nep-cba New Economics Papers
on Central Banking
Issue of 2019‒07‒22
thirty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Empowering Central Bank Asset Purchases: The Role of Financial Policies By Matthieu Darracq Paries; Jenny Korner; Niki Papadopoulou
  2. On the Global Impact of Risk-off Shocks and Policy-put Frameworks By Ricardo J. Caballero; Gunes Kamber
  3. The Effects of Inflation Targeting for Financial Development By Geoffrey R. Dunbar; Amy (Qijia) Li
  4. Disinflation in Closed and Small Open Economies By Oleksandr Faryna; Magnus Jonsson; Nadiia Shapovalenko
  5. Threefold policies for bank development: Do independence and transparency matter? By Emna Trabelsi
  6. Money Market Funds and Unconventional Monetary Policy By Bua, Giovanna; Dunne, Peter G.; Sorbo, Jacopo
  7. Forward Guidance: Is It Useful Away from the Lower Bound? By Lilia Maliar; John B. Taylor
  8. Monetary policy expectations and risk-taking among U.S. banks By Byrne, David; Kelly, Robert
  9. U.S. Macroeconomic Policy Evaluation in an Open Economy Context using Wavelet Decomposed Optimal Control Methods By Crowley, Patrick M.; Hudgins, David
  10. The International Bank Lending Channel of Monetary Policy Rates and QE: Credit Supply, Reach-for-Yield, and Real Effects By Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
  11. Effects of the ECB’s Unconventional Monetary Policy on Real and Financial Wealth By Clara De Luigi; Martin Feldkircher; Philipp Poyntner; Helene Schuberth
  12. Changing supply elasticities and regional housing booms By Knut Are Aastveit; Bruno Albuquerque; André Anundsen
  13. Credible Forward Guidance By Taisuke Nakata; Takeki Sunakawa
  14. The Third Round of the Euro Area Enlargement: Are the Candidates Ready? By Milan Deskar-Škrbić; Karlo Kotarac; Davor Kunovac
  15. Tracing the impact of the ECB’s asset purchase programme on the yield curve By Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Radde, Sören; Vladu, Andreea Liliana
  16. Forecasting and Trading Monetary Policy Switching Nelson-Siegel Models By Massimo Guidolin; Manuela Pedio
  17. Suite as! Augmenting the Reserve Bank’s output gap indicator suite By Punnoose Jacob; Finn Robinson
  18. Have the LVR restrictions improved the resilience of the banking system? By Chris Bloor; Bruce Lu
  19. Liquidity and Borrowing from a Lender of Last Resort during the Crisis of 1884 By Christopher Hoag
  20. Banking Panic Risk and Macroeconomic Uncertainty By Mikkelsen, Jakob; Poeschl, Johannes
  21. An agent-based model for the assessment of LTV caps By Laliotis, Dimitrios; Buesa, Alejandro; Leber, Miha; Población García, Francisco Javier
  22. Mitigating the Cost of Stricter Macroprudential Policies By Pervin Dadashova; Magnus Jonsson
  23. Anatomy of Sudden Yen Appreciations By Fei Han; Niklas J Westelius
  24. A Classical View of the Business Cycle By Michael T. Belongia; Peter N. Ireland
  25. On the Credit and Exchange Rate Channels of Central Bank Asset Purchases in a Monetary Union By Matthieu Darracq Paries; Niki Papadopoulou
  26. Currency Wars? Unconventional Monetary Policy Does Not Stimulate Exports By Andrew K. Rose
  27. The Bond Lending Channel of Monetary Policy By Darmouni, Olivier; Geisecke, Oliver; Rodnyanky, Alexander
  28. Economic Conditions and the Stance of Monetary Policy By Kaplan, Robert S.
  29. Costs and Benefits of Inflation: A Model Analysis of Japan and the U.S. By Tomohide Mineyama; Wataru Hirata; Kenji Nishizaki
  30. Cost-benefit Analysis of Leaning against the Wind By Trent Saunders; Peter Tulip
  31. Asset price bubbles with low interest rates: not all bubbles are alike By Jacopo Bonchi
  32. Global Dimensions of U.S. Monetary Policy By Maurice Obstfeld

  1. By: Matthieu Darracq Paries (European Central Bank); Jenny Korner (d-fine - analytical. quantitative. tech.); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: This paper contributes to the debate on the macroeconomic effectiveness of expansionary non-standard monetary policy measures in a regulated banking environment. Based on an estimated DSGE model, we explore the interactions between central bank asset purchases and bank capital-based financial policies (regulatory, supervisory or macroprudential) through its influence on bank risk-shifting motives. We find that weakly-capitalised banks display excessive risk-taking which reinforces the credit easing channel of central bank asset purchases, at the cost of higher bank default probability and risks to financial stability. In such a case, adequate bank capital demand through higher minimum capital requirements curtails the excessive credit origination and restores a more efficient propagation of central bank asset purchases. As supervisors can formulate further capital demands, uncertainty about the supervisory oversight provokes precautionary motives for banks. They build-up extra capital buffer attenuating non-standard monetary policy. Finally, in a weakly-capitalised banking system, countercyclical macroprudential policy attenuates banks risk-taking and dampens the excessive persistence of the non-standard monetary policy impulse. On the contrary, in a well-capitalised banking system, the macroeconomic stabilisation with central bank asset purchases outweigh the marginal financial stability benefits with macroprudential policy.
    Keywords: non-standard monetary policy; asset purchases; bank capital regulation; risk-taking; regulatory uncertainty; effective lower bound
    JEL: E44 E52 E58
    Date: 2019–02
  2. By: Ricardo J. Caballero; Gunes Kamber
    Abstract: Global risk-off shocks can be highly destabilizing for financial markets and, absent an adequate policy response, may trigger severe recessions. Policy responses were more complex for developed economies with very low interest rates after the Global Financial Crisis (GFC). We document, however, that the unconventional policies adopted by the main central banks were effective in containing asset price declines. These policies impacted long rates and inspired confidence in a policy-put framework that reduced the persistence of risk-off shocks. We also show that domestic macroeconomic and financial conditions play a key role in benefiting from the spillovers of these policies during risk-off episodes. Countries like Japan, which already had very low long rates, benefited less. However, Japan still benefitted from the reduced persistence of risk-off shocks. In contrast, since one of the main channels through which emerging markets are historically affected by global risk-off shocks is through a sharp rise in long rates, the unconventional monetary policy phase has been relatively benign to emerging markets during these episodes, especially for those economies with solid macroeconomic fundamentals and deep domestic financial markets. We also show that unconventional monetary policy in the US had strong effects on long interest rates in most economies in the Asia-Pacific region (which helps during risk-off events but may be destabilizing otherwise—we do not take a stand on this tradeoff).
    JEL: E40 E44 E52 E58 F30 F41 F44 G01
    Date: 2019–07
  3. By: Geoffrey R. Dunbar; Amy (Qijia) Li
    Abstract: The adoption of inflation targeting (IT) by central banks leads to an increase of 10 to 20 percent in measures of financial development, with a lag. We also find evidence that the financial sector benefits of IT adoption were higher for early-adopting central banks. Our results suggest that roughly 12 to 14 years after the Reserve Bank of New Zealand adopted inflation targeting in 1989, the benefits for financial development for new adopters of inflation targeting may have been negligible.
    Keywords: Financial Institutions; Inflation targets; Transmission of monetary policy
    JEL: E44 E58
    Date: 2019–07
  4. By: Oleksandr Faryna (National Bank of Ukraine); Magnus Jonsson (Sveriges Riksbank); Nadiia Shapovalenko (National Bank of Ukraine)
    Abstract: This paper examines the cost of disinflation as measured by the sacrifice ratio and the central bank loss function in closed and small open economies. We show that the sacrifice ratio is slightly higher in the small open economy if monetary policy in both economies follow identical Taylor rules. However, if monetary policies follow optimized simple rules the sacrifice ratio becomes slightly lower in the small open economy. The cost in terms of the central bank loss is higher in the small open economy irrespective of monetary policies. Imperfect central bank credibility changes the results quantitatively, but not qualitatively. Finally, in both economies, the optimal implementation horizon is approximately two quarters in advance and approximately four quarters if central bank credibility is imperfect.
    Keywords: disinflation, small open economy, new Keynesian model, imperfect credibility, implementation
    JEL: E31 E5 F41
    Date: 2019–03
  5. By: Emna Trabelsi (Unité de Recherche d'Analyses Quantitatives Appliquées - Université de Tunis [Tunis])
    Abstract: A well-developed banking sector is crucial to achieve a sustained economic growth. To attain this goal, both central banks and government have embraced operational and institutional arrangements. In this paper, I offer an empirical lookup on how monetary independence and transparency of macroprudential and fiscal policies are linked to bank development. Drawing upon a panel dataset for the period 1998-2014, I find that both macroprudential transparency (proxied by central bank financial stability transparency) and fiscal transparency are positively related to the share of credit granted by banks to the private sector, implying that more transparency enhances bank development. More independence from central banks seems, however, to decrease the ratio of bank credit to GDP. By considering interactions, the marginal effect of central bank financial stability transparency on bank credit/GDP, conditional on the levels of independence, is positive but decreases under a particular range of independence values. If central bank independence interacts with fiscal transparency, the marginal effect of fiscal transparency is positive and significant over a specific range of the degree of central bank independence but there is no statistical support that the marginal effect decreases within the same range unless I use the independence index of Garriga (2016).
    Keywords: central bank independence,central bank financial stability transparency,fiscal transparency,bank credit,dynamic panel
    Date: 2019–04–27
  6. By: Bua, Giovanna (Central Bank of Ireland); Dunne, Peter G. (Central Bank of Ireland); Sorbo, Jacopo (Unipol Gruppo S.p.A.)
    Abstract: Using a unique dataset, covering more than 40 percent of euro area money market funds by asset value, we assess monetary policy effects on fund behaviour and performance.We find a strong but heterogeneous association between fund performance and the policy rate of the currency in which funds report and from this we ascertain how different combinations of conventional and unconventional monetary policies affect fund behaviour. Evidence from the speed of response to policy changes indicates a shortening of investment term when policy is easing and vice versa. This has supply-offunding implications across the first two years of the term structure. When euro area monetary policy is at its limit and when policy is expanded to include the use of unconventional measures, the gap between the rate earned at the ECB’s deposit facility and the yield on short term debt securities widens. In these conditions euro-reporting funds make indirect recourse to the deposit facility and raise their investments in euro-denominated tradable certificates of deposits. This behaviour progressively reduces the impact of unconventional measures on MMF performance. Otherwise, heterogeneity in fund responses to the monetary policy mix can be attributed to differential mandates and involves some combination of increased risktaking and diversification into assets issued by foreign entities.
    Keywords: Money Market Funds; Monetary Policy; Negative Interest Rates.
    JEL: E52 G15 G23 G28
    Date: 2019–06
  7. By: Lilia Maliar; John B. Taylor
    Abstract: During the recent economic crisis, when nominal interest rates were at their effective lower bounds, central banks used forward guidance announcements about future policy rates to conduct their monetary policy. Many policymakers believe that forward guidance will remain in use after the end of the crisis; however, there is uncertainty about its effectiveness. In this paper, we study the impact of forward guidance in a stylized new Keynesian economy away from the effective lower bound on nominal interest rates. Using closed-form solutions, we show that the impact of forward guidance on the economy depends critically on a specific monetary policy rule, ranging from non-existing to immediate and unrealistically large, the so-called forward guidance puzzle. We show that the size of the smallest root (or eigenvalue) captures model dynamics better than the underlying parameters. We argue that the puzzle occurs under very special empirically implausible and socially sub-optimal monetary policy rules, whereas empirically relevant Taylor rules lead to sensible implications.
    JEL: C5 E4 E5
    Date: 2019–07
  8. By: Byrne, David (Central Bank of Ireland); Kelly, Robert (Central Bank of Ireland)
    Abstract: We investigate the role that monetary policy plays in influencing the riskiness of bank lending via the “risk-taking channel” of the transmission mechanism. This affects banks’ perception of, and preference for, extendingnewrelatively risky lending. Using data on the lending of US banks to different risk categories of borrowers, we show that unanticipated increases in expected future interest rates, as measured by the term spread, induce banks to increase the riskiness of their lending. They do this both on an intensive margin, decreasing their lending to less risky borrowers in favour of riskier borrowers, and on an extensive margin also. We show that a one percentage point increase in the term spread leads banks to increase the relative share of riskier lending by 12.6 percent. Our results are relevant for understanding the channels of the monetary policy transmission mechanism and for thinking about the linkages between monetary policy and financial stability.
    Keywords: Monetary Policy, Risk Taking, Bank Lending
    JEL: E51 E52 E58 G21
    Date: 2019–06
  9. By: Crowley, Patrick M.; Hudgins, David
    Abstract: It is widely recognized that the policy objectives of fiscal and monetary policymakers usually have different time horizons, and this feature may not be captured by traditional econometric techniques. In this paper, we first decompose U.S macroeconomic data using a time-frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short-term targets: an inflation target, a money growth target, an interest rate target, and a real exchange rate target. The results determine the reaction in fiscal and monetary policy that is required to achieve an inflation target in a low inflation environment, and when both fiscal and monetary policy are concerned with meeting certain economic growth objectives. The combination of wavelet decomposition in an optimal control framework can also provide a new approach to macroeconomic forecasting.
    JEL: C61 C63 C88 E52 E61 F47
    Date: 2019–07–10
  10. By: Bernardo Morais; José-Luis Peydró; Jessica Roldán-Peña; Claudia Ruiz-Ortega
    Abstract: We identify the international credit channel by exploiting Mexican supervisory data sets and foreign monetary policy shocks in a country with a large presence of European and U.S. banks. A softening of foreign monetary policy expands credit supply of foreign banks (e.g., U.K. policy affects credit supply in Mexico via U.K. banks), inducing strong firm-level real effects. Results support an international risk-taking channel and spill overs of core countries’ monetary policies to emerging markets, both in the foreign monetary softening part (with higher credit and liquidity risk-taking by foreign banks) and in the tightening part (with negative local firm-level real effects).
    Keywords: monetary policy, financial globalization, quantitative easing (QE), credit supply, risk-taking, foreign banks
    JEL: E52 E58 G01 G21 G28
    Date: 2018–10
  11. By: Clara De Luigi (Foreign Research Division, Oesterreichische Nationalbank); Martin Feldkircher (Foreign Research Division, Oesterreichische Nationalbank); Philipp Poyntner (Department of Economics, Vienna University of Economics and Business); Helene Schuberth (Foreign Research Division, Oesterreichische Nationalbank)
    Abstract: We assess the impact of the ECB’s unconventional monetary policy (UMP) on the wealth distribution of households in ten euro area countries. For this purpose, we estimate the effects of an ECB balance sheet expansion on financial asset and housing prices by means of vector autoregressions. We then use the estimates to carry out micro simulations based on data from the Household Finance and Consumption Survey (HFCS). We find that the overall effect of UMP on the net wealth distribution of households differs depending on which wealth inequality indicators we use. There is an inequality-increasing effect for the majority of the countries under review when we use wealth inequality indicators that are sensitive to changes at the tails of the wealth distribution. The effect is more equalizing when we base our assessment on the Gini coefficient. It is also important to note that one-third of the households in our sample does not hold financial or housing wealth and is thus not directly affected by UMP measures via the asset price channel.
    Keywords: Monetary Policy, Inequality, Wealth, Quantitative Easing
    JEL: D14 D31 E44 E52 E58
    Date: 2019–07
  12. By: Knut Are Aastveit; Bruno Albuquerque; André Anundsen (-)
    Abstract: Recent developments in US house prices mirror those of the 1996-2006 boom, but the recovery in construction activity has been weak. Using data for 254 US metropolitan areas, we show that housing supply elasticities have fallen markedly in recent years. Housing supply elasticities have declined more in areas where land-use regulation has tightened the most, and in areas that experienced the sharpest housing busts. A lowering of the housing supply elasticity implies a stronger price responsiveness to demand shocks, whereas quantity reacts less. Consistent with this, we find that an expansionary monetary policy shock has a considerably stronger effect on house prices during the recent recovery than during the previous housing boom. At the same time, building permits respond less.
    Keywords: House prices, Heterogeneity, Housing supply elasticities, Monetary policy
    JEL: C23 E32 E52 R31
    Date: 2019–06
  13. By: Taisuke Nakata; Takeki Sunakawa
    Abstract: We analyze credible forward guidance policies in a sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates by solving a series of optimal sustainable policy problems indexed by the duration of reputational loss. Lower-for-longer policies---while effective in stimulating the economy at the ELB---are potentially time-inconsistent, as the associated overheating of the economy in the aftermath of a crisis is undesirable ex post. However, if reneging on a lower-for-longer promise leads to a loss of reputation and prevents the central bank from effectively using lower-for-longer policies in future crises, these policies can be time-consistent. We find that, even without an explicit commitment technology, the central bank can still credibly keep the policy rate at the ELB for an extended period---though not as extended under the optimal commitment policy---and meaningfully mitigate the adverse effects of the ELB constraint on economy activit y.
    Keywords: Credibility ; Effective Lower Bound ; Forward Guidance ; Sustainable Plan ; Time-Consistency
    JEL: E63 E52 E61 E62 E32
    Date: 2019–05–17
  14. By: Milan Deskar-Škrbić (The Croatian National Bank, Croatia); Karlo Kotarac (The Croatian National Bank, Croatia); Davor Kunovac (The Croatian National Bank, Croatia)
    Abstract: In this paper, we study the readiness of Bulgaria, Croatia and Romania to adopt the common monetary policy of the ECB in the context of the third round of euro area enlargement. Following the later stages of the optimal currency area (OCA) theory we focus on the coherence of economic shocks between candidate countries and the euro area and analyse the relevance of euro area shocks for key macroeconomic variables in these countries. Our results, based on a novel empirical approach, show that the overall importance of those shocks that are relevant for the ECB is fairly similar in candidate countries and the euro area. The cost of joining the euro area should, therefore, not be pronounced, at least from the aspect of the adoption of the common counter-cyclical monetary policy. This conclusion holds for all three candidates, despite important differences in monetary and exchange rate regimes.
    Keywords: euro area enlargement, economic shocks, BVAR, common monetary policy, Mundellian trilemma
    JEL: E32 E52
    Date: 2019–07
  15. By: Eser, Fabian; Lemke, Wolfgang; Nyholm, Ken; Radde, Sören; Vladu, Andreea Liliana
    Abstract: We trace the impact of the ECB’s asset purchase programme (APP) on the sovereign yield curve. Exploiting granular information on sectoral asset holdings and ECB asset purchases, we construct a novel measure of the “free-float of duration risk” borne by price-sensitive investors. We include this supply variable in an arbitrage-free term structure model in which central bank purchases reduce the free-float of duration risk and hence compress term premia of yields. We estimate the stock of current and expected future APP holdings to reduce the 10y term premium by 95 bps. This reduction is persistent, with a half-life of five years. The expected length of the reinvestment period after APP net purchases is found to have a significant impact on term premia. JEL Classification: C5, E43, E52, E58, G12
    Keywords: central bank asset purchases, European Central Bank, non-standard monetary policy measures, term premia, term structure of interest rates
    Date: 2019–07
  16. By: Massimo Guidolin; Manuela Pedio
    Abstract: We use monthly data on the US riskless yield curve for a 1982-2015 sample to show that mixing simple regime switching dynamics with Nelson-Siegel factor forecasts from time series models extended to encompass variables that summarize the state of monetary policy, leads to superior predictive accuracy. Such spread in forecasting power turns out to be statistically significant even controlling for parameter uncertainty and sample variation. Exploiting regimes, we obtain evidence that the increase in predictive accuracy is stronger during the Great Financial Crisis in 2007-2009, when monetary policy underwent a significant, sudden shift. Although more caution applies when transaction costs are accounted for, we also report that the increase in predictive power owed to the combination of regimes and of monetary variables that capture the stance of unconventional monetary policies is tradeable. We devise and test butterfly strategies that trade on the basis of the forecasts from the models and obtain evidence of riskadjusted profits both per se and in comparisons to simpler models.
    Keywords: Term structure of interest rates, Dynamic Nelson-Siegel factors, regime switching, butterfly strategies, unconventional monetary policy
    Date: 2019
  17. By: Punnoose Jacob; Finn Robinson (Reserve Bank of New Zealand)
    Abstract: The Reserve Bank uses an output gap indicator suite (OGIS) to help estimate the current degree of capacity pressure in the economy. When the output gap is positive, capacity pressures are high and the labour market is likely to be tight. As a consequence, inflation is likely to increase through the Phillips curve relationship. The output gap is hence very important for monetary policy. Unlike GDP, we cannot directly measure the output gap and the estimates of the output gap obtained from statistical models tend to get revised as new datapoints are added. This is particularly true for estimates of the output gap at the endpoint of history. Using a wider range of indicators to assess capacity pressures reduces the degree to which the output gap needs to be revised. This paper augments the existing suite with new indicators. It also evaluates how well each indicator explains inflation in a Phillips curve model, and how well it forecasts inflation and GDP. Overall, we find that the indicators perform well in these evaluations, which confirms that they are useful variables to look at when assessing capacity pressures in New Zealand.
    Date: 2019–06
  18. By: Chris Bloor; Bruce Lu (Reserve Bank of New Zealand)
    Abstract: As part of sound regulatory practice, the Reserve Bank wants to further its understanding, and the public’s understanding, of how the policy has influenced financial stability. This paper contributes to this objective by developing a modelling framework that quantifies the extent that the loan-to-value ratio (LVR) policy has improved the resilience of the banking system to a severe downturn in house prices. We find that the LVR restrictions have significantly improved the resilience of the banking system. The LVR policy has reduced the scale of mortgage defaults and credit losses that would occur in a housing downturn, due to a reduction in risky loans on bank balance sheets and the mitigation of a potential house price decline. This resilience benefit has been partly offset by a fall in capital requirements that results from lower credit risk, reducing the banks’ buffer for absorbing credit losses. Nevertheless, the LVR policy is estimated to have reduced mortgage losses – as a share of the capital banks hold against their housing loans – by 12 percentage points. The policy is found to have mitigated about half of the deterioration in bank resilience from 2013 that would have occurred in the absence of the policy. Our estimates are sensitive to judgements on key variables and inputs. The resilience benefit of the LVR policy is contingent on the level of housing market risk that would exist without the policy. This suggests a stronger case to deploy the LVR tool when the risk of a house price decline is high. We were unable to model the resilience benefit of restricting property investor lending with confidence, although a provisional estimate suggests that the benefit may be large. Therefore, the headline estimate may understate the resilience benefit of the LVR intervention. A comprehensive assessment of the policy’s efficacy needs to consider the cost of the policy, which is outside the scope of this paper.
    Date: 2019–05
  19. By: Christopher Hoag (Department of Economics, Trinity College)
    Abstract: This paper investigates the relation between bank liquidity and borrowing from a lender of last resort on a high frequency basis during a financial crisis. The paper evaluates weekly observations of individual bank borrowing of clearinghouse loan certificates by a panel of New York Clearing House member banks during the crisis of 1884. Naturally, banks with higher reserve ratios borrowed lower amounts, but banks replaced a dollar of reserves with less than a dollar of borrowing from a lender of last resort.
    Keywords: banking crisis, lender of last resort, clearinghouse, loan certificates.
    JEL: G21 G28 N21
    Date: 2019–07
  20. By: Mikkelsen, Jakob; Poeschl, Johannes
    Abstract: We show that systemic risk in the banking sector breeds macroeconomic uncertainty. In a production economy with a banking sector, financial constraints of banks can lead to disastrous banking panics. We find that a higher probability of a banking panic increases uncertainty in the aggregate economy. We explore the implications of this banking panic-driven uncertainty for business cycles, asset prices and macroprudential regulation. Banking panic-driven uncertainty amplifies business cycle volatility, increases risk premia on asset prices and yields a new benefit from countercyclical bank capital buffers.
    Keywords: Banking Panics, Systemic Risk, Endogenous Uncertainty, Macroprudential Policy
    JEL: E44 G12 G21 G28
    Date: 2019–06–27
  21. By: Laliotis, Dimitrios; Buesa, Alejandro; Leber, Miha; Población García, Francisco Javier
    Abstract: We assess the effects of regulatory caps in the loan-to-value (LTV) ratio using agent-based models (ABMs). Our approach builds upon a straightforward ABM where we model the interactions of sellers, buyers and banks within a computational framework that enables the application of LTV caps. The results are first presented using simulated data and then we calibrate the probability distributions based on actual European data from the HFCS survey. The results suggest that this approach can be viewed as a useful alternative to the existing analytical frameworks for assessing the impact of macroprudential measures, mainly due to the very few assumptions the method relies upon and the ability to easily incorporate additional and more complex features related to the behavioral response of borrowers to such measures. JEL Classification: D14, D31, E50, R21
    Keywords: borrower-based measures, HFCS survey, house prices, macroprudential policy
    Date: 2019–07
  22. By: Pervin Dadashova (National Bank of Ukraine); Magnus Jonsson (Sveriges Riksbank)
    Abstract: We examine how to implement macroprudential policies – stricter capital requirements and loan-tovalue limits – in order to mitigate the output loss of corporate debt deleveraging. The analysis is performed in a dynamic general equilibrium model calibrated to fit the U.S. economy. Stricter capital requirements are generally costlier in terms of output losses than stricter loan-to-value limits. For both instruments, the output loss is a convex function of the debt-to-GDP ratio. Finally, the output loss can be significantly reduced by implementing the requirements gradually, and by activating a countercyclical capital buffer.
    Keywords: capital requirements, loan-to-value requirements, output loss, gradual implementation
    JEL: C54 E44 G28 G38
    Date: 2019–06
  23. By: Fei Han; Niklas J Westelius
    Abstract: The yen is an important barometer for the Japanese economy. Depreciations are typically associated with favorable economic developments such as increased corporate profits, rising equity prices, and upward pressure on domestic consumer prices. On the other hand, large and sharp appreciations run the risk of lowering actual and expected inflation, squeezing corporate profits, generating a negative wealth effect through depressed equity prices, and reducing confidence in the Bank of Japan’s efforts to reflate the domestic economy and achieve the inflation target. This paper takes a closer look at underlying drivers of rapid yen appreciations, highlighting the key role of carry-trade and the zero lower bound as important amplifiers.
    Date: 2019–07–01
  24. By: Michael T. Belongia; Peter N. Ireland
    Abstract: In the 1920s, Irving Fisher extended his previous work on the Quantity Theory to describe, through an early version of the Phillips Curve, how changes in the money stock could be associated with cyclical movements in output, employment, and inflation. At the same time, Holbrook Working designed a quantitative rule for achieving price stability through control of the money supply. This paper develops a structural vector autoregressive time series model that allows these "classical" channels of monetary transmission to operate alongside the now-more-familiar interest rate channel of the New Keynesian model. Even with Bayesian priors that intentionally favor the New Keynesian view, the United States data produce posterior distributions for the model's key parameters that are consistent with the ideas of Fisher and Working. Changes in real money balances enter importantly into the model's aggregate demand relationship, while growth in Divisia M2 appears in the estimated monetary policy rule. Contractionary monetary policy shocks reveal themselves through persistent declines in nominal money growth instead of rising nominal interest rates and account for important historical movements in output and inflation.
    JEL: B12 E31 E32 E41 E43 E52
    Date: 2019–07
  25. By: Matthieu Darracq Paries (European Central Bank); Niki Papadopoulou (Central Bank of Cyprus)
    Abstract: Through the euro area crisis, financial fragmentation across jurisdictions became a prime concern for the single monetary policy. The ECB broadened the scope of its instruments and enacted a series of non-standard measures to engineer an appropriate degree of policy accommodation. The transmission of these measures through the currency union remained highly dependent on the financial structure and conditions prevailing in various regions. This paper explores the country-specific macroeconomic transmission of selected non-standard measures from the ECB using a global DSGE model with a rich financial sector: we extend the six-region multi-country model of Darracq Paries et al. (2016), introducing credit and exchange rate channels for central bank asset purchases. The portfolio rebalancing frictions are calibrated to match the sovereign yield and exchange rate responses after ECB's Asset Purchase Programme (APP) first announcement. The domestic transmission of the APP through the credit intermediation chain is significant and quite heterogeneous across the largest euro area countries. The introduction of global portfolio frictions on euro area government bond holdings by international investors opens up for a larger depreciation of the euro. The interaction between international and domestic channels affect the magnitude and the cross-country distribution of the APP impact.
    Keywords: DSGE models; banking; financial regulation; cross-country spillovers; bank lending rates; non-standard measures
    JEL: E4 E5 F4
    Date: 2019–03
  26. By: Andrew K. Rose (University of California, Berkeley)
    Abstract: I investigate whether countries that use unconventional monetary policy (UMP) experience export booms. I use a popular gravity model of trade which requires neither the exogeneity of UMP, nor instrumental variables for UMP. In practice, countries that engage in UMP experience a drop in exports vis-à-vis countries that are not engaged in such policies, holding other things constant. Quantitative easing is associated with exports that are about 10% lower to countries not engaged in UMP; this amount is significantly different from zero and similar to the effect of negative nominal interest rates. Thus there is no evidence that countries have gained export markets through unconventional monetary policy; any currency wars launched have been lost.
    Keywords: quantitative; easing; negative; nominal; interest; trade; gravity; bilateral; data; empirical
    JEL: F14 E58
  27. By: Darmouni, Olivier; Geisecke, Oliver; Rodnyanky, Alexander
    Abstract: An increasing share of firms' borrowing occurs through bond markets. We present high-frequency evidence from the Eurozone that bond-reliant firms are more responsive to monetary shocks: in contrast to standard bank lending channel predictions, unexpected ECB policy changes affect their stock prices by more, even conditional on total debt and industry fixed-effects. We develop an organizing framework to decompose the stock price, credit risk and investment response of large firms. We emphasize the role of corporate liquidity management: firms react to rate hikes by being prudent in good times, reducing investment in favor of hoarding liquid assets. Since bond financing is less flexible in bad times than relationship banking, this effect can rationalize why the mix of bank and bond financing matters for monetary transmission. A mitigating force is that bonds generally have longer duration and lower interest-rate pass-through relative to loans. Our findings suggest that the recent global growth in bond debt following quantitative easing could interact with conventional interest rate policy going forward.
    Keywords: Monetary policy, ECB, Debt Structure, Bank loans, Corporate bonds
    JEL: E44
    Date: 2019–07
  28. By: Kaplan, Robert S. (Federal Reserve Bank of Dallas)
    Abstract: An essay by Robert S. Kaplan, President and CEO of the Federal Reserve Bank of Dallas.
    Date: 2019–06–24
  29. By: Tomohide Mineyama (Bank of Japan); Wataru Hirata (Bank of Japan); Kenji Nishizaki (Bank of Japan)
    Abstract: Analyzing the costs and benefits of inflation has been a primary subject in monetary economics. This article presents a summary of Mineyama, Hirata, and Nishizaki (2019), which investigates the relationship between inflation and social welfare expressed as the economic satisfaction of households for Japan and the U.S. The authors' analysis employs a New Keynesian model which embeds the major factors affecting the costs and benefits of inflation. The analysis suggests (1) social welfare is maximized when the steady-state inflation rate, the level to which the inflation rate converges in the long run, is close to two percent for both Japan and the U.S.; and (2) around one percentage point absolute deviation from the close-to-two-percent rate induces only a minor change in social welfare. Note, however, that the estimates are subject to a considerable margin of error due to parameter uncertainty in the zero lower bound of nominal interest rates.
    Keywords: Inflation; Social welfare; New Keynesian model; Downward nominal wage rigidity; Zero lower bound; Forward guidance
    JEL: E31 E43 E52
    Date: 2019–07–09
  30. By: Trent Saunders (Reserve Bank of Australia); Peter Tulip (Reserve Bank of Australia)
    Abstract: Setting interest rates higher than macroeconomic conditions would warrant due to concerns about financial stability is called 'leaning against the wind'. Many recent papers have attempted to quantify and evaluate the effects of this policy. This paper summarises this research and applies the approach to Australia. The papers we survey see the benefit of leaning against the wind as avoiding financial crises, such as those that affected Australia in 1990 or other countries in 2008. Most of the international research finds that interest rates have too small an effect on the probability of a crisis for this benefit to be worth higher unemployment. Using Australian data, we find similar results. We estimate the costs of leaning against the wind to be three to eight times larger than the benefit of avoiding financial crises. However, research has not yet quantified the increased resilience of household balance sheets, which may be an extra benefit of leaning against the wind.
    Keywords: financial stability; monetary policy; evidence-based policy
    JEL: E52 E58 G18
    Date: 2019–07
  31. By: Jacopo Bonchi
    Abstract: I extend a standard two-period OLG model to investigate the interplay between the risks of a binding zero lower bound and asset price bubbles in a low interest rates environment. The nature of the bubble is crucial when the risk-free real interest rate is low because there is a negative natural interest rate. Bubbles are fully leveraged when they are sustained by borrowers, or they are fully unleveraged when they are sustained by lenders. Leveraged bubbles emerge naturally when there is a negative natural interest rate, and they are more likely to collapse. Unleveraged bubbles appear, in contrast, if the natural rate of interest is extremely low and the probability of the bubble bursting is not extremely high. Both bubbles are more likely to emerge with a high inflation target and will potentially be larger, but only leveraged bubbles substantially mitigate the risk of a zero lower bound episode by raising the natural rate of interest
    Keywords: zero lower bound, low interest rates, asset price bubbles, inflation target
    JEL: E43 E44 E52
    Date: 2019–01–23
  32. By: Maurice Obstfeld
    Abstract: This paper is a partial exploration of mechanisms through which global factors influence the tradeoffs that U.S. monetary policy faces. It considers three main channels. The first is the determination of domestic inflation in a context where international prices and global competition play a role, alongside domestic slack and inflation expectations. The second channel is the determination of asset returns (including the natural real safe rate of interest, r*) and financial conditions, given integration with global financial markets. The third channel, which is particular to the United States, is the potential spillback onto the U.S. economy from the disproportionate impact of U.S. monetary policy on the outside world. In themselves, global factors need not undermine a central bank's ability to control the price level over the long term -- after all, it is the monopoly issuer of the numeraire in which domestic prices are measured. Over shorter horizons, however, global factors do change the tradeoff between price-level control and other goals such as low unemployment and financial stability, thereby affecting the policy cost of attaining a given price path.
    JEL: E52 E58 F36 F41 G15
    Date: 2019–07

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