nep-cba New Economics Papers
on Central Banking
Issue of 2019‒10‒21
24 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. What Rule for the Federal Reserve? Forecast Targeting By Svensson, Lars E.O.
  2. Macroprudential Policy with Leakages By Bengui, Julien; Bianchi, Javier
  3. Macroeconomics Challenges and Resilience of Emerging Market Economies By Joshua Aizenman
  4. Insolvency-Illiquidity, Macro Externalities and Regulation By Faia, Ester
  5. Exchange rate dynamics and monetary policy -- Evidence from a non-linear DSGE-VAR approach By Florian Huber; Katrin Rabitsch
  6. Is There a Zero Lower Bound? The Effects of Negative Policy Rates on Banks and Firms By Altavilla, Carlo; Burlon, Lorenzo; Giannetti, Mariassunta; Holton, Sarah
  7. The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission By Chen, Zhengyang
  8. Maximizing profits or pursuing the public good? The bank of Spain as a central bank By Martín-Aceña, Pablo; Martínez-Ruiz, Elena; Nogues-Marco, Pilar
  9. Myopic governments and conservative central banks: are they compatible? By Cornel OROS; Blandine ZIMMER
  10. Is Basel III counter-cyclical: The case of South Africa? By Guangling Liu; Thabang Molise
  11. Cryptocurrencies, Currency Competition, and The Impossible Trinity By Benigno, Pierpaolo; Schilling, Linda Marlene; Uhlig, Harald
  12. The Limits of onetary Economics: On Money as a Medium of Exchange in Near-Cashless Credit Economies By Lagos, Ricardo; Zhang, Shengxing
  13. It's the tail-risk, stupid! Precluding regulatory arbitrage in shadow banking with a normatively charged approach to supervision capitalizing on multipolar regulatory dialogues By Thiemann, Matthias; Tröger, Tobias
  14. "The Impact of the Bank of Japan's Monetary Policy on Japanese Government Bonds' Low Nominal Yields" By Tanweer Akram; Huiqing Li
  15. The real effects of bank distress: Evidence from bank bailouts in Germany By Bersch, Johannes; Degryse, Hans; Kick, Thomas; Stein, Ingrid
  16. Rules versus Discretion in Bank Resolution By Walther, Ansgar; White, Lucy
  17. The Effective Rate of Interest on Target Balances By Hans-Werner Sinn
  18. Central Bank credibility and inflation expectations: a microfounded forecasting approach By Issler, João Victor; Soares, Ana Flávia
  19. Global Shocks Alert and Monetary Policy Responses By Olatunji A. Shobande; Oladimeji T. Shodipe; Simplice A. Asongu
  20. (Dis)Solving the Zero Lower Bound Equilibrium through Income Policy By Guido Ascari; Jacopo Bonchi
  21. The Short Rate Disconnect in a Monetary Economy By Lenel, Moritz; Piazzesi, Monika; Schneider, Martin
  22. Beyond the zero lower bound: negative policy rates and bank lending By Garyn Tan
  23. On Money As a Latent Medium of Exchange By Lagos, Ricardo; Zhang, Shengxing
  24. The financial cycle and the regulatory pendulum in the United Kingdom (1885-2016) By Germán Forero-Laverde; Jesús Mur; María Ángeles Pons

  1. By: Svensson, Lars E.O.
    Abstract: How would the policy rule of forecast targeting work for the Federal Reserve? To what extent is the Federal Reserve already practicing forecast targeting? Forecast targeting means selecting a policy rate and policy-rate path so that the forecasts of inflation and employment "look good," in the sense of best fulfilling the dual mandate of price stability and maximum employment, that is, best stabilize inflation around the inflation target and employment around its maximum level. It also means publishing the policy-rate path and the forecasts of inflation and employment forecasts and, importantly, explaining and justifying them. This justification may involve demonstrations that other policy-rate paths would lead to worse mandate fulfillment. Publication and justification will contribute to making the policy-rate path and the forecasts credible with the financial market and other economic agents and thereby more effectively implement the Federal Reserve's policy. With such information made public, external observers can review Federal Reserve policy, both in real time and after the outcomes for inflation and employment have been observed, and the Federal Reserve can be held accountable for fulfilling its mandate. In contrast to simple policy rules that rely on very partial information in a rigid way, such as Taylor-type rules, forecast targeting allows all relevant information to be taken into account and has the flexibility and robustness to adapt to new circumstances. Forecast targeting can also handle issues of time consistency and determinacy. The Federal Reserve is arguably to a considerable extent already practicing forecast targeting.
    Keywords: Discretion and commitment; Flexible inflation targeting; monetary policy rules
    JEL: E52 E58
    Date: 2019–08
  2. By: Bengui, Julien; Bianchi, Javier
    Abstract: The outreach of macroprudential policies is likely limited in practice by imperfect regulation enforcement, whether due to shadow banking, regulatory arbitrage, or other regulation circumvention schemes. We study how such concerns affect the design of optimal regulatory policy in a workhorse model in which pecuniary externalities call for macroprudential taxes on debt, but with the addition of a novel constraint that financial regulators lack the ability to enforce taxes on a subset of agents. While regulated agents reduce risk taking in response to debt taxes, unregulated agents react to the safer environment by taking on more risk. These leakages do undermine the effectiveness of macruprudential taxes, yet they do not necessarily call for weaker interventions. Quantitatively, we find that a well-designed macroprudential policy that accounts for leakages remains successful at mitigating the vulnerability to financial crises.
    Keywords: capital flow management; financial crises; limited regulation enforcement; macroprudential policy; regulatory arbitrage
    JEL: E58 F32 G28
    Date: 2019–08
  3. By: Joshua Aizenman
    Abstract: A Growing share of Emerging Markets (EMs) use hybrid versions of inflation targeting (IT) that differ from the IT regimes of OECD countries. Policy interest rates among commodity countries are impacted by real exchange rate and international reserves (IR) changes, aiming at stabilizing their real exchange rate in the presence of volatile terms of trade and heightened exposure to capital inflow/outflow shocks. IT works well with independent central banks; yet, fiscal dominance concerns may hinder the efficacy and independency of central banks. This suggests experimenting with the integration of monetary rules with fiscal rules, possibly linking these rules with the operations of buffers like IR and Sovereign Wealth Funds (SWFs). The Global Financial Crisis validated the benefits of counter-cyclical management of international reserves and SWFs in reducing the volatility of real exchange rates. Macro-prudential policies may complement or even substitute buffer policies by reducing a country’s balance sheet exposure to foreign currency debt, mitigating the risk of costly sudden-stops and capital flight. A growing share of EMs is exposed to new financial technologies (fintech), providing cheaper and faster financial services, deepening financial coverage to previously under-served populations. Deeper fintech diffusion may redirect financial intermediation from regulated banks to emerging fintech shadow banks, some of which may have global reach. These developments, and the diffusion of cryptocurrencies promising anonymized payment systems may hinder the effectiveness of monetary policy, and eventually induce greater financial instability. States may encourage the diffusion of efficient financial intermediation in ways that benefit users, while restricting the use of anonymized exchange and global monies to reduce the threat of a shrinking tax base, and to maintain financial stability.
    JEL: F02 F31 F33 F36 F4 F42
    Date: 2019–10
  4. By: Faia, Ester
    Abstract: This paper studies the optimal design of equity and liquidity regulations in a dynamic macro model with information-based bank runs. Although the latter are privately efficient, since they discipline bank managers efforts into the projects' re-deploying activity, they induce aggregate externalities. Technological inefficiencies arise if bank managers extract rents which are higher than the technological costs of re-deploying projects. Pecuniary externalities arise since, when choosing leverage, bank managers do not internalize the fall in asset price ensuing from the aggregate costs of projects' liquidation in a run event. This creates scope for regulation. Equity and liquidity requirements are complementary, as the first tackles the solvency region, while the second the illiquid-solvent one. Finally, in presence of anticipatory effects prudential policies may have unintended consequences as banks adjust their behaviour when a shift in prudential regime is announced. The more so the higher the credibility of the announcement.
    Keywords: Basel regimes; equity requirements; information-based bank runs; liquidity requirements; Pecuniary externalities; Ramsey plan
    JEL: E0 E5 G01
    Date: 2019–10
  5. By: Florian Huber (Paris Lodron University of Salzburg, Salzburg Centre of European Union Studies); Katrin Rabitsch (Institute for International Economics and Development, Department of Economics, Vienna University of Economics and Business)
    Abstract: In this paper, we reconsider the question how monetary policy influences exchange rate dynamics. To this end, a vector autoregressive (VAR) model is combined with a two-country dynamic stochastic general equilibrium (DSGE) model. Instead of focusing exclusively on how monetary policy shocks affect the level of exchange rates, we also analyze how they impact exchange rate volatility. Since exchange rate volatility is not observed, we estimate it alongside the remaining quantities in the model. Our findings can be summarized as follows. Contractionary monetary policy shocks lead to an appreciation of the home currency, with exchange rate responses in the short-run typically undershooting their long-run level of appreciation. They also lead to an increase in exchange rate volatility. Historical and forecast error variance decompositions indicate that monetary policy shocks explain an appreciable amount of exchange rate movements and the corresponding volatility.
    Keywords: Monetary policy, Exchange rate overshooting, stochastic volatility modeling, DSGE priors
    JEL: E43 E52 F31
    Date: 2019–10
  6. By: Altavilla, Carlo; Burlon, Lorenzo; Giannetti, Mariassunta; Holton, Sarah
    Abstract: Exploiting confidential data from the euro area, we show that sound banks pass negative rates on to their corporate depositors without experiencing a contraction in funding and that the tendency to charge negative rates becomes stronger as policy rates move deeper into negative territory. The negative interest rate policy (NIRP) provides stimulus to the economy through firms' asset rebalancing. Firms with high current assets linked to banks offering negative rates appear to increase their investment in tangible and intangible assets and to decrease their cash holdings to avoid the costs associated with negative rates. Overall, our results challenge the commonly held view that conventional monetary policy becomes ineffective when policy rates reach the zero lower bound.
    Keywords: corporate channel; Lending Channel; monetary policy; negative rates
    JEL: D2 E43 E52 G21
    Date: 2019–10
  7. By: Chen, Zhengyang
    Abstract: The federal funds rate became uninformative about the stance of monetary policy from December 2008 to November 2015. During the same period, unconventional monetary policy actions, like large-scale asset purchases, show the Federal Reserve’s intention to depress longer-term interest rates. This paper considers a long-term real interest rate as an alternative monetary policy indicator in a structural VAR framework. Based on an event study of FOMC announcements, I advance a novel measure of long-term interest rate volatility with important implication for monetary policy identification. I find that monetary policy shocks identified with this volatility measure drive significant swings in credit market sentiments and real output. In contrast, monetary policy shocks identified by otherwise standard unexpected policy rate changes lead to muted responses of financial frictions and production. Our results support the validity of the risk-taking channel and suggest an indispensable role of financial markets in monetary policy transmission.
    Keywords: Monetary policy transmission,Structural VAR,Risk-taking channel,High-frequency identification
    JEL: E3 E4 E5
    Date: 2019
  8. By: Martín-Aceña, Pablo; Martínez-Ruiz, Elena; Nogues-Marco, Pilar
    Abstract: The purpose of this study is to examine whether the transition from a system of various issuing banks to a monopoly system was a step in the Bank of Spain becoming a central bank in the true sense of the word (a non-profit maximizing bank); or on the contrary, whether the Bank used its privilege as the only private issuing institution to obtain extra profits, and neglected its duties as a central bank. The study shows that thanks to the monopoly, the Spanish issuer obtained extraordinary profits (above the average for the sector). We also show that the Bank's "private interest" prevailed over the "public interest" (convertibility into gold) and that the monopoly was not a decisive step in its becoming a genuine central bank. The Bank of Spain was a very profitable financial institution for its shareholders, and little concerned with the public interest. History shows that the Bank of Spain's transformation into an institution responsible for monetary and financial policy did not occur until well into the twentieth century.
    Keywords: Bank of Spain, Central banks, Banking market structure, Issuing monopoly, Profit-maximizing issuing banks.
    JEL: D42 G21 L12 M2 N13 N23 N83
    Date: 2019
  9. By: Cornel OROS (CRIEF, Université de Poitiers et LEO, Université d'Orléans); Blandine ZIMMER (LaRGE Research Center, Université de Strasbourg)
    Abstract: Governments fear spending disturbances. To derive their optimal scal decisions, they use the robust control approach developed by Hansen and Sargent (2005, 2008). Results show that myopic governments, being more concerned by short-term spending imperatives than by the economy's output level, react to central bank conservatism by setting high taxes, detrimental to macroeconomic performances. Consequently, delegating monetary policy to not too a conservative central bank seems appropriate.
    Keywords: budget uncertainty, robust control, monetary delegation.
    JEL: E58 E60 E62
    Date: 2019
  10. By: Guangling Liu; Thabang Molise
    Abstract: This paper develops a dynamic general equilibrium model with banking and a macro-prudential authority, and studies the extent to which the Basel III bank capital regulation promotes financial and macroeconomic stability in the context of South African economy. The decomposition analysis of the transition from Basel II to Basel III suggests that it is the counter-cyclical capital buffer that effectively mitigates the pro-cyclicality of its predecessor, while the impact of the conservative buffer is marginal. Basel III has a pronounced impact on the financial sector compared to the real sector and is more effective in mitigating fluctuations in financial and business cycles when the economy is hit by financial shocks. In contrast to the credit-to-GDP ratio, the optimal policy analysis suggests that the regulatory authority should adjust capital requirement to changes in credit and output when implementing the counter-cyclical buffer.
    Keywords: Bank capital regulations, Financial Stability, counter-cyclical capital buffer, DSGE
    JEL: E44 E47 E58 G28
    Date: 2018–08
  11. By: Benigno, Pierpaolo; Schilling, Linda Marlene; Uhlig, Harald
    Abstract: We analyze a two-country economy with complete markets, featuring two national currencies as well as a global (crypto)currency. If the global currency is used in both countries, the national nominal interest rates must be equal and the exchange rate between the national currencies is a risk- adjusted martingale. We call this result Crypto-Enforced Monetary Policy Synchronization (CEMPS). Deviating from interest equality risks approaching the zero lower bound or the abandonment of the national currency. If the global currency is backed by interest-bearing assets, additional and tight restrictions on monetary policy arise. Thus, the classic Impossible Trinity becomes even less reconcilable.
    Keywords: cryptocurrency; currency competition; Exchange Rates; impossible trinity; independent monetary policy; uncovered interest parity
    JEL: D53 E4 F31 G12
    Date: 2019–08
  12. By: Lagos, Ricardo; Zhang, Shengxing
    Abstract: We study the transmission of monetary policy in credit economies where money serves as a medium of exchange. We find that-in contrast to current conventional wisdom in policy-oriented research in monetary economics-the role of money in transactions can be a powerful conduit to asset prices and ultimately, aggregate consumption, investment, output, and welfare. Theoretically, we show that the cashless limit of the monetary equilibrium (as the cash-and-credit economy converges to a pure-credit economy) need not correspond to the equilibrium of the nonmonetary pure-credit economy. Quantitatively, we find that the magnitudes of the responses of prices and allocations to monetary policy in the monetary economy are sizeable-even in the cashless limit. Hence, as tools to assess the effects of monetary policy, monetary models without money are generically poor approximations- even to idealized highly developed credit economies that are able to accommodate a large volume of transactions with arbitrarily small aggregate real money balances.
    Keywords: asset prices; Cashless; credit; leverage; liquidity; margin; monetary policy
    JEL: D83 E52 G12
    Date: 2019–10
  13. By: Thiemann, Matthias; Tröger, Tobias
    Abstract: The use of contractual engineering to create channels of credit intermediation outside of the realm of banking regulation has been a recurring activity in Western financial systems over the last 50 years. After the financial crisis of 2007 and 2008, this phenomenon, at that time commonly referred to as 'shadow banking', evoked a large-scale regulatory backlash, including several specific regulatory constraints being placed on non-bank financial institutions (NBFI). This paper proposes a different avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation. Rather than engaging in the proverbial race between hare and hedgehog that is emerging with increasingly specific regulation of particular contractual arrangements, this paper argues for a normative approach to supervision. We outline this approach in detail by showing that regulators should primarily analyse the allocation of tail risk inherent in the respective contractual arrangements. Our paper proposes to assign regulatory burdens equivalent to prudential banking regulation, in case these arrangements become only viable through indirect or direct access to an (ad hoc) public backstop. In order to make the pivotal assessment, regulators will need information about recent contractual innovations and their risk-allocating characteristics. According to the scholarship on regulatory networks serving as communities of interpretation, we suggest in particular how regulators should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the real-world implications of evolving transactional structures. This paper then uses the rise of credit funds as a non-bank entities economically engaged in credit intermediation to apply this normative framework, pointing to recent contractual innovations that call for more regulatory scrutiny in a multipolar regulatory dialogue.
    Keywords: shadow banking,regulatory arbitrage,principles-based regulation,credit funds,prudential supervision,non-bank financial intermediation
    JEL: G21 G28 H77 K22 K23 L22
    Date: 2019
  14. By: Tanweer Akram; Huiqing Li
    Abstract: Nominal yields for Japanese government bonds (JGBs) have been remarkably low for several decades. Japanese government debt ratios have continued to increase amid a protracted period of stagnant nominal GDP, low inflation, and deflationary pressures. Many analysts are puzzled by the phenomenon of JGBs' low nominal yields because Japanese government debt ratios are elevated. However, this paper shows that the Bank of Japan's (BoJ) highly accommodative monetary policy is primarily responsible for keeping JGB yields low for a protracted period. This is consistent with Keynes's view that the short-term interest rate is the key driver of the long-term interest rate. This paper also relates the BoJ's monetary policy and economic developments in Japan to the evolution of JGBs' long-term interest rates.
    Keywords: Japanese Government Bonds; Long-Term Interest Rates; Nominal Bond Yields; Monetary Policy; Bank of Japan; John Maynard Keynes
    JEL: E43 E50 E58 E60 G10 G12
    Date: 2019–10
  15. By: Bersch, Johannes; Degryse, Hans; Kick, Thomas; Stein, Ingrid
    Abstract: How does bank distress impact their customers' probability of default and trade credit availability? We address this question by looking at a unique sample of German firms from 2000 to 2011. We follow their firm-bank relationships through times of distress and crisis, featuring the different transmission of bank distress shocks into already weakened firm balance sheets. We find that a distressed bank bailout, which is subject to restructuring and deleveraging conditions, leads to a bank-induced increase of firms' probabilities of default. Moreover, bailouts tend to reduce trade credit availability and ultimately firms' sales. We further find that the direction and magnitude of the effects depends on firm quality and the relationship orientation of banks.
    Keywords: bank distress,bank risk channel,firm risk channel,relationship banking,firm defaults,financial crisis
    JEL: G01 G21 G24 G33
    Date: 2019
  16. By: Walther, Ansgar; White, Lucy
    Abstract: Recent reforms give regulators broad powers to "bail-in" bank creditors during financial crises. We analyze efficient bail-ins and their implementation. To preserve liquidity, regulators must avoid signalling negative private information to creditors. Therefore, optimal bail-ins in bad times depend only on public information. As a result, the optimal policy cannot be implemented if regulators have wide discretion, due to an informational time-inconsistency problem. Rules mandating tough bail-ins after bad public signals, or contingent convertible (co-co) bonds, improve welfare. We further show that bail-in and bailout policies are complementary: if bailouts are possible, then discretionary bail-ins are more effective.
    Keywords: bail-in; bail-out; bank resolution; bank runs; financial crises
    JEL: G01 G18 G21
    Date: 2019–10
  17. By: Hans-Werner Sinn
    Abstract: While the formal decision of the ECB Council to impose interest on Target claims and liabilities is meaningless, this paper shows that the pooling of primary interest income among national central banks in the Eurozone implies that Target and cash balances do, in fact, bear an effective rate of interest. The magnitude of this effective rate of interest is given by a weighted average of the ECB’s policy interest rates where (i) the relative country sizes and (ii) the uses of alternative sources and sinks of international liquidity flows determine the weights. Without countervailing transactions, which would effectively service the Target claims and liabilities, Target balances grow with compound interest. The payment of interest on Target balances internalizes the competitive externality that otherwise could induce excessive money supply in a decentralized monetary system of the kind characterizing the Eurozone. It also implies that the recording of Target balances in the balance sheets of national central banks is compatible with fair value accounting.
    Keywords: Target2, ECB, interest, competitive seignorage externality
    JEL: E40 F41 H60
    Date: 2019
  18. By: Issler, João Victor; Soares, Ana Flávia
    Abstract: Credibility is elusive and no generally agreed upon measure of it exists. Despite that, Blinder (2000) generated a consensus in the literature by arguing that ”A central bank is credible if people believe it will do what it says”. It is very hard to argue against such a definition of credibility, being the reason why it became so popular among central bankers and academics alike.
    Date: 2019–10–10
  19. By: Olatunji A. Shobande (Business School, University of Aberdeen, UK); Oladimeji T. Shodipe (Eastern Illinois University, USA); Simplice A. Asongu (Yaoundé, Cameroon)
    Abstract: The study examines the role of global predictors on national monetary policy formation for Kenya and Ghana within the New Keynesian DSGE framework. We developed and automatically calibrated our DSGE model using the Bayesian estimator, which made our model robust to rigorous stochastic number of subjective choices. Our simulation result indicates that global factors account for the inability of national Central Banks to predict the behaviour of macroeconomic and financial variables among these developing nations.
    Keywords: Business Cycle, Macroeconomic policy, Financial crises
    JEL: E32
    Date: 2019–01
  20. By: Guido Ascari (Department of Economics, University of Oxford (UK).); Jacopo Bonchi (Department of Social Sciences and Economics, Sapienza University of Rome (IT).)
    Abstract: We investigate the possibility to reflate an economy experiencing a long-lasting zero lower bound episode with subdued or negative inflation, by imposing a minimum level of wage inflation. Our proposed income policy relies on the same mechanism behind past disinflationary policies, but it works in the opposite direction. It is formalized as a downward nominal wage rigidity (DNWR) such that wage inflation cannot be lower than a fraction of the inflation target. This policy allows to dissolve the zero lower bound steady state equilibrium in an OLG model featuring “secular stagnation” and in a infinite-life model, where this equilibrium emerges due to deflationary expectations.
    Keywords: zero lower bound, wage indexation, income policy, inflation expectations.
    JEL: E31 E52 E64
    Date: 2019–10
  21. By: Lenel, Moritz; Piazzesi, Monika; Schneider, Martin
    Abstract: In modern monetary economies, most payments are made with inside money provided by payment intermediaries. This paper studies interest rate dynamics when payment intermediaries value short bonds as collateral to back inside money. We estimate intermediary Euler equations that relate the short safe rate to other interest rates as well as intermediary leverage and portfolio risk. Towards the end of economic booms, the short rate set by the central bank disconnects from other interest rates: as collateral becomes scarce and spreads widen, payment intermediaries reduce leverage, and increase portfolio risk. We document stable business cycle relationships between spreads, leverage, and the safe portfolio share of payment intermediaries that are consistent with the model. Structural changes, especially in regulation, induce low frequency shifts, such as after the financial crisis.
    Date: 2019–08
  22. By: Garyn Tan
    Abstract: How do banks operate in a negative policy rate environment? Bank profitability is threatened by policy rate cuts in negative territory because the zero lower bound on retail deposit rates prevents banks from benefiting from cheaper deposit funding costs. Contrary to some earlier research, this paper finds that banks most affected by negative rates through this retail deposits channel increase their lending relative to less affected banks. The response is limited to mortgage lending, and is driven by banks with high household deposit ratios and banks with high overnight deposit ratios. Overall, net interest margins are unaffected, which implies that the volume effect is large enough to offset the adverse impact on bank profitability. However, the positive effect on lending dissipates as negative rates persist. This suggests that although the "reversal rate" has not been breached, it may creep up over time as banks become more limited in their options to maintain profit margins. The results also point to an important role for bank capitalisation - net interest margins of relatively highly capitalised banks are squeezed, whereas the net interest margins of less capitalised banks are unaffected. This can be explained by differences in capacity for shock absorbency.
    Keywords: negative rates; zero lower bound; bank lending channel; monetary policy Transmission
    JEL: E43 E52 E58 G20 G21
    Date: 2019–09
  23. By: Lagos, Ricardo; Zhang, Shengxing
    Abstract: We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions directly with money strengthens the stance of sellers of goods and services vis-a-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these latent money demand considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small.
    Keywords: Cashless; credit; liquidity; monetary policy; money
    JEL: D83 E52 G12
    Date: 2019–10
  24. By: Germán Forero-Laverde (Universidad Externado de Colombia, Colombia); Jesús Mur (University of Zaragoza, Spain); María Ángeles Pons (University of Valencia, Spain)
    Abstract: The goal of this paper is twofold. First, we study whether there is evidence for a financial cycle, characterized by the joint movement of stock markets and credit aggregates in the United Kingdom from 1885 until 2016. Secondly, after controlling for an assortment of variables, we contrast if the causal relationship between stock markets and credit aggregates, is contingent on the level of financial repression or liberalisation. Regarding the first question, we find evidence of a time-varying relationship between stock markets and credit, and between both variables and the general economy throughout the period. Regarding the second question, our tests show a robust causal relationship between stocks and credit both in the short and long-run. Moreover, said relationship is contingent on whether the economy is experiencing a period of financial repression or latitude. Finally, we contribute evidence that changes in the regulation/deregulation dynamic in 1914 and 1971/79 coincide with structural breaks in our VAR model. Under deregulation, the long-run relationship between both variables was of bidirectional causality. Contrarily, during financial repression, the long-run nexus is broken. These results have implications for the understanding of UK historiography and the underlying mechanisms that drive financial instability.
    Keywords: Financial history, Deregulation, Financial cycle, United Kingdom, Financial stability
    JEL: N14 N24 G18 F33
    Date: 2019–09

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