nep-cba New Economics Papers
on Central Banking
Issue of 2019‒09‒16
twenty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy Expectations and Money Market in Japan : Analysis of Non-traditional Monetary Policy Regimes By Takayasu Ito
  2. Optimal Inflation Targeting in a Dual-Exchange Rate Oil Economy By Hossein Tavakolian; Hamed Ghiaie
  3. From Cash to Central Bank Digital Currencies and Cryptocurrencies: a balancing act between modernity and monetary stability By Ansgar Belke; Edoardo Beretta
  4. ECB corporate QE and the loan supply to bank-dependent firms By Betz, Frank; De Santis, Roberto A.
  5. Fundamental uncertainty about the natural rate of interest: Info-gap as guide for monetary policy By Yakov Ben-Haim; Jan Willem van den End
  6. On the Markov Switching Welfare Cost of Inflation By Apostolos Serletis; Wei Dai
  7. Ramsey Optimal Policy in the New-Keynesian Model with Public Debt By Jean-Bernard Chatelain; Kirsten Ralf
  8. Did interest rates at the zero lower bound affect lending of com-mercial banks? Evidence for the Euro area By Ansgar Belke; Christian Dreger
  9. Macroprudencial and Monetary Policies : The Need to Dance the Tango in Harmony By Jose David GARCIA REVELO; Yannick LUCOTTE; Florian PRADINES-JOBET
  10. The Countercyclical Capital Buffer and the Composition of Bank Lending By Raphael A. Auer; Steven Ongena
  11. Optimal Macroprudential Policy and Asset Price Bubbles By Nina Biljanovska; Lucyna Gornicka; Alexandros Vardoulakis
  12. Financial structure, institutional quality and monetary policy transmission: A Meta-Analysis. By Bhattacharya, Rudrani; Tripathi, Shruti; Chowdhury, Sahana Roy
  13. Credit risk in commercial real estate bank loans: the role of idiosyncratic versus macro-economic factors By Dimitris Mokas; Rob Nijskens
  14. Oil price shocks, monetary policy and current account imbalances within a currency union By Ansgar Belke; Timo Baas
  15. A Comprehensive Evaluation of Measures of Core Inflation in Canada: An Update By Helen Lao; Ceciline Steyn
  16. Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions By Jean-Bernard Chatelain; Kirsten Ralf
  17. US monetary policy since the 1950s and the changing content of FOMC minutes By Pierre L Siklos
  18. A Macroprudential Theory of Foreign Reserve Accumulation By Fernando Arce; Julien Bengui; Javier Bianchi
  19. Regulating the doom loop By Alogoskoufis, Spyros; Langfield, Sam
  20. Exposure to Daily Price Changes and Inflation Expectations By Francesco D’Acunto; Ulrike Malmendier; Juan Ospina; Michael Weber
  21. Inflation expectations anchoring: new insights from micro evidence of a survey at high-frequency and of distributions By Nikos Apokoritis; Gabriele Galati; Richhild Moessner; Federica Teppa
  22. State dependence of monetary policy across business, credit and interest rate cycles By Alpanda, Sami; Granziera, Eleonora; Zubairy, Sarah

  1. By: Takayasu Ito (Meiji University, Scool of Commerce)
    Abstract: When the Bank of Japan (BOJ) adopts interest rate targeting under a comprehensive easing policy, the yield curve up to 12 months in the Japanese money market is driven by a single trend. It is caused by monetary policy expectations. The regime of interest rate targeting gives a sense of comfort to market participants that the regular transmission mechanism works in the yield curve of the money market. Thus, monetary policy expectations are fully transmitted to the yield curve end. On the other hand, monetary policy expectations are not fully transmitted to the yield curve end under either the quantitative and qualitative easing policy or the negative easing policy. The quantitative and qualitative easing policy and the negative interest rate policy paralyze the market function in the short-term money market. Central bankers should always keep it in mind that the transmission of interest rates along the yield curve is an integral part of the mechanism through which monetary policy affects the economy.
    Keywords: Monetary Policy Expectations, Money Market, Non-traditional Monetary Policy
    JEL: E40 E58 G10
    Date: 2019–07
  2. By: Hossein Tavakolian; Hamed Ghiaie (Université de Cergy-Pontoise, THEMA)
    Abstract: This paper develops a DSGE model for a small open oil economy which has two rates at official and free (unofficial) markets for foreign currency. In this model, government has access to foreign currency by supplying oil in international markets. Using the oil revenue, the government provides the Central Bank and essential imported goods with foreign currency at the official rate; Other goods are imported at the unofficial rate. The CB’s objective is to minimize the difference between nominal free and official exchange rates. To do so, the CB uses three policy instruments: i) either holds foreign currency as financial assets or sells it to the free market at the unofficial rate, ii) nominal monetary base growth rate and iii) nominal depreciation of official exchange rate. These instruments are applied in this paper in four scenarios of CPI targeting and PPI targeting in both dual and unified exchange rate regimes. Through a welfare analysis, this paper indicates that PPI targeting works better than CPI targeting in this economy. As well, this paper illustrates that PPI targeting under unified system considerably increases welfare. In addition, the interaction between fiscal and monetary policy is assessed. The results show that monetary and exchange rate policies are also more effective when fiscal authority follows a procyclical fiscal rule.
    Keywords: DSGE model, Dual-Exchange Rate System, PPI Inflation Targeting.
    JEL: E52 E58 F41
    Date: 2019
  3. By: Ansgar Belke; Edoardo Beretta
    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 scientific as well as banking and political level.
    Keywords: cash, central banks, cryptocurrencies, digital currencies, monetary systems
    JEL: E4 E5 G21 G23
    Date: 2019–09
  4. By: Betz, Frank; De Santis, Roberto A.
    Abstract: Using a representative sample of businesses in the euro area, we show that Eurosystempurchases of corporate bonds under the Corporate Sector Purchase programme (CSPP)increased the net issuance of debt securities, triggering a shift in bank loan supply infavour of firms that do not have access to bond-based financing. Identification comes frommatching bank-dependent firms to their lenders and accounting for the effect of CSPPon banks’ activity in the syndicated loan market. In a difference-in-differences setting,we show that credit access improved relatively more for firms borrowing from banksrelatively more exposed to CSPP-eligible firms. Unlike in previous studies, this resultapplies regardless of bank balance sheet quality as measured by Tier 1 and NPL ratios. JEL Classification: E52, E58, G01, G21, G28
    Keywords: corporate sector purchase programme, ECB, loan supply, Unconventional monetary policy
    Date: 2019–09
  5. By: Yakov Ben-Haim; Jan Willem van den End
    Abstract: In this paper we assume that the natural rate of interest is fundamentally uncertain. Based on a small scale macroeconomic model, info-gap theory is used to rank different monetary policy strategies in terms of their robustness against this uncertainty. Applied to the euro area, we find that a strategy that is responsive to deviations from the policy targets is more robust against natural rate uncertainty than the historical response of the ECB as reflected in an estimated Taylor rule. An inert or passive monetary strategy is least robust. Our analysis presents a methodology that is applicable in a wide range of policy analyses under deep uncertainty.
    Keywords: Monetary Policy; Monetary Strategy; Knightian uncertainty; info-gaps; satisficing
    JEL: E42 E47 E52
    Date: 2019–08
  6. By: Apostolos Serletis (University of Calgary); Wei Dai (University of Calgary)
    Abstract: This paper uses the Markov switching approach to account for instabilities in the long- run money demand function and compute the welfare cost of inflation in the United States. In doing so, it circumvents the problem of data-mining of some earlier seminal contributions on these issues, allowing for complicated nonlinear dynamics and sudden changes in the parameters of the money demand function. Moreover, it extends the sample period, and investigates the robustness of results to alternative money demand specifications, monetary aggregation procedures, and assumptions regarding dynamics aspects of the money demand specification.
    Keywords: Welfare cost of inflation, Markov regime switching, Divisia money
    JEL: C22 E41 E52
    Date: 2019–08–30
  7. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: This paper compares Ramsey optimal policy for the new-Keynesian model with public debt with its .scal theory of the price level (FTPL) equilibrium. Both the fiscal theory of the price level and Ramsey optimal policy implies that a de.cit shock is instantaneously followed by an increase of in.ation and output gap. But each optimal policy parameters belongs in di¤erent sets with respect to FTPL. The optimal .scal rule parameter implies local stability of public debt dynamics ("passive fiscal policy"). The optimal Taylor rule parameter for in.ation is larger than one. The optimal Taylor rule parameter for output gap is negative, because of the intertemporal substitution e¤ect of interest rate on output gap. Both Taylor rule optimal parameters implies the local stability of inflation and output gap dynamics.
    Keywords: Fiscal theory of the Price Level,Ramsey optimal policy
    Date: 2019–09
  8. By: Ansgar Belke; Christian Dreger
    Abstract: The paper examines the bank lending activities of banks in a low interest rate environ-ment. External financing of small- and medium-sized enterprises in the euro area primari-ly takes place via bank loans and not through capital markets. Based on the Bankscope database, bank balance sheet data is utilized. Control variables are included, such as for the system of banking regulation. The panel estimation includes 706 banks from 15 Euro area member states and is conducted for the period 2000 to 2015. All models show a significant positive impact of lower interest rates on net lending. In particular, the results do not indicate that credit is restricted if interest rates move towards the zero-lower bound.
    Keywords: Bank lending, banking regulation, monetary transmission mechanisms, low interest rate environment
    JEL: E44 E51 E52
    Date: 2019–07
  9. By: Jose David GARCIA REVELO; Yannick LUCOTTE; Florian PRADINES-JOBET
    Keywords: , Macroprudential policy, Monetary policy, Financial stability, Excessive credit growth, Policy synchronisation.
    Date: 2019
  10. By: Raphael A. Auer; Steven Ongena
    Abstract: Do macroprudential regulations on residential lending influence commercial lending behavior too? To answer this question, we identify the compositional changes in banks’ supply of credit using the variation in their holdings of residential mortgages on which extra capital requirements were uniformly imposed by the countercyclical capital buffer (CCyB) introduced in Switzerland in 2012. We find that the CCyB’s introduction led to higher growth in commercial lending although this was unrelated to conditions in regional housing markets. Interest rates and fees charged to the firms concurrently increased. We rationalize these findings in a model featuring both private and firm-specific collateral.
    Keywords: macroprudential policy, spillovers, credit, bank capital, systemic risk
    JEL: E51 E58 E60 G01 G21 G28
    Date: 2019
  11. By: Nina Biljanovska; Lucyna Gornicka; Alexandros Vardoulakis
    Abstract: An asset bubble relaxes collateral constraints and increases borrowing by credit-constrained agents. At the same time, as the bubble deflates when constraints start binding, it amplifies downturns. We show analytically and quantitatively that the macroprudential policy should optimally respond to building asset price bubbles non-monotonically depending on the underlying level of indebtedness. If the level of debt is moderate, policy should accommodate the bubble to reduce the incidence of a binding collateral constraint. If debt is elevated, policy should lean against the bubble more aggressively to mitigate the pecuniary externalities from a deflating bubble when constraints bind.
    Keywords: Economic conditions;Financial crises;Demand;Economic stabilization;Price indexes;Collateral constraints,rational bubbles,macroprudential regulation,optimal policy,WP,asset price bubble,overvaluation,asset price,Euler equation,bubble
    Date: 2019–08–30
  12. By: Bhattacharya, Rudrani (National Institute of Public Finance and Policy); Tripathi, Shruti (National Institute of Public Finance and Policy); Chowdhury, Sahana Roy (International Management Institute, Kolkata)
    Abstract: The long-standing empirical literature of monetary policy transmission acknowledges weak transmission of monetary policy shock to real activities and inflation in emerging economies. Fragile financial system, low level of financial integration and weak institutions are often cited as the reasons for lack of monetary policy transmission in these economy. This paper investigates to what extent these factors explain the variation in the extent of monetary policy transmission in a comprehensive set of developed and developing economies using meta-analysis framework. We find that the degree of financial development captured by various financial indicators explain cross-country variations in the magnitude and time lag of monetary policy transmission. We also find the role of financial accelerator in transmission magnitude to output growth.
    Keywords: Financial developmen ; Institutions ; Monetary Policy Transmission ; Meta-Analysis
    JEL: C51 E52 E58
    Date: 2019–07
  13. By: Dimitris Mokas; Rob Nijskens
    Abstract: The commercial real estate market is pro-cyclical. This feature, together with the relative size of the industry and the large capital inflows, has made this sector relevant for financial stability. Using a novel loan level data set covering the commercial real estate portfolios of Dutch banks we aim to uncover potential drivers of distress in commercial real estate loans. Furthermore, we estimate the relative importance of idiosyncratic and systematic factors and emphasize the importance of bank behavior for distinguishing between good and bad credit growth. We find that loans originated near the peak of the cycle are riskier, confirming the pro-cyclical nature of the market. As opposed to loans originated during busts, the risk of boom loans does not decrease when economic conditions improve. Idiosyncratic factors correlated with higher credit risk are loan-to-value ratios and interest rates, especially when coupled with variable rate contracts. Moreover, we find that collateral type plays a role, as loans for non-residential (office, retail, industrial) real estate with higher vacancy rates are riskier. These results have implications for both macroprudential and microprudential supervision, as they demonstrate the pro-cyclicality of the market and show that indicators like loan-to-value, interest rate structure and vacancy rates must be monitored more carefully in boom times.
    Keywords: macroprudential policy; risk monitoring; commercial real estate; procyclicality of credit
    JEL: E32 E44 E58 G21 G3 G33
    Date: 2019–08
  14. By: Ansgar Belke; Timo Baas
    Abstract: For more than two decades now, current-account imbalances are a crucial issue in the international policy debate as they threaten the stability of the world economy. More recently, the government debt crisis of the European Union shows that internal current account imbalances inside a currency union may also add to these risks. Oil price fluctuations and a contracting monetary policy that reacts on oil prices, previously discussed to affect the current account may also be a threat to the currency union by changing internal imbalances. Therefore, in this paper, we analyze the impact of oil price shocks on current account imbalances within a currency union. Differences in institutions, especially labor market institutions and trade result in an asymmetric reaction to an otherwise symmetric shock. In this context, we show that oil price shocks can have a long-lasting impact on internal balances, as the exchange rate adjustment mechanism is not available. The common monetary policy authority, however, can reduce such effects by specifying an optimum monetary policy target. Nevertheless, we also show that there is no single best solution. CPI, core CPI or an asymmetric CPI target all come at a cost either regarding an increase in unemployment or increasing imbalances.
    Keywords: Current account deficit, Oil price shocks, DSGE models, Search and matching labor market, Monetary policy
    JEL: E32 F32 Q43
    Date: 2019–03
  15. By: Helen Lao; Ceciline Steyn
    Abstract: We provide an updated evaluation of the value of various measures of core inflation that could be used in the conduct of monetary policy. We find that the Bank of Canada’s current preferred measures of core inflation—CPI-trim, CPI-median and CPI-common—continue to outperform alternative core measures across a range of criteria. These measures remain less biased, less volatile and much more persistent relative to alternative core measures and CPI inflation. They are also still moving with the economic cycle. Our analysis shows that historical revisions have been relatively small among these three core inflation measures since their inception and that CPI-common seems less prone to revisions and sector-specific shocks than CPI-trim and CPI-median.
    Keywords: Inflation and prices; Monetary policy framework
    JEL: E31 E52
    Date: 2019–09
  16. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: The reference model of frictionless endowment economies includes a Fisher relation for the real interest rate and government intertemporal budget constraint. For this model, Ramsey optimal policy mix is a unique equilibrium with an interest rate peg and a "passive" fiscal rule with a negative-feedback value of its parameter stabilizing public debt. This is a third equilibrium with respect to the two usual equilibria with ad hoc policy rules. The first one has passive fiscal policy and an active monetary policy rule parameter destabilizing in.ation. The second one has an active fiscal policy rule parameter destabilizing public debt and a passive monetary policy which includes the case of an interest rate peg. :
    Keywords: Frictionless endowment economy,Fiscal theory of the Price Level,Ramsey optimal policy,Interest Rate Rule,Fiscal Rule Keywords: Frictionless endowment economy,Fiscal Rule
    Date: 2019–09
  17. By: Pierre L Siklos
    Abstract: Content analysis is used to analyze 60 years of FOMC minutes. Since there is no unique algorithm to quantify content two different algorithms are applied. Wordscores compares content relative to a chosen benchmark while DICTION is an alternative algorithm that is specifically designed to capture various elements that capture the sentiment or tone conveyed in a text. The resulting indicators are then incorporated into a VAR. The content of FOMC minutes is found to be significantly related to the state of the economy, notably real GDP growth and changes in the fed funds rate. However, the relationship between content and macroeconomic conditions changes after 1993 when minutes are made public with a lag. Both content indicators also suggest substantive changes in the content of FOMC minutes since the 1950s in terms of the FOMC’s dovishness or hawkishness.
    Keywords: FOMC minutes, Wordscores, DICTION, monetary policy stance, vector autoregression
    JEL: E58 E52 E31 E37
    Date: 2019–09
  18. By: Fernando Arce; Julien Bengui; Javier Bianchi
    Abstract: This paper proposes a theory of foreign reserves as macroprudential policy. We study an open economy model of financial crises, in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. The optimal reserve accumulation policy leans against the wind and significantly reduces the exposure to financial crises. The theory is consistent with the joint dynamics of private and official capital flows, both over time and in the cross section, and can quantitatively account for the recent upward trend in international reserves.
    JEL: E0 F3 F31
    Date: 2019–09
  19. By: Alogoskoufis, Spyros; Langfield, Sam
    Abstract: Euro area governments have committed to break the doom loop between banks and sovereigns.But policymakers disagree on how to treat sovereign exposures in bank regulation. Our contributionis to model endogenous sovereign portfolio reallocation by banks in response toregulatory reform. Simulations highlight a tension between concentration and credit risk inportfolio reallocation. Resolving this tension requires regulatory reform to be complementedby an expansion in the portfolio opportunity set to include an area-wide low-risk asset. Byreinvesting into such an asset, banks would reduce both their concentration and credit riskexposure. JEL Classification: G01, G11, G21, G28
    Keywords: Bank regulation, sovereign risk, systemic risk
    Date: 2019–09
  20. By: Francesco D’Acunto; Ulrike Malmendier; Juan Ospina; Michael Weber
    Abstract: We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals' inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation---which excludes grocery prices---to design expectations-based policies might lead to systematic mistakes.
    JEL: C83 D14 D84 D9 E31 E52 G11
    Date: 2019–09
  21. By: Nikos Apokoritis; Gabriele Galati; Richhild Moessner; Federica Teppa
    Abstract: We shed new light on the anchoring of long-term euro area inflation expectations since the crisis by using micro evidence from a new survey at high (weekly) frequency. We find that long-term inflation expectations remained well anchored to the ECB's inflation aim, which has acted as a focal point. By contrast, we find no evidence that professional forecasts (reported by Consensus Economics) acted as focal points. But there are subtle signs of long-term inflation expectations not being perfectly well-anchored. Using measures based on the distribution of inflation expectations from a quarterly survey, namely uncertainty based on the full distribution, the probability of expected long-term inflation lying between 1.5% and 2.5%, and the effect of short-term on long-term deflation risk, we find that long-term euro area inflation expectations have remained well-anchored, and have become better-anchored between 2011 and 2018.
    Keywords: Inflation expectations
    JEL: E31 E58
    Date: 2019–08
  22. By: Alpanda, Sami; Granziera, Eleonora; Zubairy, Sarah
    Abstract: We investigate how the business, credit and interest rate cycles affect the monetary transmission mechanism, using state-dependent local projection methods and data from 18 advanced economies. We exploit the time-series variation within countries, as well as cross-sectional variation across countries, to investigate this issue. We find that the impact of monetary policy shocks on output and most other macroeconomic and financial variables is smaller during periods of economic downturns, high household debt, and high interest rates. We then build a small-scale theoretical model to rationalize these facts. The model highlights the presence of collateral and debt-service constraints on household borrowing and refinancing as a potential cause for state dependence in monetary policy with respect to the business, credit, and interest rate cycles.
    JEL: E21 E32 E52
    Date: 2019–09–06

This nep-cba issue is ©2019 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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