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on Central Banking |
| By: | Chunya Bu; John Rogers; Wenbin Wu |
| Abstract: | Identification of Fed monetary policy shocks is complex, in light of the distinct policymaking regimes before, during, and after the ZLB period of December 2008 to December 2015. We develop a heteroscedasticity-based partial least squares approach, combined with Fama-MacBeth style cross-section regressions, to identify a US monetary policy shock series that usefully bridges periods of conventional and unconventional policymaking and is effectively devoid of the central bank information effect. Our series has moderately high correlation with the shocks identified by Nakamura and Steinsson (2018), Swanson (2018), and Jarocinski and Karadi (2018), but has crucially important differences. Following both the Nakamura-Steinsson and Jarocinski-Karadi empirical tests, we find scant evidence of the information effect in our measure. We attribute the source of these different findings to our econometric procedure and our use of the full maturity spectrum of interest rate instrume nts in constructing our measure. We then present evidence confirming an hypothesis in the literature that the information effect can lead to the result that shocks to monetary policy have transmission effects with signs that differ from traditional theory. We find that shocks to series that are devoid of (embody) the information effect display conventionally-signed (perverse) impulse responses of output and inflation. This provides evidence of first-order importance to staff at central banks undertaking quantitative theoretical modeling of the effects of monetary policy. |
| Keywords: | Federal Reserve Board And Federal Reserve System ; Information Effect |
| JEL: | E4 E5 |
| Date: | 2019–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-43&r=all |
| By: | Julio A. Carrillo (Banco de México (E-mail: jcarrillo@banxico.org.mx)); Enrique G. Mendoza (University of Pennsylvania (E-mail: egme@sas.upenn.edu)); Victoria Nuguer (Inter-American Development Bank (E-mail: victorian@iadb.org)); Jessica Roldán-Peña (Banco de México (E-mail: jroldan@banxico.org.mx)) |
| Abstract: | Violations of Tinbergen's Rule and strategic interaction undermine monetary and financial policies significantly in a New Keynesian model with the Bernanke-Gertler accelerator. Welfare costs of risk shocks are large because of efficiency losses and income effects of costly monitoring, but they are larger under a simple Taylor rule (STR) and a Taylor rule augmented with credit spreads (ATR) than under a dual rules regime (DRR) with a Taylor rule and a financial rule targeting spreads, by 264 and 138 basis points respectively. ATR and STR are tight money-tight credit regimes that respond too much to inflation and not enough to spreads, and yield larger fluctuations in response to risk shocks. Reaction curves display shifts from strategic substitutes to complements in the choice of policy-rule elasticities. The Nash equilibrium is also a tight money-tight credit regime, with welfare 30 basis points lower than in Cooperative equilibria and the DRR, but still sharply higher than in the ATR and STR regimes. |
| Keywords: | Monetary policy, Financial frictions, Macroprudential policy, Leaning against the wind, Policy coordination |
| JEL: | E3 E44 E52 G18 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:19-e-08&r=all |
| By: | Christopher Curfman; John Kandrac |
| Abstract: | We investigate how liquidity regulations affect banks by examining a dormant monetary policy tool that functions as a liquidity regulation. Our identification strategy uses a regression kink design that relies on the variation in a marginal high-quality liquid asset (HQLA) requirement around an exogenous threshold. We show that mandated increases in HQLA cause banks to reduce credit supply. Liquidity requirements also depress banks' profitability, though some of the regulatory costs are passed on to liability holders. We document a prudential benefit of liquidity requirements by showing that banks subject to a higher requirement before the financial crisis had lower odds of failure. |
| Keywords: | Monetary Policy ; Bank Failure ; Bank Lending ; Liquidity Regulation ; Required Reserves |
| JEL: | G21 E58 E51 G28 E52 |
| Date: | 2019–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-41&r=all |
| By: | Philip Coyle; Taisuke Nakata |
| Abstract: | In expectations-driven liquidity traps, a higher inflation target is associated with lower inflation and consumption. As a result, introducing the possibility of expectations-driven liquidity traps to an otherwise standard model lowers the optimal inflation target. Using a calibrated New Keynesian model with an effective lower bound (ELB) constraint on nominal interest rates, we find that even a very small probability of falling into an expectations-driven liquidity trap lowers the optimal inflation target nontrivially. Our analysis provides a reason to be cautious about the argument that central banks should raise their inflation targets in light of a higher likelihood of hitting the ELB. |
| Keywords: | Liquidity Traps ; Optimal Inflation Target ; Sunspot Shock ; Zero Lower Bound |
| JEL: | E52 E63 E32 E62 E61 |
| Date: | 2019–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-36&r=all |
| By: | Miguel Biron; Felipe Córdova; Antonio Lemus |
| Abstract: | During the Global Financial Crisis, banks suffered losses on a scale not witnessed since the Great Depression, partly due to two major structural developments in the banking industry; deregulation combined with financial innovation. In the aftermath of the financial crisis, the regulatory response concentrated on the Basel III recommendations, raising core capital requirements for banking institutions, which affected their business models and funding patterns. Consequently, these changes have had significant implications for how banks grant loans, how they react to monetary policy shocks, and how they respond to external shocks. We find evidence of significant interactions between the bank lending channel and both monetary and global shocks in Chile. These links have changed significantly after the Global Financial Crisis. In particular, they have been shaped by the counter-cyclical behavior of a state-owned bank. |
| Keywords: | bank lending channel, global factors, Banco Estado |
| JEL: | E40 E44 E51 E52 E58 G21 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:800&r=all |
| By: | Bazot, Guillaume; Monnet, Eric; Morys, Matthias |
| Abstract: | Are central banks able to isolate their domestic economy by offsetting the effects of foreign capital flows? We provide an answer for the First Age of Globalisation based on an exceptionally detailed and standardized database of monthly balance sheets of all central banks in the world (i.e. 21) over 1891-1913. Investigating the impact of a global interest rate shock on the exchange-rate, the interest rate and the central bank balance sheet, we find that not a single country played by the "rules of the game." Core countries fully sterilized capital flows, while peripheral countries also relied on convertibility restrictions to avoid reserve losses. In line with the predictions of the trilemma, the exchange rate absorbed the shock fully in countries off the gold standard (floating exchange rate): the central bank's balance sheet and interest rate were not affected. In contrast, in the United States, a gold standard country without a central bank, the reaction of the money market rate was three times stronger than that of interest rates in countries with a central bank. Central banks' balance sheets stood as a buffer between domestic economy and global financial markets. |
| Keywords: | central banking; Federal Reserve System; gold standard; rules of the game; Sterilization; trilemma |
| JEL: | E42 E50 F30 F44 N10 N20 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13895&r=all |
| By: | Előd Takáts; Judit Temesvary |
| Abstract: | We combine a rarely accessed BIS database on bilateral cross-border lending flows with cross-country data on macroprudential regulations. We study the interaction between the monetary policy of major international currency issuers (USD, EUR and JPY) and macroprudential policies enacted in source (home) lending banking systems. We find significant interactions. Tighter macroprudential policy in a home country mitigates the impact on lending of monetary policy of a currency issuer. For instance, macroprudential tightening in the UK mitigates the negative impact of US monetary tightening on USD-denominated cross-border bank lending outflows from UK banks. Vice-versa, easier macroprudential policy amplifies impacts. The results are economically significant. |
| Keywords: | Cross-Border Claims ; Diff-In-Diff Analysis ; Macroprudential Policy ; Monetary Policy |
| JEL: | F34 F42 G38 G21 |
| Date: | 2019–06–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-45&r=all |
| By: | Belke, Ansgar; Beretta, Edoardo |
| Abstract: | The paper explores the precarious balance between modernizing monetary systems by means of digital currencies (either issued by the central bank itself or independently) and safeguarding financial stability as also ensured by tangible payment (and saving) instruments like paper money. Which aspects of modern payments systems could contribute to improve the way of functioning of today's globalized economy? And, which might even threaten the above mentioned instable equilibrium? This survey-paper aims, precisely, at giving some preliminary answers to a complex - therefore, ongoing - debate at the scientific as well as the banking and the political level. |
| Keywords: | cash,central banks,cryptocurrencies,digital currencies,monetary systems |
| JEL: | E4 E5 G21 G23 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:816&r=all |
| By: | Patrick K. O’Brien; Nuno Palma |
| Abstract: | The Bank Restriction Act of 1797 was the unconventional monetary policy of its time. It suspended the convertibility of the Bank of England's notes into gold, a policy which lasted until 1821. The current historical consensus is that it was a result of the state's need to finance the war, France’s remonetization, a loss of confidence in the English country banks, and a run on the Bank of England’s reserves following a landing of French troops in Wales. We argue that while these factors help us understand the timing of the suspension, they cannot explain its success. We deploy new long-term data which leads us to a complementary explanation: the policy succeeded thanks to the reputation of the Bank of England, achieved through a century of prudential collaboration between the Bank and the Treasury. |
| Keywords: | Bank of England, financial revolution, fiat money, money supply, monetary policy commitment, reputation, time-consistency, regime shift |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:ucg:wpaper:0082&r=all |
| By: | Ceyhun Bora Durdu; Alex Martin; Ilknur Zer |
| Abstract: | We examine the role of U.S. monetary policy in global financial stability by using a cross-country database spanning the period from 1870-2010 across 69 countries. U.S. monetary policy tightening increases the probability of banking crises for those countries with direct linkages to the U.S., either in the form of trade links or significant share of USD-denominated liabilities. Conversely, if a country is integrated globally, rather than having a direct exposure, the effect is ambiguous. One possible channel we identify is capital flows: If the correction in capital flows is disorderly (e.g., sudden stops), the probability of banking crises increases. These findings suggest that the effect of U.S. monetary policy in global banking crises is not uniform and largely dependent on the nature of linkages with the U.S. |
| Keywords: | banking crises ; financial stability ; monetary policy shocks ; sudden stop |
| JEL: | G15 E44 E52 F42 |
| Date: | 2019–05–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2019-39&r=all |
| By: | Belke, Ansgar; Frenzel Baudisch, Coletta; Göcke, Matthias |
| Abstract: | The interest rate represents an important monetary policy tool to steer investment in order to reach price stability. Therefore, implications of the exact form and magnitude of the interest rate-investment nexus for the European Central Bank's effectiveness in a low interest rate environment gain center stage. We first present a theoretical framework of the hysteretic impact of changes in the interest rate on macroeconomic investment under certainty and under uncertainty to investigate whether uncertainty over future interest rates in the Euro area hampers monetary policy transmission. In this non-linear model, strong reactions in investment activity occur as soon as changes of the interest rate exceed a zone of inaction, that we call 'play' area. Second, we apply an algorithm describing path-dependent play-hysteresis to estimate investment hysteresis using data on domestic investment and interest rates on corporate loans for 5 countries of the Euro area in the period ranging from 2001Q1 to 2018Q1. We find hysteretic effects of interest rate changes on investment in most countries. However, their shape and magnitude differ widely across countries which poses a challenge for a unified monetary policy. By introducing uncertainty into the regressions, the results do not change much which may be due to the interest rate implicitly incorporating uncertainty effects in investment decisions, e.g. by risk premia. |
| Keywords: | European Central Bank,interest rate,investment,monetary policy,nonideal relay,pathdependence,play-hysteresis,uncertainty |
| JEL: | C32 E44 E49 E52 F21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:817&r=all |
| By: | Martin Feldkircher (Oesterreichische Nationalbank); Elizaveta Lukmanova (KU Leuven); Gabriele Tondl (Department of Economics, Vienna University of Economics and Business) |
| Abstract: | In this paper, we examine international linkages in inflation and short-term interest rates using a global sample of OECD and emerging economies. Using a Bayesian global vector autoregression (GVAR) model, we show that for short-term interest rates both movements in inflation and output play an important role. In advanced countries, however, international factors such as foreign interest rates appear as an important driver of local interest rates. For inflation, we also find evidence for the importance of global factors, such as price developments in other countries, oil prices and the exchange rate. Again, this impact of global factors appears predominately in advanced countries. |
| Keywords: | Monetary policy, Inflation, Global VAR |
| JEL: | E40 E43 E44 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp289&r=all |
| By: | Saki Bigio (University of California, Los Angeles and NBER); Yuliy Sannikov (Stanford Business School and NBER) |
| Abstract: | A model integrates a modern implementation of monetary policy (MP) into an incomplete markets monetary economy. Policy sets corridor rates and conducts open-market operations and fiscal transfers. These tools grant independent control over credit spreads and inflation. We study the implementation of spreads and inflation via different MP instruments. Through its influence on spreads, MP affects the evolution of real credit, interests, output, and wealth distribution (both in the long and the short run). We decompose effects through different transmission channels. We study the optimal spread management and find that the active management of spreads is a desirable target. |
| Keywords: | Monetary Economics, Monetary Policy, Credit Channel |
| JEL: | E31 E32 E41 E44 E52 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:apc:wpaper:150&r=all |
| By: | Belke, Ansgar; Klose, Jens |
| Abstract: | This article compares two types of monetary policy rules - the Taylor-Rule and the Orphanides-Rule - with respect to their forecasting properties for the policy rates of the European Central Bank. In this respect the basic rules, results from estimated models and augmented rules are compared. Using quarterly real-time data from 1999 to the beginning of 2019, we find that an estimated Orphanides-Rule performs best in nowcasts, while it is outperformed by an augmented Taylor-Rule when it comes to forecasts. However, also a no-change rule delivers good results for forecasts, which is hard to beat for most policy rules. |
| Keywords: | Taylor-Rule,Orphanides-Rule,monetary policy rates,forecasting,European Central Bank |
| JEL: | E43 E52 E58 C53 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:rwirep:815&r=all |
| By: | Silvia Albrizio (Bank of Spain); Sangyup Choi (Yonsei University); Davide Furceri (IMF); Chansik Yoon (Princeton University) |
| Abstract: | How does domestic monetary policy in systemic countries spillover to the rest of the world? This paper examines the transmission channel of domestic monetary policy in the cross-border context. We use exogenous shocks to monetary policy in systemically important economies, including the U.S., and local projections to estimate the dynamic effect of monetary policy shocks on bilateral cross-border bank lending. We find robust evidence that an increase in funding costs following an exogenous monetary tightening leads to a statistically and economically significant decline in cross-border bank lending. The effect is weakened during periods of high uncertainty. In contrast, the effect is found to not vary according to the degree of borrower country riskiness, further weakening support for the international portfolio rebalancing channel. |
| Keywords: | Monetary policy spillovers; International bank lending channel; Cross-border banking flows; Global financial cycles; Local projections |
| JEL: | E52 F21 F32 F42 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:yon:wpaper:2019rwp-145&r=all |
| By: | Lamla, Michael J; Vinogradov, Dmitri V |
| Abstract: | Little is known on how and whether central bank announcements affect consumers' beliefs about policy relevant economic figures. This paper focuses on consumers' perceptions and expectations of inflation and interest rates and confidence therein. Based on a sound identification (running surveys shortly before and after communication events), and relying on above 15 000 observations, spanning over 12 FOMC press conferences between December 2015 and June 2018, we document the impact of the central bank communication on ordinary people. While announcement events have little measurable direct effect on average beliefs, they make people more likely to receive news about the central bank's policy. In general, informed consumers tend to have lower perceptions and expectations, higher confidence and, to an extent, better quality beliefs. |
| Keywords: | perceptions, expectations, central bank communication, consumers. |
| Date: | 2019–08–08 |
| URL: | http://d.repec.org/n?u=RePEc:esy:uefcwp:25125&r=all |
| By: | Rodrigo Barbone Gonzalez |
| Abstract: | This paper investigates the bank lending-channel of monetary policy (MP) surprises. To identify the effects of MP surprises on credit supply, I take the changes in interest rate derivatives immediately after each MP announcement and bring this high-frequency identification strategy to comprehensive and matched bank-firm data from Brazil. The results are robust and stronger than those obtained with Taylor residuals or the reference rate. Consistently with theory, heterogeneities across financial intermediaries, e.g. bank capital, are relevant. Firms connected to stronger banks mitigate about one third of the effects of contractionary MP on credit and about two thirds on employment. |
| Keywords: | employment, monetary policy, surprises, loan-level, lending channel |
| JEL: | E52 E51 G21 G28 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:799&r=all |
| By: | Fiorella De Fiore; Oreste Tristani |
| Abstract: | We study the optimal combination of interest rate policy and unconventional monetary policy in a model where agency costs generate a spread between deposit and lending rates. We show that credit policy can be a powerful substitute for interest rate policy. In the face of shocks that negatively affect banks' monitoring efficiency, unconventional measures insulate the real economy from further deterioration in financial conditions and it may be optimal for the central bank not to cut rates to zero. Thus, credit policy lowers the likelihood of hitting the zero bound constraint. Reductions in the policy rates without non-standard measures are suboptimal as they inefficiently force savers to change their intertemporal consumption patterns. |
| Keywords: | optimal monetary policy, unconventional policies, zero-lower bound, asymmetric information |
| JEL: | E44 E52 E61 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:804&r=all |
| By: | Jonathan Benchimol; Lahcen Bounader |
| Abstract: | The form of bounded rationality characterizing the representative agent is key in the choice of the optimal monetary policy regime. While inflation targeting prevails for myopia that distorts agents' inflation expectations, price level targeting emerges as the optimal policy under myopia regarding the output gap, revenue, or interest rate. To the extent that bygones are not bygones under price level targeting, rational inflation expectations is a minimal condition for optimality in a behavioral world. Instrument rules implementation of this optimal policy is shown to be infeasible, questioning the ability of simple rules à la Taylor (1993) to assist the conduct of monetary policy. Bounded rationality is not necessarily associated with welfare losses. |
| Date: | 2019–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/166&r=all |
| By: | José Bustamante; Walter Cuba; Rafael Nivin |
| Abstract: | This paper uses loan-level data from Peru's credit registry to determine how the role of bank-specific characteristics (i.e. bank size, liquidity, capitalization, funding, revenue, and profitability) may affect the supply of credit in domestic and foreign currency. Also, we analyze how these characteristics affect the banks' response to monetary policy shocks. Finally, we assess how the link between bank-specific characteristics and credit supply is affected by global financial conditions and commodity price changes. Our results show that well-capitalized, high-liquidity, low-risk, more profitable banks tend to grant more credit, especially in domestic currency. Moreover, we found evidence that reserve requirements both in domestic and foreign currency are effective in curbing domestic credit in Peru, giving support to the BCRP's active use of RRs as a macroprudential tool to smooth out the credit cycle. Last, we found that banks with more diversified funding sources are less affected after a negative commodity price change. |
| Keywords: | credit channel, monetary policy, credit registry data |
| JEL: | E44 G21 G32 L25 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:803&r=all |
| By: | Benchimol, Jonathan (Bank of Israel); Qureshi, Irfan (Asian Development Bank) |
| Abstract: | This paper presents an analysis of the stimulants and consequences of money demand dynamics. By assuming that households’ money holdings and consumption preferences are not separable, we demonstrate that the interest-elasticity of demand for money is a function of the households’ preference to hold real balances, the extent to which these preferences are not separable in consumption and real balances, and trend inflation. An empirical study of U.S. data revealed that there was a gradual fall in the interest-elasticity of money demand of approximately one-third during the 1970s due to high trend inflation. A further decline in the interest-elasticity of the demand for money was observed in the 1980s due to the changing household preferences that emerged in response to financial innovation. These developments led to a reduction in the welfare cost of inflation that subsequently explains the rise in monetary neutrality observed in the data. |
| Keywords: | Time-Varying Money Demand; Real Balance Effect; Welfare Cost of Inflation; Monetary Neutrality |
| JEL: | E31 E41 E52 |
| Date: | 2019–06–11 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:364&r=all |
| By: | Eric Monnet; Damien Puy |
| Abstract: | Why did monetary authorities hold large gold reserves under Bretton Woods (1944–1971) when only the US had to? We argue that gold holdings were driven by institutional memory and persistent habits of central bankers. Countries continued to back currency in circulation with gold reserves, following rules of the pre-WWII gold standard. The longer an institution spent in the gold standard (and the older the policymakers), the stronger the correlation between gold reserves and currency. Since dollars and gold were not perfect substitutes, the Bretton Woods system never worked as expected. Even after radical institutional change, history still shapes the decisions of policymakers. |
| Date: | 2019–07–24 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/161&r=all |
| By: | Carlos Cantú; Roberto Lobato; Calixto López; Fabrizio Lopez-Gallo |
| Abstract: | We use loan-level data from the Mexican credit registry to study how bank-specific characteristics in influence credit supply. We explore how these characteristics affect the transmission of monetary policy and their role in building banks' resilience to external shocks. Then, we compare the response of the credit supply of foreign subsidiaries to that of domestic banks. Finally, we study the impact of other micro characteristics on the credit supply and their influence on the transmission of shocks. Our results highlight the importance of banks' strong balance sheets and stable sources of funding for the provision of credit in Mexico. In general, these characteristics shelter banks from shocks. |
| Keywords: | credit registry, credit supply, bank-speci c characteristics, bank lending channel |
| JEL: | E44 E51 E52 E58 G21 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:802&r=all |
| By: | Polanski, Arnold (University of East Anglia); Stoja, Evarist (University of Bristol); Chiu, Ching-Wai (Jeremy) (Bank of England) |
| Abstract: | We present a framework focused on the interdependence of high-dimensional tail events. This framework allows us to analyse and quantify tail interdependence at different levels of extremity, decompose it into systemic and residual part and to measure the contribution of a constituent to the interdependence of a system. In particular, tail interdependence can capture simultaneous distress of the constituents of a (financial or economic) system and measure its systemic risk. We investigate systemic distress in several financial datasets confirming some known stylized facts and discovering some new findings. Further, we devise statistical tests of interdependence in the tails and outline some additional extensions. |
| Keywords: | Co-exceedance; systemic distress; risk contribution; extreme risk interdependence |
| JEL: | C32 G01 |
| Date: | 2019–08–05 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0815&r=all |
| By: | Georgiadis, Georgios; Mösle, Saskia |
| Abstract: | A large share of global trade being priced and invoiced primarily in US dollar rather than the exporter's or the importer's currency has important implications for the transmission of shocks. We introduce this "dominant currency pricing" (DCP) into ECB-Global, the ECB's macroeconomic model for the global economy. To our knowledge, this is the first attempt to incorporate DCP into a major global macroeconomic model used at central banks or international organisations. In ECB-Global, DCP affects in particular the role of expenditure switching and the US dollar exchange rate for spillovers: In case of a shock in a non-US economy that alters the value of its currency multilaterally, expenditure switching occurs only through imports; in case of a US shock that alters the value of the US dollar multilaterally, expenditure switching occurs both in non-US economies' imports and - as these are imports of their trading partners - exports. Overall, under DCP the US dollar exchange rate is a major driver of global trade, even for transactions that do not involve the US. In order to illustrate the usefulness of ECB-Global and DCP for policy analysis, we explore the implications of the Euro rivaling the US dollar as a second dominant currency in global trade. According to ECB-Global, in such a scenario the global spillovers from US shocks are smaller, while those from euro area shocks are amplified; domestic euro area monetary policy effectiveness is hardly affected by the Euro becoming a second globally dominant currency in trade. |
| Keywords: | global macroeconomic modelling,dominant currency paradigm,spillovers |
| JEL: | F42 E52 C50 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:ifwkwp:2136&r=all |
| By: | Carlos Cantú; Leonardo Gambacorta |
| Abstract: | This paper focuses on the recent changes in banking systems and how bank-specific characteristics have affected credit supply in five Latin American countries (Brazil, Chile, Colombia, Mexico and Peru). We use detailed credit registry data and apply a common empirical strategy. Since data confidentiality prevents the pooling of the data, we use meta-analysis techniques to summarise the results. We find that large and well-capitalised banks with low risk indicators, stable sources of funding, and a commercial business model generally supply more credit. Such banks are also more sheltered from monetary and global shocks, with the role of specific characteristics varying by the type of shock. |
| Keywords: | bank business models, bank lending, credit registry data, meta-analysis |
| JEL: | E51 E58 G21 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:798&r=all |
| By: | H. Evren Damar; Reint Gropp; Adi Mordel |
| Abstract: | Deposit insurance protects depositors from failing banks, thus making insured deposits risk-free. When a deposit insurance limit is increased, some deposits that previously were uninsured become insured, thereby increasing the share of risk-free assets in households’ portfolios. This increase cannot simply be undone by households, because to invest in uninsured deposits, a household must first invest in insured deposits up to the limit. This basic insight is the starting point of the analysis in this paper. We show that in a standard portfolio allocation model, faced with a deposit insurance limit increase, households move some of their assets out of deposits into risky alternatives, such as mutual funds. Our empirical analysis, taking advantage of a deposit insurance increase in Canada in 2005 and detailed household portfolio data, confirms the insights from the model and stands up to multiple alternative explanations. Hence, we show that an increase in the deposit insurance limit results in a sizable deposit outflow. Our work has important policy lessons. First, although there is considerable evidence on the financial stability consequences of deposit insurance (as it reduces the impact of runs in a crisis), we document a novel implication where enhanced protection may also trigger deposit outflows during non-crisis times. Second, the paper highlights the link between deposit insurance and the composition of household portfolios. It emphasizes the role that uninsured deposits play in the household investment decision and the importance of studying them separately from insured deposits when analyzing portfolio allocation choice. |
| Keywords: | Financial Institutions; Financial system regulation and policies |
| JEL: | D14 G21 G28 L51 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-29&r=all |
| By: | Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa); Philton Makena (Department of Economics, University of Pretoria, Pretoria, South Africa) |
| Abstract: | We develop an overlapping generations monetary endogenous growth (generated by productive public expenditures) model with inflation targeting, characterized by relocation shocks for young agents, which in turn generates a role for money (even in the presence of the return-dominating physical capital) and financial intermediaries. Based on this model, we show that two distinct growth paths emerge conditional on a threshold value of the share of physical capital in the production function. Along one path, we find convergence to a single stable equilibrium, and on the other path, we find multiple equilibria: a stable low-growth and an unstable high-growth, with the stable low-growth equilibrium found to be locally indeterminate. Since, government expenditure is productive in our model, a higher inflation-target would translate into higher growth, but under multiple equilibria, this is not necessarily always the case. |
| Keywords: | Endogenous Growth, Inflation Targeting, Growth Dynamics |
| JEL: | C62 O41 O42 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:201960&r=all |
| By: | Heipertz, Jonas; Ouazad, Amine; Rancière, Romain |
| Abstract: | The paper uses bank- and instrument-level data on asset holdings and liabilities to identify and estimate a general equilibrium model of trade in financial instruments. Bilateral ties are formed as each bank selects the size and the diversification of its assets and liabilities. Shocks propagate due to the response, rather than the size, of bilateral ties to such shocks. This general equilibrium propagation of shocks reveals a financial network where the strength of a tie is determined by the sensitivity of an instrument's return to other instruments' returns. General equilibrium analysis predicts the propagation of real, financial and policy shocks. The network's shape adjusts endogenously in response to shocks, to either amplify or mitigate partial equilibrium shocks. The network exhibits key theoretical properties: (i) more connected networks lead to less amplification of partial equilibrium shocks, (ii)Â the influence of a bank's equity is independent of the size of its holdings; (ii) more risk-averse banks are more diversified, lowering their own volatility but increasing their influence on other banks. The general equilibrium based network model is structurally estimated on disaggregated data for the universe of French banks. We used the estimated network to assess the effects of ECB quantitative easing policy on asset prices, balance-sheets, individual bank distress risk, and networks systemicness. |
| Keywords: | Asset and Liability Management; Asset Trade; Endogenous Networks; General Equilibrium |
| JEL: | D4 D5 D85 E5 G12 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:13855&r=all |
| By: | Rose Cunningham; Vikram Rai; Kristina Hess |
| Abstract: | We investigate the extent to which excess supply (demand) in labour markets contributes to a lower (higher) growth rate of average nominal wages for workers. Using panel methods on data from 10 advanced economies for 1992–2018, we produce reduced-form estimates of a wage Phillips curve specification that is consistent with a New Keynesian framework. We find comparable effects on nominal wage growth from several indicators of “slack” in the labour market: unemployment rates, unemployment rate gaps, the prime-age employment-to-population ratios, a composite labour market indicator constructed using a principal component for a wide range of labour force data, and unemployment rates separated by duration of unemployment. Our results provide evidence that while the slope of the wage Phillips curve seems to have become flatter following the global financial crisis in 2008, the relationship still appears to be highly significant. We find that the long-term unemployment rate (unemployment longer than six months) has had a larger effect on wage growth in the period since 2008. We also investigate the shape of the Phillips curve and find some evidence of a convex relationship between labour market slack and nominal wage growth, particularly for the pre-crisis period. Piecewise regressions suggest some mixed evidence on nominal rigidities in the aggregate data. |
| Keywords: | Inflation and prices; Labour markets; Monetary Policy |
| JEL: | C33 E31 E32 |
| Date: | 2019–08 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:19-8&r=all |
| By: | Kim, Young Il |
| Abstract: | - Korea's household debt continues to be a major economic risk despite countermeasures, necessitating a thorough overhaul of the current macro-prudential management system. - The debt expanded to 1,514 trillion won in 3Q 2018 from a decade ago (713 trillion won in 2008), considerably exceeding the income growth during the same period. - The rapid increase suggests that past policy measures have been ineffective in achieving a soft landing. - This study adopts a political economy perspective to determine the obstacles to past macroprudential policies, which can be effective tools in terms of credit risk management, and suggests directions for improvement. - It was found that the more fixated policy makers are on the short-term gains in growth and employment, the less likely they are to seek macro-prudential policies for financial stability. - Short election cycles can narrow the horizon of policy decisions, hence policy makers often pursue those with immediate outcomes to earn the public's favor―even if they entail negative fallouts. - The failure to implement suitable and timely macro-prudential policies will increase the probability of a credit boom-driven crisis and restrict the scope of mid- to long-term economic policies. - To improve the macro-prudential management system, its institutional basis needs to be consolidated to prevent the policy horizon from becoming narrower. - An institutional mechanism should operate the macro-prudential management system in correspondence with the mid- to long-term preference of the national economy. - More practical measures should be considered and adopted which could strengthen public accountability and the operational independence of the macro-prudential management system. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:kdifor:272&r=all |
| By: | Falter, Alexander |
| Abstract: | This paper builds a macro model with a financial sector and a housing market to understand the transmission and effects of macroprudential instruments addressing mortgage credit. The model compares the introduction of a loan-to-value ratio (LTV), a countercyclical capital buffer (CCyB)-style rule and sectoral constraints similar to sectoral risk weights. The results show that instruments work largely as intended and are to different extents suitable to dampen credit booms. Moreover, there is a trade-off between effectiveness, i.e. the extent to which instruments are able to dampen credit booms, and efficiency, i.e. the extent to which instruments might exhibit unintended consequences for the financial sector or real economy. General shocks, where housing credit increases as a side effect of larger movements, might warrant the use of the CCyB or also sectoral risk weights to correct for sector specific developments. Simple sectoral shocks can be dealt with or responded to first with sectoral risk weights. The LTV is much more effective than sectoral risk weights in confining credit growth, but shows less efficiency due to strong substitution effects. |
| Keywords: | Macroprudential Regulation,Mortgage Markets,Housing Markets,Asset Markets,Waterbed Effects |
| JEL: | E31 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:252019&r=all |
| By: | Saleem Bahaj (Bank of England (E-mail: saleembahaj@gmail.com)); Ricardo Reis (London School of Economics (E-mail: r.a.reis@lse.ac.uk)) |
| Abstract: | Theory claims that central-bank lending programs put ceilings on private lending rates, reduce ex post funding risk, and encourage ex ante investment. Testing for these effects is challenging. Most programs either have long precedents or were introduced in response to large shocks with multiple effects. Swap lines between advanced-economy central banks are a significant new policy through which a source central bank provides source-currency credit to recipient-country banks using the recipient central bank as the monitor and as the bearer of the credit risk. This paper shows that, in theory, the swap lines should put a ceiling on deviations from covered interest parity, lower average market funding costs, and increase inflows from recipient-country banks into assets denominated in the source-country's currency. Empirically, these are tested using difference-in-difference strategies that exploit variation in the terms of the swap line over time, variation in the central banks that have access to the swap line, variation in the exposure of different securities to foreign funding, and variation in banks' exposure to dollar funding risk. The evidence suggests that the lender of last resort is very effective. |
| Keywords: | liquidity facilities, currency basis, bond portfolio flows |
| JEL: | E44 F33 G15 |
| Date: | 2019–07 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:19-e-09&r=all |