges that macroprudential measures alter capital inflows, most appear effective in reducing credit growth. Currency-based measures may reduce both inflows and credit growth (particularly FX reserve requirements and FX lending regulations). These results indicate that the impact of policies needs to be analysed at a granular level and that policy makers should adopt an integrated view of the financial policy toolkit.
    JEL: E58 F32 F34 G15 G21 G28
    Date: 2019–07–04
  18. By: Lewis, Daniel J. (Federal Reserve Bank of New York)
    Abstract: I propose to identify announcement-specific decompositions of asset price changes into monetary policy shocks based on intraday time-varying volatility. This approach is the first to accommodate changes in both the nature of shocks and the state of the economy across announcements. I compute daily historical decompositions with respect to three monetary policy shocks for the United States from 2007 to 2018. I derive expressions for the asymptotic variance of such historical decompositions and apply them to assess the statistical significance of notable announcements. Only a handful spark significant shocks, and I discuss the characteristics of those announcements in detail. For many announcements, asset purchase shocks lower corporate borrowing costs, but spreads increase in response to both asset purchases and forward guidance. Turning to the real economy, I find that the asset purchase shock has significant effects on consumer and professional expectations of inflation and GDP growth. I compute dynamic responses of inflation and GDP growth; asset purchases have significant expansionary effects, while fed funds shocks and forward guidance do not.
    Keywords: high-frequency identification; time-varying volatility; monetary policy shocks; forward guidance; quantitative easing
    JEL: C32 C58 E44 E52 E58
    Date: 2019–06–01
  19. 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: ECB policy surprise,event-study,intraday,persistence,asymmetry
    JEL: E43 E44 E52 E58 G12 G14
    Date: 2019
  20. By: Hartigan, Luke; Morley, James
    Abstract: We conduct factor model analysis to investigate how inflation targeting has affected the Australian economy. Estimating a dynamic factor model for a dataset with more than one hundred variables, we find that Australia has a similar factor structure to other economies, with a sizeable portion of macroeconomic fluctuations accounted for by two common factors that have clear "real'' and "nominal" interpretations based on their links to different types of variables. The factor structure appears to have changed soon after the introduction of inflation targeting, corresponding to a large reduction in the volatility of common movements in macroeconomic variables compared to idiosyncratic movements. Estimates from a block exogenous factor augmented vector autoregressive model suggest that the transmission and responsiveness of monetary policy have also changed, with monetary policy becoming more effective and responsive to foreign shocks following the introduction of inflation targeting.
    Keywords: inflation targeting; monetary policy; factor modelling; structural change; impulse response functions
    Date: 2019–07
  21. By: Roth, Felix (Department of Economics, University of Hamburg); Jonung, Lars (Department of Economics, Lund University)
    Abstract: This chapter examines the evolution of public support for the euro and public trust in the European Central Bank (ECB) during the new currency’s first two decades. Using a unique set of opinion poll data that is not available for any other currency, we find that a majority of citizens in every member country of the euro area (EA) support the euro. The economic crisis in the EA following the Great Recession and the euro crisis led to a slight decline in public support for the euro but a sharp fall in trust in the ECB. The recent economic recovery has strengthened support for the euro as well as trust in the ECB. We suggest that support for the euro as a medium of exchange was not strongly affected by the crisis, while trust in the ECB, as the framer of monetary policy, was measurably weakened by the crisis. Our econometric work demonstrates that unemployment is a key driver of support for the euro and its governance. Given these developments, we discuss whether the present levels of support for the euro equip the currency to weather populist challenges in the coming decade.
    Keywords: Euro; public support; trust; unemployment; optimum currency area; monetary union; ECB; EU
    JEL: E42 E52 E58 F33
    Date: 2019–06–14
  22. By: Destefanis, Sergio; Fragetta, Matteo; Gasteiger, Emanuel
    Abstract: This paper examines whether Euro Area countries would have faced a more favorable inflation output variability tradeoff without the Euro. We provide evidence that this claim is true for the periods of the Great Recession and the European Sovereign Debt Crisis. For the Euro Area as a whole, the deterioration of the tradeoff becomes insignificant with Draghi's "whatever it takes" announcement onwards. However, a more detailed analysis shows that the detrimental effect of the Euro is more severe and long-lasting for peripheral countries, pointing to structural differences among Euro Area countries as a key element of the detrimental effect of the Euro. We base our results on a novel empirical strategy that, consistently with monetary theory, models the joint determination of the variability of inflation and output conditional on structural supply shocks. Moreover, our findings are robust to potential endogeneity concerns related to adoption of the Euro.
    Keywords: Euro Area,Monetary Policy,Difference-in-Differences
    JEL: C32 E50
    Date: 2019
  23. By: Kelly, Robert; Byrne, David
    Abstract: The funding mix of European firms is weighted heavily towards bank credit, which underscores the importance of efficient pass-through of monetary policy actions to lending rates faced by firms. Euro area pass-through has shifted from being relatively homogenous to being fragmented and incomplete since the financial crisis. Distressed loan books are a crisis hangover with direct implications for profitability, hampering banks ability to supply credit and lower loan pricing in response to reductions in the policy rate. This paper presents a parsimonious model to decompose the cost of lending and highlight the role of asset quality in diminishing pass-through. Using bank-level data over the period 2008-2014, we empirically test the implications of the model. We show that a one percentage point increase in the impairment ratio lowering short run pass-through by 3 percent. We find that banks with severely impaired balance sheets do not adjust their loan pricing in response to changes in the policy rate at all. We derive a measure of the hidden bad loan problem, the NPL gap, which we define as the excess of non-performing loans over impaired loans. We show that it played a significant role in the fragmentation of euro area pass-through post-crisis. JEL Classification: D43, E51, E52, E58, G21
    Keywords: impaired loans, interest rates, monetary policy pass-through, non-performing loans
    Date: 2019–07
  24. By: Tomohide Mineyama (Bank of Japan); Wataru Hirata (Bank of Japan); Kenji Nishizaki (Bank of Japan)
    Abstract: In this paper, we investigate the steady-state inflation rate that maximizes social welfare in a New Keynesian model. We calibrate the model on the Japanese and the U.S. economies, and we solve the model employing a computation method that addresses the non-linear dynamics associated with four major factors affecting the costs and benefits of inflation: (i) nominal price rigidity; (ii) money holdings; (iii) downward nominal wage rigidity (DNWR); and (iv) the zero lower bound of the nominal interest rates (ZLB). The calibrated model suggests the steady-state inflation rate that maximizes social welfare is close to two percent for both Japan and the U.S., though the main driver differs by country: the ZLB for Japan, but the DNWR for the U.S. In addition, around one percentage point absolute deviation from the close-to-two-percent rate induces only a minor change in social welfare. We also find that the lower-end of the range that is acceptable in terms of welfare losses is reduced when we introduce forward guidance in monetary policy through which private agents anticipate a prolonged zero interest rate once the ZLB binds. The estimates of the steady-state inflation rate are subject to a considerable margin of error due to parameter uncertainty in ZLB parameterization.
    Keywords: Inflation; Social welfare; New Keynesian model; Downward nominal wage rigidity; Zero lower bound; Forward guidance
    JEL: E31 E43 E52
    Date: 2019–06–27
  25. By: Qazi Haque (Centre for Applied Macroeconomic Analysis and The University of Western Australia); Nicolas Groshenny (Centre for Applied Macroeconomic Analysis and The University of Adelaide); Mark Weder (Aarhus University and Centre for Applied Macroeconomic Analysis)
    Abstract: The paper re-examines whether the Federal Reserves monetary policy was a source of instability during the Great Inflation by estimating a sticky-price model with positive trend inflation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and finds that the Federal Reserve responded aggressively to inflation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identified commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.
    Date: 2019

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