nep-cba New Economics Papers
on Central Banking
Issue of 2019‒09‒02
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The Effect of Unconventional Monetary Policy on Cross‐Border Bank Loans: Evidence from an Emerging Market By Koray Alper; Fatih Altunok; Tanju Çapacıoğlu; Steven Ongena
  2. Monetary Policy Announcements and Expectations: Evidence from German Firms By Enders, Zeno; Hünnekes, Franziska; Müller, Gernot
  3. In Fed Watchers’ Eyes: Hawks, Doves and Monetary Policy By Klodiana Istrefi
  4. Monetary Policy for a Bubbly World By Asriyan, Vladimir; Fornaro, Luca; Martín, Alberto; Ventura, Jaume
  5. ECB, BoE and Fed Monetary-Policy announcements: price and volume effects on European securities markets By Eurico Ferreira; Ana Paula Serra
  6. Time-Varying Impact of Uncertainty Shocks on Macroeconomic Variables of the United Kingdom: Evidence from Over 150 Years of Monthly Data By Christina Christou; David Gabauer; Rangan Gupta
  7. Improving U.S. Monetary Policy Communications By Cecchetti, Stephen G; Schoenholtz, Kermit
  8. The Neutrality of Nominal Rates: How Long is the Long Run? By João Ritto; João Valle e Azevedo; Pedro Teles
  9. Change of Monetary Regime, Contracts, and Prices: Lessons from the Great Depression, 1932-1935 By Sebastian Edwards
  10. A Risk-centric Model of Demand Recessions and Speculation By Caballero, Ricardo; Simsek, Alp
  11. (Macro) Prudential Taxation of Good News By Flemming, Jean; Lhuillier, Jean-Paul; Piguillem, Facundo
  12. Interbank rate uncertainty and bank lending By Altavilla, Carlo; Carboni, Giacomo; Lenza, Michele; Uhlig, Harald
  13. "Evolving International Monetary and Financial Architecture and the Development Challenge: A Liquidity Preference Theoretical Perspective" By Jorg Bibow
  14. Monetary Policy and Money Market Funds By Bua, Giovanna; Dunne, Peter G.
  15. Inspecting the Mechanism of Quantitative Easing in the Euro Area By Koijen, Ralph; Koulischer, Francois; Nguyen, Benoît; Yogo, Motohiro
  16. Diversity in finance: An overview By Schmidt, Reinhard H.
  17. Optimal Monetary Policy when Information is Market-Generated By Benhima, Kenza; Blengini, Isabella
  18. Global factors and trend inflation By Gunes Kamber; Benjamin Wong
  19. Lending above macroprudential mortgage limits: The Irish experience since 2015 By Kinghan, Christina; McCann, Fergal
  20. Past meets present in policymaking: The Federal Reserve and the U.S. money market, 1913-1929 By O'Sullivan, Mary
  21. Towards a political economy of monetary dependency: The case of the CFA franc in West Africa By Koddenbrock, Kai; Sylla, Ndongo Samba
  22. The Effects of Competition in Consumer Credit Market By Stefan Gissler; Rodney Ramcharan; Edison Yu
  23. Predicting Consumer Default: A Deep Learning Approach By Albanesi, Stefania; Vamossy, Domonkos
  24. The Formation of Consumer Inflation Expectations: New Evidence From Japan's Deflation Experience By Jess Diamond; Kota Watanabe; Tsutomu Watanabe
  25. Safe U.S. Assets and U.S. Capital Flows By Charles Engel
  26. Bank Assets, Liquidity and Credit Cycles By Lubello, Federico; Petrella, Ivan; Santoro, Emiliano
  27. Monetary Policy, Crisis and Capital Centralization in Corporate Ownership and Control Networks: a B-Var Analysis By Emiliano Brancaccio; Raffaele Giammetti; Milena Lopreite; Michelangelo Puliga

  1. By: Koray Alper (Government of the Republic of Turkey - Central Bank of the Republic of Turkey); Fatih Altunok (Central Bank of the Republic of Turkey); Tanju Çapacıoğlu (Central Bank of Turkey); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We analyze the impact of quantitative easing by the Federal Reserve, European Central Bank and Bank of England on cross‐border credit flows. Relying on comprehensive loan‐level data, we find that Fed QE strongly boosts cross‐border credit granted to Turkish banks by banks located in the US, Euro Area and UK, while ECB and BoE QEs work only moderately through banks in the EA and UK, respectively. In general QE works at short maturities across bank locations and loan currencies, more strongly for weaker lenders and borrowers, and may have resulted in maturity mismatches in Turkish banks searching for yield.
    Keywords: bank lending channel; bank borrowing channel; monetary transmission; quantitative easing (QE); cross‐border bank loans, micro‐level data, capital requirements, financial de‐globalization
    JEL: E44 E52 F42 G15 G21
    Date: 2019–07
  2. By: Enders, Zeno; Hünnekes, Franziska; Müller, Gernot
    Abstract: We assess empirically whether monetary policy announcements impact firm expectations. Two features of our data set are key. First, we rely on a survey of production and price expectations of German firms, that is, expectations of actual price setters. Second, we observe the day on which firms submit their answers to the survey. We compare the responses of firms before and after monetary policy surprises and obtain two results. First, firm expectations respond to policy surprises. Second, the response becomes weaker as the surprise becomes bigger. A contractionary surprise of moderate size reduces firm expectations, while a moderate expansionary surprise raises them. Large surprises, both negative and positive, fail to alter expectations. Consistent with this result, we find that many of the ECB's announcements of non-conventional policies did not affect expectations significantly. Overall, our results are consistent with the notion that monetary policy surprises generate an information effect which is endogenous to the size of the policy surprise.
    Keywords: European Central Bank; Firm expectations; information effect; Monetary policy announcements; survey data
    JEL: E3 E52 E58
    Date: 2019–08
  3. By: Klodiana Istrefi
    Abstract: I construct a novel measure of policy preferences of the Federal Open Market Committee (FOMC) as perceived in public. This measure is based on newspaper and financial media coverage of 130 FOMC members serving during 1960-2015. Narratives reveal that about 70percent of these FOMC members are perceived to have had persistent policy preferences over time, as either inflation-fighting hawks or growth-promoting doves. The rest are perceived as swingers, switching between types, or remained an unknown quantity to markets. Hawk and Dove perceptions capture "true" tendencies as expressed in preferred rates, forecasts and dissents of these FOMC members well. At the FOMC level the composition of hawks and doves varies significantly, featuring slow- and fast-switching hawkish and dovish regimes, due to the rotation of voting rights each year, members’ turnover and swings in preferences.
    Keywords: Monetary Policy, Federal Reserve, FOMC, Policy Preferences, Inflation.
    JEL: E43 E47 E63 G12
    Date: 2019
  4. By: Asriyan, Vladimir; Fornaro, Luca; Martín, Alberto; Ventura, Jaume
    Abstract: What is the role of monetary policy in a bubbly world? To address this question, we study an economy in which financial frictions limit the supply of assets. The ensuing scarcity generates a demand for "unbacked" assets, i.e., assets that are backed only by the expectation of their future value. We consider two types of unbacked assets: bubbles, which are created by the private sector, and money, which is created by the central bank. Bubbles and money share many features, but they also differ in two crucial respects. First, while the rents from the creation of bubbles accrue to entrepreneurs and foster investment, the rents from money creation accrue to the central bank. Second, while bubbles are driven by market psychology, and can rise and fall according to the whims of the market, money is under the control of the central bank. We characterize the optimal monetary policy and show that, through its ability to supply assets, monetary policy plays a key role in the bubbly world. The model sheds light on the recent expansion of central bank liabilities in response to the bursting of bubbles.
    Keywords: bubbles; Financial Frictions; liquidity trap; Optimal monetary policy
    JEL: E32 E44 O40
    Date: 2019–06
  5. By: Eurico Ferreira; Ana Paula Serra
    Abstract: As a response to the recent global financial crisis, the main central banks implemented several programs of unconventional monetary policies. This paper assesses the announcement effects of the policy measures taken by the European Central Bank, the Bank of England and the Federal Reserve on European securities markets. We measure the impact of these announcements on government bond and stock prices and trading volumes. Using the event study methodology, we evaluate the reaction of some of the major European market indices around the announcement dates of unconventional monetary policies, over the period between 2008 and 2016. Our results show that the overall impact of the announcements of unconventional monetary policy measures is significant for European stock markets. Further, results suggest that the impact was more significant with the announcement of “Forward Guidance” and “Asset Purchases” policy measures, respectively, on stock prices and trading volumes. If events are categorized using a narrow definition of “Forward Guidance”, the effects for this category are positive but not always statistically significant.
    JEL: E52 E58 G12 G14
    Date: 2019
  6. By: Christina Christou (School of Economics and Management, Open University of Cyprus, 2252, Latsia, Cyprus); David Gabauer (Institute of Applied Statistics, Johannes Kepler University, Altenbergerstraße 69, 4040 Linz, Austria. Department of Business and Management, Webster Vienna Private University, Praterstraße 23, 1020 Vienna, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, South Africa)
    Abstract: In this paper, we analyse the impact of uncertainty (corporate bond spread) shock on inflation rate, unemployment rate, monetary policy rate, and the nominal exchange rate returns of the United Kingdom over the monthly period of 1855:01 to 2016:12. Given that we use data spanning over one and a half century, we use a time-varying parameter vector autoregressive (TVP-VAR) model. We find that a positive uncertainty shock reflects a negative demand shock as suggested by theory, and results in declines in the inflation, interest rate and dollar-pound exchange rate returns, and an increase in unemployment rate. However, this impact varies over time, with the strongest effect observed for the period after World War II until the start of the Great Moderation, and during the recent global crisis. Our results are in general robust to an alternative econometric framework (breaks-based VAR) and a metric of uncertainty (stock market volatility).
    Keywords: Uncertainty, Macroeconomic Effects, Time-Varying Vector Autoregression, United Kingdom
    JEL: C32 E30 E40 F31
    Date: 2019–08
  7. By: Cecchetti, Stephen G; Schoenholtz, Kermit
    Abstract: The Federal Open Market Committee (FOMC) publishes vast amounts of information regarding monetary policy, including its goals, strategy and outlook. By reinforcing the commitment to price stability and maximum sustainable employment, this transparency has helped improve U.S. economic performance in recent decades. Based on two dozen interviews with policy experts, we identify three objectives that guide our search for further improvements in communications practices: simplifying public statements, clarifying how policy will react to changing conditions, and highlighting uncertainty and risks. As examples, we propose a simpler post-meeting policy statement and the introduction of a concise Report on Economic Projections, the elements of which are mostly available in existing publications. A broader, systematic application of these objectives could also help the FOMC streamline other aspects of its communications framework.
    Keywords: central bank accountability; central bank communication; Federal Reserve; forward guidance; monetary policy; Monetary policy credibility; Policy Transparency; Reaction functions
    JEL: E50 E58 E61
    Date: 2019–08
  8. By: João Ritto; João Valle e Azevedo; Pedro Teles
    Abstract: How can inflation be raised in economies such as Japan and the euro area where it has been below the objective for quite some time? We estimate an empirical model aimed at identifying the effects of permanent and temporary monetary shocks for the U.S., Japan, France, the U.K., Germany and the euro area. We find that the permanent monetary shock leads to a permanent rise in nominal rates and inflation. Importantly, the short-run effects of this permanent shock are similar to the long-run effects: inflation responds positively and immediately to a permanent rise in nominal rates, confirming the results in Uribe (2017, 2018). We also reinvestigate the long-run relation between inflation and nominal short interest rates. Using data for 41 developed countries covering the last 50 years, we document a strong, yet below one-for-one relationship between nominal rates and inflation, that tends to be less visible over the more recent period, characterized by inflation targeting at low common levels.
    JEL: E31 E32 E52 E58
    Date: 2019
  9. By: Sebastian Edwards
    Abstract: In this paper I analyze the process leading to the abandonment of the gold standard in the U.S. in1933, and the devaluation of the dollar in 1934. I argue that most changes of monetary regime have an impact on contracts. In this specific case, contracts that were written in terms of gold, or “gold equivalent,” were rewritten in paper dollars. Congress did this on June 5 1933, when it abrogated the “gold clause” retroactively. The Supreme Court validated the move in February 1935. The result was a very large transfer of wealth from creditors to debtors. I use daily data on commodity prices to investigate the extent to which these policies contributed to ending deflation. I find that commodity prices reacted strongly to the announcement of policy changes, and to legal procedures involving contracts. These results are consistent with the “change in regime” hypothesis of Sargent.
    JEL: B22 F31 F33 N1 N82
    Date: 2019–07
  10. By: Caballero, Ricardo; Simsek, Alp
    Abstract: We theoretically analyze the interactions between asset prices, financial speculation, and macroeconomic outcomes when output is determined by aggregate demand. If the interest rate is constrained, a decline in risky asset valuations generates a demand recession. This reduces earnings and generates a negative feedback loop between asset prices and aggregate demand. In the recession phase, beliefs matter not only because they affect asset valuations but also because they determine the strength of the amplification mechanism. In the ex-ante boom phase, belief disagreements (or heterogeneous asset valuations) matter because they induce investors to speculate. This speculation exacerbates the crash by reducing high-valuation investors' wealth when the economy transitions to recession. Macroprudential policy that restricts speculation in the boom can Pareto improve welfare by increasing asset prices and aggregate demand in the recession.
    Keywords: aggregate demand; asset prices; booms and recessions; exogenous and endogenous uncertainty; heterogeneous beliefs; interest rate rigidity; monetary and macroprudential policy; Speculation; the Fed put; Time-varying risk premium
    JEL: E00 E12 E21 E22 E30 E40 G00 G01 G11
    Date: 2019–06
  11. By: Flemming, Jean; Lhuillier, Jean-Paul; Piguillem, Facundo
    Abstract: We analyze the optimal macroprudential policy under the presence of news shocks. News are shocks to the growth rate that convey information about future growth. In this context, crises are characterized by long periods with positive shocks (and good news) that eventually revert,rendering the collateral constraint binding and triggering deleveraging. In this environment it is optimal to tax borrowing during good times, and let agents act freely leaving the allocations undistorted, including borrowing and lending, when the economy reverts to a bad state. We contrast our findings to the case of standard, shocks to the level of income, where it is optimal to tax debt in bad times, when agents need to borrow the most for precautionary savings motives. Also, taxes are used much less often and are around one-tenth of those under level shocks.
    Keywords: financial crises; macroprudential policy; Pecuniary externality
    JEL: E32 E44 G18
    Date: 2019–06
  12. By: Altavilla, Carlo; Carboni, Giacomo; Lenza, Michele; Uhlig, Harald
    Abstract: This paper investigates the effects of interbank rate uncertainty on lending rates to euro area firms. We introduce a novel measure of interbank rate uncertainty, computed as the cross-sectional dispersion in interbank market rates on overnight unsecured loans. Using proprietary bank-level data, we find that interbank rate uncertainty significantly raises lending rates on loans to firms, with a peak effect of around 100 basis points during the 2007-2009 global financial crisis and the 2010-2012 European sovereign crisis. This effect is attenuated for banks with lower credit risk, sounder capital positions and greater access to central bank funding. JEL Classification: E44, D80, G21
    Keywords: bank lending, interbank market, uncertainty
    Date: 2019–08
  13. By: Jorg Bibow
    Abstract: This paper investigates the peculiar macroeconomic policy challenges faced by emerging economies in today's monetary (non)order and globalized finance. It reviews the evolution of the international monetary and financial architecture against the background of Keynes's original Bretton Woods vision, highlighting the US dollar's hegemonic status. Keynes's liquidity preference theory informs the analysis of the loss of policy space and widespread instabilities in emerging economies that are the consequence of financial hyperglobalization. While any benefits promised by mainstream promoters remain elusive, heightened vulnerabilities have emerged in the aftermath of the global crisis.
    Keywords: Emerging Economies; Hyperglobalization; Liquidity; Liquidity Preference Theory; Reserve Accumulation; US Dollar Hegemony
    JEL: B22 E43 E44 F02 F36 G12
    Date: 2019–08
  14. By: Bua, Giovanna (Central Bank of Ireland); Dunne, Peter G. (Central Bank of Ireland)
    Abstract: We explore how recent unconventional monetary policies have affected money market fund behaviour. This category of investment funds is important from a monetary policy perspective because its members provide investment opportunities that are expected to be safe and highly liquid while they are actively involved in short term interbank funding markets. Crucially, they do not have access to the ECB’s deposit facility. At its extreme, unconventional monetary policy puts money market funds under pressure by depressing the yields available on the assets they typically hold. This could cause excessive risk taking by funds, outflows of investment and unintended intermediation between banks and funds.We consider whether these concerns are well-grounded and reveal other unintended side-effects.
    Date: 2019–08
  15. By: Koijen, Ralph; Koulischer, Francois; Nguyen, Benoît; Yogo, Motohiro
    Abstract: Using new data on security-level portfolio holdings by investor type and across countries in the euro area, we study portfolio rebalancing during the European Central Bank's (ECB) purchase programme that started in March 2015. To quantify changes in risk concentration, we estimate the evolution of the distribution of duration, government, and corporate credit risk exposures across investor sectors and regions until the last quarter of 2017. Using these micro data, we show that 60% of ECB purchases are sold by non-euro area investors, and we do not find evidence that risks get concentrated in certain sectors or geographies. We estimate a sector-level asset demand system using instrumental variables to connect the dynamics of portfolio rebalancing to asset prices. Our estimates imply that government yields declined by 47bp, on average, but the estimates range from -28bp to -57bp across countries.
    Date: 2019–08
  16. By: Schmidt, Reinhard H.
    Abstract: This paper aspires to provide an overview of the issue of diversity of banking and financial systems and its development over time from a positive and a normative perspective. In other word: how different are banks within a given country and how much do banking systems and entire financial systems differ between countries and regions, and do in-country diversity and between-country diversity change over time, as one would be inclined to expect as a consequence of globalization and increasingly global standards of regulation? As the first part of this paper shows, the general answer to these questions is that there is still today a surprisingly high level of diversity in finance. This raises the two questions addressed in the second part of the paper: How can the persistence of diversity be explained, and how can it be assessed? In contrast to prevailing views, the author argues that persistent diversity should be regarded as valuable in a context in which there is no clear answer to the question of which structures of banking and financial systems are optimal from an economic perspective.
    Keywords: diversity,finance,banking systems,financial systems
    Date: 2019
  17. By: Benhima, Kenza; Blengini, Isabella
    Abstract: The nature of the private sector's information changes the optimal conduct of monetary policy. When firms observe their individual demand and use it as a signal of real shocks, the optimal policy consists in maximizing the information content of that signal. When real shocks are deflationary (like labor supply shocks), the optimal policy is countercyclical and magnifies price movements, which contrasts with the exogenous information case, where optimal monetary policy is procyclical and stabilizes prices. When the central bank communicates its information to the public, this policy is still optimal if firms pay limited attention to central bank announcements.
    Keywords: central bank communication; endogenous information; Expectations; Information Frictions; Optimal monetary policy
    JEL: D83 E32 E52 F32
    Date: 2019–06
  18. By: Gunes Kamber; Benjamin Wong
    Abstract: We develop an empirical model to study the influence of global factors in driving trend inflation and the inflation gap. We apply our model to 7 developed economies and 21 emerging market economies. Our results suggest that while global factors can have a sizeable influence on the inflation gap, they play only a marginal role in driving trend inflation. Much of the influence of global factors in the inflation gap may be reflecting commodity price shocks. Finally, we find that the effect of global factors to be greater in our sample of emerging market economies relative to the developed economies. There is some evidence which suggest propagation mechanisms, which may reflect institutional structures or policy choices, can explain the greater role for global factors in driving trend inflation in emerging market economies.
    Keywords: Trend inflation, foreign shocks, Beveridge-Nelson decomposition
    JEL: C32 E31 F41
    Date: 2019–08
  19. By: Kinghan, Christina (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland)
    Abstract: Borrower-based measures introduced in 2015 by the Central Bank of Ireland placed a limit on the loan to income (LTI) and loan to value (LTV) ratio of newly originated mortgages in Ireland. These limits come with an important exception: a system of “allowances” for a percentage of each lender’s total annual loan volume to be issued above the stated LTI and LTV limits. In this Note we study the way in which these allowances are allocated, focusing on two dimensions. First, from a borrower composition viewpoint, we show that allowances for First Time Buyers (FTBs) typically go to borrowers who are at low to middle incomes, predominantly in Dublin and more likely to be single. Second, from a risk management perspective, we study banks’ choice of LTI and LTV levels within the allowance group.We show that borrowers with an LTI allowance are highly likely to have the maximum allowable LTV level, and vice versa, suggesting that a large proportion of borrowers are accessing the maximum available leverage under the regime. Finally, we show that, in line with rapid house price growth since 2015, the LTI and LTV levels of loans with allowances have grown in each year to 2018.
    Date: 2019–07
  20. By: O'Sullivan, Mary
    Abstract: This paper contributes to our understanding of how the past is invoked in the present in the realm of economic policy. It focuses on the systemic financial reform envisaged by the Federal Reserve Act of 1913, which was supposed to displace the powerful New York call market with a new discount or acceptance market as the centrepiece of the U.S. money market. The paper shows that the past was remembered and ignored in ways that were crucial in generating “lessons” about the necessity and possibility of radical financial reform in the United States. It reveals the strong commitment to these lessons by prominent officials in the Federal Reserve Bank of New York in designing and implementing policies for reform. Their commitment proved to be unwavering even in the face of mounting criticism that their policies were failing to promote the development of an acceptance market. By focussing on the anaemic demand for acceptances as a key obstacle to reform, I suggest that policymakers were so fixated on the past that they overlooked the potential implications of unexpected changes in the US money market since the enactment of the Federal Reserve Act. Thus, they responded with frustration to the failure of their efforts to achieve the financial reform envisaged by that Act without contemplating any serious alternative to it.
    Keywords: Financial history, Money markets, Call loans, Acceptances, Uses of the past, Monetary and financial reform, Federal Reserve Act.
    JEL: N00 N22
    Date: 2019
  21. By: Koddenbrock, Kai; Sylla, Ndongo Samba
    Abstract: This paper focuses on the most neglected case of monetary dependency: the CFA franc. This currency arrangement was born in 1945, during the colonial era, but it still operates in the same ways more than 70 years later in fourteen countries in Africa, mostly former French colonies. Engaging with the seminal African scholarship by Joseph Pouemi on internal and external monetary repression and the emergent literature on "financial subordination," we introduce the notion of the "chain of monetary dependency," consisting of an external and an internal part. We argue that the CFA franc provides an extreme but paradigmatic example of this chain. The CFA franc is paradigmatic because of the very strong external repression of monetary and financial policy through US dollar and euro dependence. Internally, the CFA franc arrangement radicalizes the constraints imposed on all central bank policies and bank-firm relations in the Global South and makes it more difficult to pursue growth strategies geared towards the well-being of the broader population.
    Keywords: CFA franc,colonialism,dependency,monetary sovereignty,money,West Africa
    Date: 2019
  22. By: Stefan Gissler; Rodney Ramcharan; Edison Yu
    Abstract: This paper finds that banks and non-banks respond differently to increased competition in consumer credit markets. Increased competition and the greater threat of failure induces banks to specialize more in relationship business lending, and surviving banks are more profitable. However, non-banks change their credit policy when faced with more competition and expand credit to riskier borrowers at the extensive margin, resulting in higher default rates. These results show how the effects of competition depend on the form of intermediation. They also suggest that increased competition can cause credit risk to migrate outside the traditional supervisory umbrella.
    JEL: D12 G21 G23
    Date: 2019–08
  23. By: Albanesi, Stefania; Vamossy, Domonkos
    Abstract: We develop a model to predict consumer default based on deep learning. We show that the model consistently outperforms standard credit scoring models, even though it uses the same data. Our model is interpretable and is able to provide a score to a larger class of borrowers relative to standard credit scoring models while accurately tracking variations in systemic risk. We argue that these properties can provide valuable insights for the design of policies targeted at reducing consumer default and alleviating its burden on borrowers and lenders, as well as macroprudential regulation.
    Keywords: Consumer default; credit scores; deep learning; macroprudential policy
    JEL: C45 D1 E27 E44 G21 G24
    Date: 2019–08
  24. By: Jess Diamond (Department of Economics, Hosei University); Kota Watanabe (Canon Institute for Global Studies and University of Tokyo); Tsutomu Watanabe (Graduate School of Economics, University of Tokyo)
    Abstract: Using a new micro-level dataset we investigate the relationship between the inflation experience and inflation expectations of households in Japan. We focus on the period after 1995, when Japan began its era of deflation. Our key findings are fourfold. Firstly, we find that inflation expectations tend to increase with age. Secondly, we find that measured inflation rates of items purchased also increase with age. However, we find that age and inflation expectations continue to have a positive correlation even after controlling for the household-level rate of inflation. Further analysis suggests that the positive correlation between age and inflation expectations is driven to a significant degree by the correlation between cohort and inflation expectations, which we interpret to represent the effect of historical inflation experience on expectations of future inflation rates.
    Keywords: Inflation Expectations; Deflation; Monetary Policy; Household Level Inflation Data; Japan
    Date: 2019–08–19
  25. By: Charles Engel (University of Wisconsin – Madison)
    Abstract: The “exorbitant privilege” of the U.S. – the ability of the U.S. to earn positive net income on its international portfolio even though it is a net debtor – may be linked to the “convenience yield” on U.S. government bonds. The convenience yield refers to the low pecuniary return on U.S. Treasuries associated with the non-pecuniary yield on those assets arising from their liquidity and safety. A simple model shows how the convenience yield can lead to current account deficits, an appreciated currency in real terms, and positive net factor income. Empirically, we find evidence associating the convenience yield with a strong dollar in real terms, and, in turn, evidence linking the real exchange rate to the U.S. current account. We calculate that this channel may account for approximately 40% of the U.S. current account deficit. We then discuss factors that might influence the convenience yield, and discuss possible drawbacks to the exorbitant privilege.
    Date: 2019–08–18
  26. By: Lubello, Federico; Petrella, Ivan; Santoro, Emiliano
    Abstract: We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers' assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers' financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
    Keywords: Bank Collateral; Banking; capital misallocation; liquidity; macroprudential policy
    JEL: E32 E44 G21 G28
    Date: 2019–06
  27. By: Emiliano Brancaccio; Raffaele Giammetti; Milena Lopreite; Michelangelo Puliga
    Abstract: Based on a connection between network analysis and B-VAR models, this paper provides a first empirical evidence of the relationships between capital centralization expressed in terms of network control on one hand and monetary policy guidelines and business cycles on the other. Our findings suggest that a tightening monetary policy leads to a decrease in the fraction of top shareholders of network control which results in a higher centralization of capital; and that a higher centralization of capital, in turn, leads to a reduction of GDP with respect to its trend. These relations are confirmed both for the United States and the Euro Area.
    Keywords: network analysis; ownership and control networks; centralization of capital; monetary policy; business cycle; financial crisis; B-VAR models.
    Date: 2019–08–22

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