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on Central Banking |
| By: | Serhan Cevik; Tianle Zhu |
| Abstract: | Monetary independence is at the core of the macroeconomic policy trilemma stating that an independent monetary policy, a fixed exchange rate and free movement of capital cannot exist at the same time. This study examines the relationship between monetary autonomy and inflation dynamics in a panel of Caribbean countries over the period 1980–2017. The empirical results show that monetary independence is a significant factor in determining inflation, even after controlling for macroeconomic developments. In other words, greater monetary policy independence, measured as a country’s ability to conduct its own monetary policy for domestic purposes independent of external monetary influences, leads to lower consumer price inflation. This relationship—robust to alternative specifications and estimation methodologies—has clear policy implications, especially for countries that maintain pegged exchange rates relative to the U.S. dollar with a critical bearing on monetary autonomy. |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/197&r=all |
| By: | Bindseil, Ulrich |
| Abstract: | In some recent studies, the question of the origins of central banking has been revisited, suggesting that beyond Swedish and British central banking, a number of earlier European continental institutions would also have played an important role. However, it has often been difficult to access the charters and regulations of these early central banks – in particular in English. This paper contributes to closing this gap by introducing and providing translations of some charters and regulations of six pre 1800 central banks in France and Germany. The six early public banks displayed varying levels of success and duration, and qualify to a different degree as central banks. An overview table maps the articles of the early central banks’ charters and regulations into key central banking topics. The texts also provide evidence of the role of central banking legislation, and of the distinction between, on the one side, the statutes and charters of the banks, and on the other side the operational aspects which tend to be framed by separate rules and regulations. Finally, the texts provide evidence of the policy objectives of early central banks, including in particular those of a monetary nature. To put these documents into context, the objectives, balance sheet structure, achievements and closure of each central bank are briefly summarised. JEL Classification: E32, E5, N23 |
| Keywords: | central bank governance, central bank mandates, central bank operations, central bank regulations, origins of central banking |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:2019234&r=all |
| By: | Rohan Kekre (University of Chicago); Moritz Lenel (Princeton University) |
| Abstract: | We explore the effects of monetary, fiscal, and macroprudential policies on risk premia and investment in a heterogeneous agent New Keynesian environment. Heterogeneity in agents' marginal propensity to save in capital (MPSK) summarizes differences in risk aversion, portfolio constraints, and background risk. Policies which redistribute to agents with high MPSKs reduce risk premia and, absent a monetary policy tightening, raise investment. We quantitatively evaluate the role of this mechanism for the transmission of conventional monetary policy. An unexpected reduction in the nominal interest rate redistributes to agents with high MPSKs. We characterize the necessary heterogeneity in MPSKs to rationalize the observed stock market and investment responses to monetary policy shocks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1423&r=all |
| By: | Sandrine Lecarpentier; Cyril Pouvelle |
| Abstract: | The objective of the paper is to investigate how banks adjust the structure of their balance sheet as a response to a funding shock and to propose a methodology for projecting banks’ liquidity ratios in a top-down stress test scenario. In line with a theoretical model assessing the effects of capital and liquidity constraints on banks’ behaviour, we estimate the joint system of banks’ solvency and liquidity ratios, using for proxy of the latter, the "liquidity coefficient" implemented in France before Basel III. We provide evidence of a positive effect of the solvency ratio on the liquidity coefficient: a high level of solvency enables the liquidity coefficient to improve due to a more stable funding structure. By contrast, we do not find firm evidence of an impact of the liquidity coefficient on the solvency ratio. We also show that financial variables capturing international markets’ risk aversion and tensions in the interbank market have a significant impact during periods of stress only, confirming the evidence of strong interactions between market liquidity and bank funding liquidity during crisis periods. |
| Keywords: | Bank Capital Regulation, Bank Liquidity Regulation, Basel III, stress tests |
| JEL: | G28 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2019-18&r=all |
| By: | Dániel Baksa (International Monetary Fund & Central European University); Zsuzsa Munkácsi (International Monetary Fund) |
| Abstract: | The empirical and theoretical evidence on the inflation impact of population aging is mixed, and there is no evidence regarding the volatility of inflation. Based on advanced economies’ data and a DSGE-OLG model - a multi-period general equilibrium framework with overlapping generations, - we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper is also the first to discuss, using this framework, how aging affects the short-term cyclical behavior of the economy and the transmission channels of monetary policy. Further, we are also the first to examine the interplay between aging and optimal central bank policies. As aging redistributes wealth among generations, generations behave differently, and the labor force becomes more scarce with aging, our model suggests that aging makes monetary policy less effective, and aggregate demand less elastic to changes in the interest rate. Moreover, in more gray societies central banks should react more strongly to nominal variables, and in a very old society the nominal GDP targeting rule might become the most effective monetary policy rule to compensate for higher inflation volatility. |
| Keywords: | aging, monetary policy transmission, optimal monetary policy, inflation targeting |
| JEL: | E31 E52 J11 |
| Date: | 2019–09–27 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:67&r=all |
| By: | Eugenio M Cerutti; Carolina Osorio Buitron |
| Abstract: | This paper analyzes the drivers of cross-border bank lending to 49 Emerging Markets (EMs) during the period 1990Q1-2014Q4, by assessing the impact of monetary, financial and real sector shocks in both the US and the euro area. The literature has traditionally highlighted the influence of US monetary policy on driving cross-border bank flows, and more recently the importance of both US and Euro Area (EA) financial/banking sectors’ related variables. Our contribution is the simultaneous analysis of the role of these US and EA drivers, as well as their interactions with real sector shocks. We corroborate the negative impact of US monetary policy tightening on cross-border lending to EMs, but we find that EA monetary policy seems to have an impact mostly on Emerging Europe, reflecting the fact that cross-border lending to most other EM regions is dollar denominated. We also find that real sector shocks in both the US and EA trigger an increase in cross-border lending, but less in EA when modeling the financial sector. Finally, for financial sector shocks, such as those associated with a decrease in bank leverage, our results indicate a broad-based overall contraction of cross-border lending if the shock originates in the US, and heterogenous effects across borrowing regions if the shock originates in the EA. |
| Date: | 2019–09–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:19/199&r=all |
| By: | Albert Queralto (Federal Reserve Board) |
| Abstract: | We use a two-country New Keynesian model with balance sheet constraints to investigate the magnitude of international spillovers of U.S. monetary policy. Home borrowers obtain funds from domestic households in domestic currency, as well as from residents of the foreign economy (the U.S.) in dollars. In our economy, foreign lenders differ from domestic lenders in their ability to recover resources from defaulting borrowers' assets, leading to more severe financial constraints for foreign debt than for domestic borrowing. As a consequence, a deterioration in borrowers' balance sheets induces a rise in the home currency's premium and an exchange rate depreciation. We use the model to investigate how spillovers are affected by the degree of currency mismatches in balance sheets, and whether the latter make it desirable for policy to target the exchange rate. We find that the magnitude of spillovers is significantly enhanced by the degree of currency mismatches. Our findings also suggest that using monetary policy to stabilize the exchange rate is not necessarily more desirable with greater balance sheet mismatches and may actually exacerbate short-run exchange rate volatility. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:993&r=all |
| By: | Pedro Henrique da Silva Castro |
| Abstract: | Is monetary policy power reduced in the presence of governmental credit with subsidized interest rates, insensitive to the monetary cycle? I argue this question has not yet been reasonably answered even though a virtual consensus seems to have been reached. Using a general analytical decomposition I show that the available microeconometric evidence is not necessarily informative about the macroeconomic effect of interest, due to the presence of general equilibrium effects. Moreover, evidence of decreased power over output does not imply that power over inflation is also decreased. A simple New Keynesian model where fi rms take credit, from both the market and the government, to finance working capital needs is presented to exemplify those possibilities. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:505&r=all |
| By: | Todorov, Karamfil |
| Abstract: | This paper studies the impact of the European Central Bank’s (ECB) Corporate Sector Purchase Programme (CSPP) announcement on prices, liquidity, and debt issuance in the European corporate bond market using a data set on bond transactions from Euroclear. I find that the quantitative easing (QE) programme increased prices and liquidity of bonds eligible to be purchased substantially. Bond yields dropped on average by 30 basis points (bps) (8%) after the CSPP announcement. Tri-party repo turnover rose by 8.15 million USD (29%), and bilateral turnover went up by 7.05 million USD (72%). Bid-ask spreads also showed significant liquidity improvement in eligible bonds. QE was successful in boosting corporate debt issuance. Firms issued 2.19 billion EUR (25%) more in QE-eligible debt after the CSPP announcement, compared to other types of debt. Surprisingly, corporates used the attracted funds mostly to increase dividends. These effects were more pronounced for longer-maturity, lower-rated bonds, and for more credit-constrained, lower-rated firms. |
| Keywords: | Quantitative easing; Corporate Sector Purchase Programme; ECB; Bond market; Corporate debt issuance |
| JEL: | E52 E58 G12 G18 |
| Date: | 2019–08–09 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:101665&r=all |
| By: | Francesco Bianchi; Howard Kung; Thilo Kind |
| Abstract: | This paper presents market-based evidence that President Trump influences expectations about monetary policy. The main estimates use tick-by-tick fed funds futures data and a large collection of Trump tweets criticizing the conduct of monetary policy. These collected tweets consistently advocate that the Fed lowers interest rates. Identification in our high-frequency event study exploits a small time window around the precise time stamp for each tweet. The average effect of these tweets on the expected fed funds rate is strongly statistically significant and negative, with a cumulative effect of around negative 10 bps. Therefore, we provide evidence that market participants believe that the Fed will succumb to the political pressure from the President, which poses a significant threat to central bank independence. |
| JEL: | E52 E58 G1 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26308&r=all |
| By: | Kozo Ueda (Waseda University) |
| Abstract: | Central banks across the globe are paying increasing attention to the distributional aspects of monetary policy. In this study, we focus on reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms tend to grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into endogenous growth with heterogeneous firms. The model shows that, under a high nominal growth rate, firms of inferior quality bear a heavier burden of menu cost payments than do firms of superior quality. This outcome increases the market share of superior firms, while some inferior firms exit the market. This reallocation effect, if strong, yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity, whereas standard New Keynesian models often conclude that zero nominal growth is optimal. Moreover, the presence of menu costs can improve welfare. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:128&r=all |
| By: | Matteo, Gatti; Tommaso, Oliviero |
| Abstract: | Deposit insurance is one of the main pillars of banking regulation meant to safeguard financial stability. In early 2009, the EU increased the minimum deposit insurance limit from €20,000 to €100,000 per bank account with the goal of achieving greater stability in the financial markets. Italy had already set a limit of €103,291 in 1994. We evaluate the impact of the new directive on the banks’ average interest rate on customer deposits by comparing banks in the Eurozone countries to those in Italy, before and after the policy change. The comparability between the two groups of banks is improved by means of a propensity score matching. We find that the increase in the deposit insurance limit led to a significant decrease in the cost of funding per unit of customer deposit and that the effect is stronger for riskier banks, suggesting that the policy reduced the risk premium demanded by depositors. |
| Keywords: | Deposit Insurance, Average Deposit Interest Rate, Cost of Deposit Funding |
| JEL: | G21 G28 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:419&r=all |
| By: | Simone Auer (Bank of Italy); Marco Bernardini (Bank of Italy); Martina Cecioni (Bank of Italy) |
| Abstract: | Using country-industry level data and high-frequency identified monetary policy shocks, we find evidence of a positive but non-linear relationship between corporate leverage and the effectiveness of monetary policy in the euro area. More leveraged industries tend to increase their production more strongly after an expansionary monetary policy shock, pointing to a non-negligible role of financial frictions in the transmission mechanism. However, at high leverage ratios this positive relation becomes weaker and eventually inverts. This finding is consistent with recent theoretical studies arguing about the role of credit risk in dampening the financial accelerator channel. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1102&r=all |
| By: | Hassan Afrouzi (Columbia University); Laura Veldkamp (Columbia University) |
| Abstract: | Recent work finds that people's beliefs about inflation are systematically upward biased. Since inflation expectations are central to the efficacy of monetary policy, understanding these expectations, and their biases, is important for policy. While one can always find preference-based explanations for bias, the fact that more informed agents have less upward bias, suggests some connection to information, as opposed to preferences. This paper proposes a rational Bayesian explanation for the bias: Agents with parameter uncertainty over positively-skewed distributions have a positive bias in their forecast. We use inflation and survey data to show that this mechanism can quantitatively explain the magnitude of the bias. The model implies that communicating about inflation skewness may be an important dimension of forward guidance. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:894&r=all |
| By: | Konstantin Egorov (New Economic School); Dmitry Mukhin (Yale University) |
| Abstract: | The recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the optimal non-cooperative monetary policy and the welfare implications of dollar pricing in a context of an open economy model with nominal rigidities. We establish the following results: 1) as in a closed economy, the optimal policy in both the U.S. and other economies stabilizes prices of local producers; 2) this policy generates asymmetric spillovers between countries such that the U.S. has a free floating exchange rate and an independent monetary policy, while other countries partially peg their exchange rates to the dollar giving rise to a “global monetary cycle”; 3) capital controls cannot insulate countries from U.S. spillovers; 4) the optimal cooperative policy is hard to implement because of the conflict of interest between countries; 5) there are potential gains from dollar pricing for the U.S., while other countries can benefit from forming a currency union such as the Eurozone. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1510&r=all |
| By: | Ester Faia (Goethe University Frankfurt); Vincenzo Pezone (Goethe University and SAFE) |
| Abstract: | Using a unique confidential contract level dataset merged with firm-level asset price data, we find robust evidence that firms' stock market valuations and employment levels respond more to monetary policy announcements the higher the degree of wage rigidity. Data on the renegotiations of collective bargaining agreements allow us to construct an exogenous measure of wage rigidity. We also find that the amplification induced by wage rigidity is stronger for firms with high labor intensity and low profitability, providing evidence of distributional consequences of monetary policy. We rationalize the evidence through a model in which firms in different sectors feature different degrees of wage rigidity due to staggered renegotiations vis-a-vis unions. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:278&r=all |
| By: | Francesco Ferrante (Federal Reserve Board); Matthias Paustian (Federal Reserve Board) |
| Abstract: | We develop an incomplete-markets heterogeneous agent New-Keynesian (HANK) model in which households are allowed to borrow using nominal debt. We show that, in this framework, forward guidance, that is the promise by the central bank to lower future interest rates, can be a powerful policy tool, especially when the economy is in a liquidity trap. In our model, expected lower rates imply a future transfer of wealth from savers to borrowers, reducing precautionary motives and stimulating current demand and inflation. In addition, at the time of the policy announcement, debt deflation generates also a wealth transfer towards constrained agents, who have high marginal propensity to consume, further increasing aggregate consumption and inflation, and igniting a positive feedback loop. These results contrast with previous research on HANK models, which focused on frameworks where agents were not allowed to borrow, and which found negligible effects of forward guidance. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1256&r=all |
| By: | Ricardo Reyes-Heroles (Federal Reserve Board); Gabriel Tenorio |
| Abstract: | We characterize optimal macroprudential policy in response to external risks---shocks to the level and volatility of world interest rates--in a small open economy subject to financial crises. Low and stable world interest rates reinforce overborrowing arising from a pecuniary externality generated by collateral constraints that depend on asset prices. We show that this mechanism leads to greater exposure to crises typically accompanied by abrupt increases in interest rates and a persistent rise in their volatility, as commonly observed for crises in emerging market economies. A tax on international borrowing implementing the optimal policy depends on two factors, the incidence and severity of future crises. We show that the interaction of these factors implies that the tax responds to external risks even though equilibrium allocations do not, and that it does so non-monotonically with respect to the direction of external shocks|higher macroprudential taxes are not always the optimal policy in response to an increase in external risks|. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1138&r=all |
| By: | George-Marios Angeletos (M.I.T.); Karthik Sastry (Massachusetts Institute of Technology) |
| Abstract: | Should a policymaker offer forward guidance by committing to a path for the policy instrument or a target for an equilibrium outcome? We study how the optimal approach depends on plausible bounds on agents’ depth of knowledge and rationality. Agents make mistakes in predicting, or reasoning about, the behavior of others and the GE effects of policy. The optimal policy minimizes the bite of such mistakes on implementability and welfare. This goal is achieved by fixing and com- municating an outcome target if and only if the GE feedback is strong enough. Our results suggest that central banks should stop talking about interest rates and start talking about unemployment when faced with a steep Keynesian cross or a prolonged liquidity trap. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1537&r=all |
| By: | Ricardo Lagos (New York University); Gaston Navarro (Federal Reserve Board) |
| Abstract: | The federal funds market changed drastically during the last decade, as new policy tools were implemented while large-scale asset purchases programs increased reserve balances to unprecedented levels. We develop a model of the federal funds market that incorporates most of its salient features and recent changes. The model includes heterogeneous types of banks and we estimate the parameters governing this heterogeneity using bank-level transaction data. Consistent with the data, a small set of very active banks in the model participate in the majority of loan transactions. We use the model to analyze the consequences of a balance sheet normalization. We argue that the increase in interest rates will be larger if reserves decrease disproportionately more for the set of active banks. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1521&r=all |
| By: | Vincent Sterk (University College London); Wei Cui (University College London) |
| Abstract: | Is Quantitative Easing (QE) an effective substitute for conventional monetary policy? We study this question using a quantitative heterogeneous-agents model with nominal rigidities, as well as liquid and partially liquid wealth. The direct effect of QE on aggregate demand is determined by the difference in marginal propensities to consume out of the two types of wealth, which is large according to the model and empirical studies. A comparison of optimal QE and interest rate rules reveals that QE is indeed a very powerful instrument to anchor expectations and to stabilize output and inflation. However, QE interventions come with strong side effects on inequality, which can substantially lower social welfare. A very simple QE rule, which we refer to as Real Reserve Targeting, is approximately optimal from a welfare perspective when conventional policy is unavailable. We further estimate the model on U.S. data and find that QE interventions greatly mitigated the decline in output during the Great Recession. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:29&r=all |
| By: | Ṣebnem Kalemli-Özcan |
| Abstract: | I show that monetary policy divergence vis-a-vis the U.S. has larger spillover effects in emerging markets than advanced economies. The monetary policy of the U.S. affects domestic credit costs in other countries through its effect on global investors’ risk perceptions. Capital flows in and out of emerging market economies are particularly sensitive to fluctuations in such risk perceptions and have a direct effect on local credit spreads. Domestic monetary policy is ineffective in mitigating this effect as the pass-through of policy rate changes into short-term interest rates is imperfect. This disconnect between short rates and monetary policy rates is explained by changes in risk perceptions. A key policy implication of my findings is that emerging markets’ monetary policy actions designed to limit exchange rate volatility can be counterproductive. |
| JEL: | E0 F0 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26297&r=all |
| By: | John V. Leahy; Aditi Thapar |
| Abstract: | We study whether the effects of monetary policy are dependent on the demographic structure of the population. We exploit cross-sectional variation in the response of US states to an identified monetary policy shock. We find that there are three distinct age groups. In response to an increase in interest rates, the responses of private employment and personal income are weaker the greater the share of population under 35 years of age, are stronger the greater the share between 40 and 65 years of age, and are relatively unaffected by the share older than 65 years. We find that all age groups become more responsive to monetary policy shocks when the proportion of middle aged increases. We provide evidence consistent with middle aged entrepreneurs starting and expanding businesses in response to an expansionary monetary shock. |
| JEL: | E32 E52 J11 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26324&r=all |
| By: | Markus K. Brunnermeier; Harold James; Jean-Pierre Landau |
| Abstract: | The ongoing digital revolution may lead to a radical departure from the traditional model of monetary exchange. We may see an unbundling of the separate roles of money, creating fiercer competition among specialized currencies. On the other hand, digital currencies associated with large platform ecosystems may lead to a re-bundling of money in which payment services are packaged with an array of data services, encouraging differentiation but discouraging interoperability between platforms. Digital currencies may also cause an upheaval of the international monetary system: countries that are socially or digitally integrated with their neighbors may face digital dollarization, and the prevalence of systemically important platforms could lead to the emergence of digital currency areas that transcend national borders. Central bank digital currency (CBDC) ensures that public money remains a relevant unit of account. |
| JEL: | E41 E42 E51 E52 E58 G21 G23 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26300&r=all |
| By: | Aaron Mehrotra; Richhild Moessner; Chang Shu Author-X-Name_First: Chang |
| Abstract: | We analyse how movements in the components of sovereign bond yields in the United States affect long-term rates in 10 advanced and 21 emerging economies. The paper documents significant global spillovers from both the expectations and term premia components of long-term rates in the United States. We find that spillovers to domestic long-term rates in emerging economies from the US expectations components tend to be more sizeable than those from the US term premia. Finally, spillovers from US term premia are larger when an emerging economy displays greater macro-financial vulnerabilities. |
| Keywords: | interest rate spillovers, term premia, emerging economies |
| JEL: | E52 E43 F42 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:814&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. JEL Classification: F42, E52, C50 |
| Keywords: | dominant currency paradigm, global macroeconomic modelling, spillovers |
| Date: | 2019–10 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20192321&r=all |
| By: | Haelim Anderson (Federal Deposit Insurance Corporation); Guillermo Ordonez (University of Pennsylvania); Selman Erol (Carnegie Mellon University, Tepper School of Business) |
| Abstract: | Central banks provide public liquidity (through lending facilities and promises of bailouts) with the intent to stabilize financial markets. Even though this provision is restricted to member (regulated) banks, an interbank system can in principle develop so to give indirect access to nonmember (shadow) banks. We construct a model to understand how the network may change in the presence of Central Bank interventions and how those changes can translate into more room for contagion and an endogenously higher financial fragility. We provide evidence that upon the introduction of the Fed’s lending facilities in 1914, aggregate liquidity declined and systemic risks increased. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1285&r=all |
| By: | David Berger (Northwestern University); Fabrice Tourre (Copenhagen Business School); Joseph Vavra (University of Chicago); Konstantin Milbradt (Northwestern University) |
| Abstract: | How much ability does the Fed have to stimulate the economy by cutting interest rates? We argue that the presence of substantial debt in fixed-rate, prepayable mortgages means that the ability to stimulate the economy by cutting interest rates depends not just on their current level but also on their previous path. Using a household model of mortgage prepayment matched to detailed loan level evidence on the relationship between prepayment and rate incentives, we argue that recent interest rate paths will generate substantial headwinds for future monetary stimulus. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:175&r=all |
| By: | Jonathan Chiu; Thorsten Koeppl |
| Abstract: | A cryptocurrency system such as Bitcoin relies on a decentralized network of anonymous validators to maintain and update copies of the ledger in a process called mining. In such a permissionless system, someone can cheat by spending a coin twice, which leads to the so-called double-spending problem. A well-functioning cryptocurrency system must ensure that users do not have an incentive to double spend. We develop a general-equilibrium model of a cryptocurrency. We use the model to obtain a condition that rules out double spending and study the optimal design of cryptocurrencies. We also quantify the welfare costs of using a cryptocurrency as a payment instrument. We find that it is better to use the revenue from currency creation rather than transaction fees to finance the costly mining process. We estimate that Bitcoin generates a large welfare loss that is about 500 times bigger than the welfare loss in a monetary economy with 2 percent inflation. This welfare loss can be lowered in an optimal design to the equivalent of that in a monetary economy with moderate inflation of about 45 percent. |
| Keywords: | Digital Currencies and Fintech; Monetary Policy; Payment clearing and settlement systems |
| JEL: | E4 E5 L5 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:19-40&r=all |
| By: | Fernando Martin (Federal Reserve Bank of St. Louis) |
| Abstract: | Societies have come to rely on simple rules to restrict the size and behavior of governments: constraints on monetary policy, revenue, budget balance and debt. I study the merit of these constraints in a dynamic stochastic model in which fiscal and monetary policies are jointly determined. Under several specifications, a revenue ceiling is the only rule that effectively induces the government to lower spending and dominates other policy constraints in terms of welfare by an order of magnitude. However, the reduction in spending is modest and comes at the cost of higher debt and inflation. Monetary policy rules are not desirable as they severely hinder distortion-smoothing and may lead to large welfare losses if implemented incorrectly. Budget balance and debt rules are generally benign, with the former being always preferable to the latter. All types of fiscal rules are usually best implemented at all times, but can be suspended in adverse times, often at a minor cost. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1181&r=all |
| By: | Thibaut Piquard; Dilyara Salakhova |
| Abstract: | We study the substitution between secured and unsecured interbank markets. Banks are competitive and subject to reserve requirements in a corridor rate system with deposit and lending facilities. Banks face counterparty risk in the unsecured market and incur an opportunity cost to pledge collateral. The model provides insights on interest rates, trading volumes and substitution between the two markets. Using transaction data on the Euro money market, we provide new empirical findings that the model accounts for: (i) borrowing banks are active on both markets even when their collateral constraint is not binding, (ii) secured interest rates may fall below the deposit facility rate. We derive and empirically test predictions on how "conventional" and "unconventional" monetary policies impact interbank markets, depending on whether marketable collateral is purchased or not. |
| Keywords: | : Monetary Policy, Interbank Markets, Secured and Unsecured Funding. |
| JEL: | E42 E52 E58 G21 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:730&r=all |
| By: | Minseong Kim |
| Abstract: | We demonstrate that if all agents in an economy make time-consistent decisions and policies, then there exists no rational expectation equilibrium in a dynamic stochastic general equilibrium (DSGE) model, unless under very restrictive and special circumstances. Some time-consistent interest rate rules, such as Taylor rule, worsen the equilibrium non-existence issue in general circumstances. Monetary policy needs to be lagged in order to avoid equilibrium non-existence due to agents making time-consistent decisions. We also show that due to the transversality condition issue, either fiscal-monetary coordination may need to be modeled, or it may be necessary to write a model such that bonds or money provides utility as medium of exchange or has liquidity roles. |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1909.10915&r=all |
| By: | Nathaniel Pancost (University of Texas at Austin McCombs Sc); Roberto Robatto (University of Wisconsin-Madison) |
| Abstract: | We study optimal capital requirement regulation in a dynamic quantitative model in which deposits facilitate real economic activity and thus the value of deposits is microfounded. We identify a novel general equilibrium effect that drives a wedge between the private value of deposits (i.e., the value to price-taking agents, measured by the deposit premium) and the social value of deposits (i.e., the value that matters for regulation). The wedge reduces the social value of deposits, and as a result, the optimal capital requirement is substantially higher than in comparable models in the literature. Nonetheless, even when the marginal social value of deposits is very low, setting capital requirements too high is suboptimal. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:638&r=all |
| By: | Matteo Leombroni (Stanford); Ciaran Rogers (Stanford University) |
| Abstract: | We study the heterogeneity of consumption responses across households to a common monetary policy shock. Households vary in age, wealth and ex-ante asset allocation. We combine an asset pricing framework with heterogeneous agents and incomplete markets with a life-cycle model. Within our environment, the transmission of monetary policy does not only work through the usual income and substitution motives, but also through an endogenous portfolio rebalancing effect which generates changes in equilibrium asset prices and a subsequent wealth effect on consumption. We find that, if the shock is such that prices are unchanged, the response of consumption is fully transitory, where younger households increase, and older households decrease, consumption. If equilibrium prices rise as a result of the monetary shock, wealth effects mitigate heterogeneity in current consumption responses, but introduce persistence in responses that increase significantly with age. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:684&r=all |
| By: | Fausto, Cavalli; Ahmad, Naimzada; Nicolò, Pecora |
| Abstract: | In this paper we consider a nonlinear model for the real economy described by a multiplieraccelerator setup. The model comprises the government sector, which infl uences the output dynamics by means of the fiscal policy, and the money market, where the money supply depends upon the fl uctuations in the economic activity. Through rigorous analytical tools combined with numerical simulations, we investigate the stability conditions of the unique steady state and the emergence of different kinds of endogenous dynamics, which are the results of the fraction of the fiscal and the monetary policy through their reactivity degrees. Such policies, if properly tuned, can lead the economy toward the desired full employment target but, on the other hand, can also generate endogenous fluctuations in the pace of the economic activity, associated with the occurrence of closed invariant curves and multistability phenomena. |
| Keywords: | nonlinear dynamics; monetary and fiscal policies; bifurcations; multistability. |
| Date: | 2019–05 |
| URL: | http://d.repec.org/n?u=RePEc:mib:wpaper:409&r=all |
| By: | Siqiang Yang (University of Pittsburgh) |
| Abstract: | The paper investigates how nominal exchange rate volatility affects a sovereign’s default risk and its incentive to accumulate reserves. The model considers an environment where the sovereign faces a currency mismatch problem and is subject to volatile exchange rate fluctuations. This implies that when the exchange rate depreciates, the debt burden in terms of domestic currency increases, leading to higher default risk and borrowing costs. To insure against this risk, the sovereign optimally accumulates reserves to (i) smooth consumption when borrowing becomes costly, (ii) to hedge against the depreciation of the exchange rate, and (iii) to reduce the volatility of the exchange rate. The model is then calibrated using data from Mexico (1991-2015). The model can replicate the positive association between nominal exchange rate volatility and sovereign default risk. It can also generate more than half of the reserve holdings in Mexico. Moreover, all three channels of reserve accumulation are shown to be quantitatively important. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:721&r=all |
| By: | John Geanakoplos (Yale University); David Rappoport (Federal Reserve Board) |
| Abstract: | A synthesis of new and old approaches in understanding macroeconomic fluctuations and the role of monetary policy (MP) is the credit surface, where the interest rate is a function of multiple credit terms: leverage, credit rating, term, etc. We gauge credit conditions using the credit surface in mortgage, corporate bond, and peer-to-peer lending markets, and explore its relationship with economic activity in these segments of the economy. In addition, we study the transmission of MP through the corporate bond credit surface. Our results suggest that the passthrough of MP is heterogeneous and non-monotonic in ex-ante riskiness, initially declining as risk increases but then increasing. Our preliminary results support the view that the credit surface is important for macroeconomic fluctuations and the transmission of MP. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:1516&r=all |
| By: | Christopher Johnson (UC Davis) |
| Abstract: | The Great Recession featured a global collapse in real and financial economic activity that was highly synchronized across countries. Two unique precursors to the crisis were the rise in the shadow banking sector and increased securitization. I develop a model that is the first to explain the extent to which these factors contributed to the international transmission of the crisis that mostly originated in the United States. Using a two-country model with commercial and shadow banking sectors, I show that a country-specific financial shock leads to a simultaneous decline in real and financial aggregates in both countries. My model is the first to include both shadow and commercial banking in an open-economy framework. While commercial banks transfer funds from borrowers to lenders, shadow banks securitize loans and sell them to intermediaries internationally as asset-backed securities. Transmission occurs through a balance sheet channel, which is stronger when intermediaries hold more securities from abroad. I also consider the implications of capital controls on the transmission of a financial crisis. In general, I find that capital controls can reduce transmission. |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed019:780&r=all |
| By: | Povilas Lastauskas; Julius Stakénas |
| Abstract: | Do labor market reforms initiated in periods of loose monetary policy yield different outcomes from those that were introduced in periods when monetary tightening prevailed? Since economic theory usually pays attention to the steady state change and ignores business cycle interactions of structural reforms, we connect local projection methodology with the Mallow’s Cp averaging criterion to arrive at an inference that does not require knowledge of the exact functional form, is robust to mis-specification, admits non-linearities, and cross-sectional dependence and addresses uncertainty regarding interactions between labor reforms and macroeconomy. We also develop a test to check the importance of monetary policy for any horizon and the entire impulse response function, taking the multiple testing problem into account. We document that replacement rates deliver substantially different outcomes on real GDP, inflation and real effective exchange rate, whereas labor activation schemes bear different effects on unemployment in low- and high-interest rate environments. There is also evidence of monetary policy trend playing an important role and increasing synchronized monetary and labor market policies across European countries. |
| Keywords: | labor market reforms, nonlinear responses, Mallow’s Cp criterion for model averaging, error factor structure, low and high interest rate environments |
| JEL: | C33 C54 E52 E62 J08 J38 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_7844&r=all |
| By: | Jason R. Donaldson; Giorgia Piacentino |
| Abstract: | We develop a model in which, as in practice, bank debt is both a financial security used to raise funds and a kind of money used to facilitate trade. This dual role of bank debt provides a new rationale for why banks do what they do. In the model, banks endogenously perform the essential functions of real-world banks: they transform liquidity, transform maturity, pool assets, and have dispersed depositors. Moreover, they make their debt redeemable on demand. Thus, they are endogenously fragile. We show novel effects of narrow banking, suspension of convertibility, and some other policies. |
| JEL: | G01 G21 |
| Date: | 2019–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:26298&r=all |