nep-cba New Economics Papers
on Central Banking
Issue of 2019‒07‒15
fourteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Does monetary policy affect income inequality in the euro area? By Anna Samarina; Anh D.M. Nguyen
  2. Has Regulatory Capital Made Banks Safer? Skin in the Game vs Moral Hazard By Ernest Dautovic
  3. US Monetary Policy and International Bond Markets By Simon Gilchrist; Vivian Yue; Egon Zakrajšek
  4. Leaning Against Housing Prices As Robustly Optimal Monetary Policy By Klaus Adam; Michael Woodford
  5. The Federal Reserve’s Current Framework for Monetary Policy: A Review and Assessment By Janice C. Eberly; James H. Stock; Jonathan H. Wright
  6. Prudential Monetary Policy By Ricardo J. Caballero; Alp Simsek
  7. Macroprudential stress test of the euro area banking system By Budnik, Katarzyna; Covi, Giovanni; Dimitrov, Ivan; Groß, Johannes; Hansen, Ib; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz; Cera, Katharina; di Iasio, Giovanni; Giuzio, Margherita; Mirza, Harun; Moccero, Diego; Nicoletti, Giulio; Pancaro, Cosimo; Balatti, Mirco; Palligkinis, Spyros
  8. Inflation and Exchange Rate Targeting Challenges Under Fiscal Dominance By Rashad Ahmed; Joshua Aizenman; Yothin Jinjarak
  9. Effects of monetary and macroprudential policies – evidence from inflation targeting economies in the Asia-Pacific region and potential implications for China By Soyoung Kim; Aaron Mehrotra
  10. International Coordination of Economic Policies in the Global Financial Crisis: Successes, Failures, and Consequences By Edwin M. Truman
  11. Do SVARs with sign restrictions not identify unconventional monetary policy shocks ? By Jef Boeckx; Maarten Dossche; Alessandro Galesi; Boris Hofmann; Gert Peersman
  12. Quest for robust optimal macroprudential policy By Pablo Aguilar; Samuel Hurtado; Stephan Fahr; Eddie Gerba
  13. Externalities and financial crisis – enough to cause collapse? By Miller, Marcus; Zhang, Lei
  14. Divisia monetary aggregates for a heterogeneous euro area By Brill, Maximilian; Nautz, Dieter; Sieckmann, Lea

  1. By: Anna Samarina (De Nederlandsche Bank & University of Groningen); Anh D.M. Nguyen (Bank of Lithuania & Vilnius University)
    Abstract: This paper examines how monetary policy affects income inequality in 10 euro area countries over the period 1999–2014. We distinguish macroeconomic and financial channels through which monetary policy may have distributional effects. The macroeconomic channel is captured by wages and employment, while the financial channel by asset prices and returns. We find that expansionary monetary policy in the euro area reduces income inequality, especially in the periphery countries. The macroeconomic channel leads to these equalizing effects: monetary easing reduces income inequality by raising wages and employment. However, there is some indication that the financial channel may weaken the equalizing effect of expansionary monetary policy.
    Keywords: income inequality, monetary policy, euro area
    JEL: D63 E50 E52
    Date: 2019–06–14
  2. By: Ernest Dautovic
    Abstract: The paper evaluates the impact of macroprudential capital regulation on bank capital, risk taking behaviour, and solvency. The identication relies on an exogenous policy change in bank-level capital requirements across systemically important banks in Europe. A one percentage point hike in capital requirements leads to anaverage CET1 capital level increase of 13 percent improving their loss absorption capacity.
    Keywords: capital requirements, risk-taking, moral hazard, macroprudential policy
    JEL: E51 G21 O52
    Date: 2019–06
  3. By: Simon Gilchrist; Vivian Yue; Egon Zakrajšek
    Abstract: This paper uses high-frequency financial data to analyze the effects of US monetary policy—during the conventional and unconventional policy regimes—on international bonds markets. We focus on yields of dollar-denominated sovereign bonds issued by more than 90 countries since the early 1990s, which allows us to abstract from the policy-induced movements in exchange rates that otherwise confound the response of yields on foreign bonds denominated in local currencies. Our results show that yields on dollar-denominated sovereign debt are highly responsive to unanticipated changes in the stance of US monetary policy during both the conventional and unconventional policy regimes, and that the passthrough of unconventional policy actions to foreign bond yields is, on balance, comparable to that of conventional policy actions. In addition, a conventional US monetary easing leads to a significant narrowing of credit spreads on sovereign bonds issued by countries with a speculative-grade credit rating. During the unconventional policy regime, however, yields on speculative-grade sovereign debt move one-to-one with policy-induced fluctuations in yields on comparable US Treasuries. We also examine whether the response of sovereign credit spreads to US monetary policy differs between policy easings and policy tightenings and find no evidence of such asymmetry. This finding casts doubt on the notion that US monetary easings induce excessive risk-taking in international bond markets.
    JEL: E4 E5 F3
    Date: 2019–06
  4. By: Klaus Adam; Michael Woodford
    Abstract: We analytically characterize optimal monetary policy for an augmented New Key- nesian model with a housing sector. In a setting where the private sector has rational expectations about future housing prices and inflation, optimal monetary policy can be characterized without making reference to housing price developments: commitment to a 'target criterion' that refers to inflation and the output gap only is optimal, as in the standard model without a housing sector. When the policymaker is concerned with po- tential departures of private sector expectations from rational ones and seeks to choose a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. In the empirically realistic case where housing is subsidized and where monopoly power causes output to fall short of its optimal level, the robustly optimal target criterion requires the central bank to 'lean against' housing prices: following unexpected housing price increases, policy should adopt a stance that is projected to undershoot its normal targets for inflation and the output gap, and simi- larly aim to overshoot those targets in the case of unexpected declines in housing prices. The robustly optimal target criterion does not require that policy distinguish between 'fundamental' and 'non-fundamental' movements in housing prices.
    JEL: D81 D84 E52
    Date: 2018–05
  5. By: Janice C. Eberly; James H. Stock; Jonathan H. Wright
    Abstract: We review and assess the monetary policy framework currently used by the Federal Reserve, with special focus on policies that operate through the slope of the term structure, including forward guidance and large scale asset purchases. These slope policies are important at the zero lower bound. We study the performance of counterfactual monetary policies since the Great Recession in the framework of a structural VAR, identified using high-frequency jumps in asset prices around FOMC meetings as external instruments. The intention is to give guidance to policymakers responding to future downturns. In our counterfactuals, we find that slope policies played an important role in supporting the recovery, but did not fully circumvent the zero lower bound. In our simulations, earlier and more aggressive use of slope policies support a faster recovery. The recovery would also have been faster, with the unemployment gap closing seven quarters earlier, if the Fed had inherited a higher level of inflation and nominal interest rates consistent with a higher inflation target coming into the financial crisis recession.
    JEL: C22 E43 E52
    Date: 2019–06
  6. By: Ricardo J. Caballero; Alp Simsek
    Abstract: Should monetary policy have a prudential dimension? That is, should policymakers raise interest rates to rein in financial excesses during a boom? We theoretically investigate this issue using an aggregate demand model with asset price booms and financial speculation. In our model, monetary policy affects financial stability through its impact on asset prices. Our main result shows that, when macroprudential policy is imperfect, small doses of prudential monetary policy (PMP) can provide financial stability benefits that are equivalent to tightening leverage limits. PMP reduces asset prices during the boom, which softens the asset price crash when the economy transitions into a recession. This mitigates the recession because higher asset prices support leveraged, high-valuation investors' balance sheets. An alternative intuition is that PMP raises the interest rate to create room for monetary policy to react to negative asset price shocks. The policy is most effective when there is extensive speculation and leverage limits are neither too tight nor too slack.
    JEL: E00 E12 E21 E22 E30 E40 G00 G01 G11
    Date: 2019–06
  7. By: Budnik, Katarzyna; Covi, Giovanni; Dimitrov, Ivan; Groß, Johannes; Hansen, Ib; Kleemann, Michael; Reichenbachas, Tomas; Sanna, Francesco; Sarychev, Andrei; Siņenko, Nadežda; Volk, Matjaz; Cera, Katharina; di Iasio, Giovanni; Giuzio, Margherita; Mirza, Harun; Moccero, Diego; Nicoletti, Giulio; Pancaro, Cosimo; Balatti, Mirco; Palligkinis, Spyros
    Abstract: This paper presents an approach to a macroprudential stress test for the euro area banking system, comprising the 91 largest euro area credit institutions across 19 countries. The approach involves modelling banks’ reactions to changing economic conditions. It also examines the effects of adverse scenarios on economies and the financial system as a whole by acknowledging a broad set of interactions and interdependencies between banks, other market participants, and the real economy. Our results highlight the importance of the starting level of bank capital, bank asset quality, and banks’ adjustments for the propagation of shocks to the financial sector and real economy. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector deleveraging, macroprudential policy, macro stress test, real-financial feedback mechanism
    Date: 2019–07
  8. By: Rashad Ahmed; Joshua Aizenman; Yothin Jinjarak
    Abstract: Countries have increased significantly their public-sector borrowing since the Global Financial Crisis. In this context, we document several potential fiscal dominance effects during 2000-2017 under Inflation Targeting (IT), and non IT regimes. Higher ratio of public debt to GDP are associated with lower policy interest rates in advanced economies. In Emerging Market economies under non-IT regimes, composed mostly of exchange rate targeters, the interest rate effect of higher public debt is non-linear, and depends both on the ratio of foreign-currency to local-currency debt, and on the ratio of hard-currency debt to GDP. For these Emerging Market economies under non-IT regimes, real exchange rate depreciations and a higher international reserves to GDP ratio are significantly associated with higher interest rates. Sorting countries into low, medium and high nominal exchange rate volatility bins, we find that the high nominal exchange rate volatility group of Emerging Market economies, composed mostly of commodity intensive countries, show the most persuasive evidence of debt levels influencing policy interest rates.
    JEL: F31 F33 F34 F36 F41
    Date: 2019–06
  9. By: Soyoung Kim (Seoul National University); Aaron Mehrotra (Bank for International Settlements)
    Abstract: We examine the effects of monetary and macroprudential policies in the Asia-Pacific region, where many inflation targeting economies have adopted macroprudential policies in order to safeguard financial stability. Using structural panel vector autoregressions that identify both monetary and macroprudential policy actions, we show that tighter macroprudential policies used to contain credit growth have also had a significant negative impact on macroeconomic aggregates such as real GDP and the price level. The similar effects of monetary and macroprudential policies may suggest a complementary use of the two policies at normal times. However, they could also create challenges for policymakers, especially during times when low inflation coincides with buoyant credit growth.
    Keywords: financial stability; price stability; macroprudential policy; monetary policy; panel VAR
    JEL: E58 E61
  10. By: Edwin M. Truman (Peterson Institute for International Economics)
    Abstract: The global financial crisis dominated the international financial landscape during the first 20 years of the 21st century. This paper assesses the contribution of the international coordination of economic policies to contain the crisis. The paper evaluates international efforts to diagnose the crisis and decide on appropriate responses, the treatments that were agreed and adopted, and the successes and failures as the crisis unfolded. International economic policy coordination eventually contributed importantly to containing the crisis, but the authorities failed to agree on a diagnosis and the consequent need for joint action until the case was obvious. The policy actions that were adopted were powerful and effective, but they may have undermined prospects for coordinated responses to crises in the future.
    Keywords: international economic policy coordination, Group of Seven (G-7), Group of Twenty (G-20), Federal Reserve, central banks, swap arrangements, International Monetary Fund, multilateral development banks, special drawing rights, global financial crisis, banking crises, financial crises, Bank for International Settlements, Financial Stability Forum, Financial Stability Board
    JEL: E50 E60 F00 F02 F30 F33 F42 F55
    Date: 2019–07
  11. By: Jef Boeckx (Economics and Research Department, National Bank of Belgium); Maarten Dossche (European Central Bank); Alessandro Galesi (Bank of Spain); Boris Hofmann (Bank for International Settlements); Gert Peersman (Ghent University)
    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.
    Keywords: Non-standard measures, structural VAR, identification, ECB.
    JEL: E52 C32 E58
    Date: 2019–06
  12. By: Pablo Aguilar (Banco de España); Samuel Hurtado (Banco de España); Stephan Fahr (European Central Bank); Eddie Gerba (Danmarks Nationalbank)
    Abstract: This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al. (2015). We find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher tan the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit and GDP 5% and 0.8% higher had optimal capital level been in place during the 2011-2013 crisis. Further, using a model-consistent loss function, we find that the optimal Countercyclical Capital Buffer (CCyB) rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from optimal combination of instruments is higher than the sum of their individual effects due to synergies and positive mutual spillovers.
    Keywords: optimal policy, global welfare analysis, financial stability, financial DSGE model, macroprudential policy
    JEL: G21 G28 G17 E58 E61
    Date: 2019–07
  13. By: Miller, Marcus (University of Warwick and CEPR); Zhang, Lei (Sichuan University)
    Abstract: After the boom in US subprime lending came the bust - with a run on US shadow banks. The magnitude of boom and bust were, it seems, amplified by two significant externalities triggered by aggregate shocks: the endogeneity of bank equity due to mark-to-market accounting and of bank liquidity due to ‘fire-sales’ of securitised assets. We show how adding a systemic ‘bank run’ to the canonical model of Adrian and Shin allows for a tractable analytical treatment - including the counterfactual of complete collapse that forces the Treasury and the Fed to intervene.
    Keywords: pecuniary externalities ; bank runs ; illiquidity ; Lender of Last Resort ; cross-border banking
    JEL: G01 G11 G24
    Date: 2019
  14. By: Brill, Maximilian; Nautz, Dieter; Sieckmann, Lea
    Abstract: We introduce a Divisia monetary aggregate for the euro area that accounts for the heterogeneity across member countries both, in terms of interest rates and the decomposition of monetary assets. In most of the euro area countries, the difference between the growth rates of the country-specific Divisia aggregate and its simple sum counterpart is particularly pronounced before recessions. The results obtained from a panel probit model confirm that the divergence between the Divisia and the simple sum aggregate has a significant predictive content for recessions in euro area countries.
    Keywords: Monetary aggregation,Euro area Divisia aggregate,Recessions
    JEL: E51 E32 C43
    Date: 2019

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