nep-cba New Economics Papers
on Central Banking
Issue of 2019‒10‒28
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Transmission channels of central bank asset purchases in the Irish economy By Cawley, Cormac; Finnegan, Marie
  2. The Role of ECB Communication in Guiding Markets By Marc Anderes; Alexander Rathke; Sina Streicher; Filip Jan-Egbert Sturm
  3. Dornsbush revisited from an asymmetrical perspective: Evidence from G20 nominal effective exchange rates By Frédérique Bec; Mélika Ben Salem
  4. The effect of the Fed zero-lower bound announcementon bank profitability and diversification By Andrea Landi, Alex Sclip, Valeria Venturelli
  5. Central bank digital currency and monetary policy: a literature review By Beniak, Patrycja
  6. Monetary policy hysteresis and the financial cycle By Phurichai Rungcharoenkitkul; Claudio Borio; Piti Disyatat Author-X-Name_First: Piti
  7. Inflation Globally By Òscar Jordà; Fernanda Nechio
  8. Facing the Tides; Managing Capital Flows in Asia By Harald Finger; Pablo Lopez Murphy
  9. The reaction function channel of monetary policy and the financial cycle By Andrew Filardo; Paul Hubert; Phurichai Rungcharoenkitkul Author-X-Name_First: Phurichai
  10. The Nonpuzzling Behavior of Median Inflation By Laurence Ball; Sandeeo Mazumder
  11. What is new about cryptocurrencies? A visual analysis By Anil Savio Kavuri; Alistair Milne; Justine Wood
  12. The other side of the Coin: Risks of the Libra Blockchain By Louis Abraham; Dominique Guégan
  13. Deposit Insurance, Market Discipline and Bank Risk By A.O. Karas; William Pyle; Koen Schoors
  14. Fragmentation in global financial markets: good or bad for financial stability? By Stijn Claessens
  15. Central Bank Digital Currency:One, Two or None? By Christian Pfister
  16. A Requiem for the Fiscal Theory of the Price Level By Roger Farmer; Pawel Zabczyk
  17. The Monetary Foundations of Britain’s Early 19th Century Ascendency By Carolyn Sissoko
  18. Copulas and Macroeconomics: the Quantity Theory of Money By Ernst Juerg Weber

  1. By: Cawley, Cormac; Finnegan, Marie
    Abstract: The European Central Bank (ECB) engaged in an expanded asset purchase programme (APP) from 2014 to 2018 to help achieve their primary objective of price stability. Total assets purchased over this period was over €2.5 trillion and new net purchases ended in December 2018. This paper identifies whether the ECB’s APP in Ireland operated through the portfolio rebalancing channel, the signalling channel or the lending channel. It presents a quantitative descriptive analysis of some key Irish data sets in the 2014–2018 period and uses time-series visualisation and trend analysis to identify trends and correlations. There are a number of preliminary findings. First, much downward pressure on sovereign debt yields and spreads had occurred before the APP began due to previous accommodative monetary policy and the signalling channel. Second, the corporate-sector purchase programme (CSPP) did impact on targeted bonds and may have had spill overs to non-targeted bonds. Third, the APP did not lead to much increased lending to the SME sector. Fourth, while households did engage in traditional portfolio rebalancing, Irish banks did not and were perhaps more motivated to meet their capital requirements and manage their level of reserves. This is a first step towards understanding the transmission channels of ECB policy in Ireland and more work needs to be done to detangle the transmission of the most recent APP from other factors and consider these findings in the context of theoretical models. Such work is important to help inform policy makers on enhancing the transmission mechanism to the Irish economy of the recently launched new ECB asset purchase programme from November 2019.
    Keywords: Quantitative easing; asset purchase programme; Ireland; transmission channels of QE
    JEL: E4 E44 E5 E52 E58
    Date: 2019–09–23
  2. By: Marc Anderes (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Alexander Rathke (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Sina Streicher (KOF Swiss Economic Institute, ETH Zurich, Switzerland); Filip Jan-Egbert Sturm (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Economists and central bankers nowadays believe that forward guidance has become more important in a world in which key interest rates have hit their effective lower bounds (ELB). In case of the European Central Bank (ECB), this should have increased the informational content of the introductory statements at the press conference following ECB policy meetings. We examine whether this form of ECB communication adds information to a shadow interest rate that summarises the overall policy stance as interpreted by financial markets. To measure communication, we use information based on ECB press releases distinguishing between topics like inflation, the real economy and monetary developments. We also look at the effect of communication on consensus expectations about key macroeconomic variables. Especially ECB’s assessment of the economy, i.e. communication related to economic growth, triggers movement in financial markets and thereby the shadow rate. Communication of the ECB through its press releases also causes professional forecasters to change their outlook. Not only their growth forecasts are affected, also their expectations for M3 growth and inflation are.
    Keywords: Central bank communication, shadow rates, consensus expectations, ECB, euro area, money growth
    JEL: E3 E43 E51 E52 E58
    Date: 2019–10
  3. By: Frédérique Bec (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique, Centre de Recherche en Économie et STatistique (CREST)); Mélika Ben Salem (ERUDITE - Equipe de Recherche sur l’Utilisation des Données Individuelles en lien avec la Théorie Economique - UPEM - Université Paris-Est Marne-la-Vallée - UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12)
    Abstract: This paper develops an asymmetrical overshooting correction autoregressive model to capture excessive nominal exchange rate variation. It is based on the widely accepted perception that open economies might prefer under-evaluation to over-evaluation of their currency so as to foster their net exports. Our approach departs from existing works by allowing the strength of the overshooting correction mechanism to differ between over-depreciations and over-appreciations. It turns out that most of monthly effective exchange rates for the G20 countries are in fact well characterized by an overshooting correction after an over-appreciation only.
    Date: 2019–10–17
  4. By: Andrea Landi, Alex Sclip, Valeria Venturelli
    Abstract: In this paper we investigate the impact of the Federal Reserve's decision to main- tain the zero-lower bound for at least two years on bank profitability and strategies. Using a difference in difference setting we find that banks with lower reliance on deposit funding are more sensitive to the policy event. Reduced net worth of low deposit banks, relative to high deposit banks, induces those banks to change their strategies toward an increase in fee income related products to maintain the tar- geted level of performance. Such an increase is mainly explained by fiduciary and insurance related revenues that entail a lower risk for financial stability.
    Keywords: Profitability, diversification, zero-lower bound, unconventional monetary policy, banking
    JEL: E43 E44 E52 G21
    Date: 2019–10
  5. By: Beniak, Patrycja
    Abstract: Rapid digitalisation of payments leads to greater cost and time efficiency, yet could also potentially trigger legal and security challenges as well as lead to weakening of finan- cial stability and less effective monetary policy transmission. In order to ensure greater safety, central banks are contemplating and testing solutions thanks to which public using payment innovations could transact in funds that are ultimately backed by central bank. One of these solutions is central bank digital currency, a digital version of cash. The pro- posed versions of central bank digital currency are very diverse. Depending on the version assumed by a particular central bank, central bank digital currency can have an impact on central bank interest rate setting, monetary policy implementation and transmission mechanism. This relates most notably to effective lower bound which could either rise or fall, conditional on design on central bank digital currently.
    Keywords: virtual currencies, central bank digital currency, monetary policy, effective lower bound
    JEL: E42 E52 E58 G21 G28
    Date: 2019–10–22
  6. By: Phurichai Rungcharoenkitkul; Claudio Borio; Piti Disyatat Author-X-Name_First: Piti
    Abstract: This paper studies the interaction between monetary policy and macroeconomic stability in a model with two distinguishing features. First, financing - cash flows - underpins all economic activity, with banks generating deposits by granting loans. Money is non-neutral as the policy interest rate anchors the real economy. Second, bank lending is subject to an endogenous boom-bust cycle due to externalities in the loan market. Together, these features imply that monetary policy may have long-lasting impact on the real economy through its in fluence on the financial cycle. In this `finance-based' economy, there is no well-defined natural rate of interest to which the economy gravitates. The possibility of a `low interest rate trap' emerges: monetary policy that leans insufficiently against the build-up of financial imbalances increases the vulnerability to financial busts over successive cycles. As a result, low rates can beget lower rates.
    Keywords: monetary policy, financial cycle, money neutrality, hysteresis, natural rate of interest
    JEL: E52 E58 E43
    Date: 2019–10
  7. By: Òscar Jordà; Fernanda Nechio
    Abstract: The Phillips curve remains central to stabilization policy. Increasing financial linkages, international supply chains, and managed exchange rate policy have given core currencies an outsized influence on the domestic affairs of world economies. We exploit such influence as a source of exogenous variation to examine the effects of the recent financial crisis on the Phillips curve mechanism. Using a difference-in-differences approach, and comparing countries before and after the 2008 financial crisis sorted by whether they endured or escaped the crisis, we are able to assess the evolution of the Phillips curve globally.
    Date: 2019–10
  8. By: Harald Finger; Pablo Lopez Murphy
    Abstract: This paper looks empirically at some economic effects of volatile exchange rates and financial conditions and examines policy responses for managing such volatility. It also sheds light on some economic costs that stem from volatile capital flows and exchange rates and analyzes how countries deploy their policy toolkits in response. The data-driven analysis should contribute to ongoing reflections about how to manage volatile capital flows and exchange rates both in Asian EMEs and more broadly.
    Keywords: Exchange rate policy;Real effective exchange rates;Balance of payments;Exchange markets;Balance of payments statistics;DPPP,capital flow,capital inflow,output gap,inflow,currency depreciation
    Date: 2019–10–23
  9. By: Andrew Filardo; Paul Hubert; Phurichai Rungcharoenkitkul Author-X-Name_First: Phurichai
    Abstract: This paper examines whether monetary policy reaction function matters for financial stability. We measure how responsive the Federal Reserve's policy appears to be to imbalances in the equity, housing and credit markets. We find that changes in these policy sensitivities predict the later development of financial imbalances. When monetary policy appears to respond more countercyclically to market overheating, imbalances tend to decline over time. This effect is distinct from that of current and anticipated interest rate levels - the risk-taking channel. The evidence highlights the importance of a "policy reaction function" channel of monetary policy in shaping the financial cycle.
    Keywords: policy reaction function channel, asset price booms, credit booms, monetary policy, financial cycles, time-varying models
    JEL: E50 E52 G00 G01 G12
    Date: 2019–10
  10. By: Laurence Ball; Sandeeo Mazumder
    Abstract: Economists are puzzled by the behavior of U.S. inflation since the Great Recession of 2008-2009, and many suggest that the Phillips curve relating inflation to unemployment has broken down. This paper argues that inflation behavior is easier to understand if we divide headline inflation into core and transitory components, and if core inflation is measured by the weighted median of industry inflation rates. This weighted median is less volatile than the traditional measure of core inflation, the inflation rate excluding food and energy prices, because it filters out large price changes in all industries. We illustrate the usefulness of the weighted median with a case study of inflation in 2017 and early 2018. We also show that a Phillips curve relating the weighted median to unemployment appears clearly in the data for 1985-2017, with no sign of a breakdown in 2008.
    Date: 2019–10
  11. By: Anil Savio Kavuri; Alistair Milne; Justine Wood
    Abstract: In the context of recent developments with cryptocurrencies, as well as the potential rise of central bank digital currencies, we present a new visualisation of money. Using three novel figures, we distinguish between the relevant mechanisms, technologies, recordkeeping, and transactions of various forms of money, as well as the classifications of different types of money; this enables the resolution of omissions and ambiguities in other recent such visualisations (CPMI 2018; Bech and Garratt 2017; Bech and Garratt 2017; CPMI 2015; Wadsworth 2018a; Wadsworth 2018b). This reveals the novelty of cryptocurrencies, which use the software-based cryptographically secured recordkeeping, that support the issue of money with a credible commitment to a limited quantity of issue. We conclude with a discussion of policy implications stemming from our analysis.
    Keywords: Money, Cryptocurrencies, Central bank digital currencies, Bitcoin
    JEL: B22 E40 E41 E42 E50 E51 E52 E58 E59 E61
    Date: 2019–10
  12. By: Louis Abraham (Ecole polytechnique); Dominique Guégan (University of Paris 1 Panthéon-Sorbonne; Ca’ Foscari University of Venice)
    Abstract: Libra was presented as a cryptocurrency on June 18, 2019 by Facebook. On the same day, Facebook announced plans for Calibra, a subsidiary in charge of the development of an electronic wallet and financial services. In view of the primary risk of sovereignty posed by the creation of Libra, the Central Banks quickly took very clear positions against the project and adressed a lot of questions to the responsible of the project focusing on regulation aspects and national sovereignty. The purpose of this paper is to provide a holistic analysis of the project to encompass several aspects of its implementation and the issues it raises. We address a set of questions that are part of the cryptocurrency environment and blockchain technology that supports the Libra project. We identify the main risks considering at the same time: political risks, financial risks, economical risks, technological risks and ethics focusing on the governance of the project based on two levels: one for the Association and the other for the Libra Blockchain. We emphazise the difficulty to regulate such a project as soon as it will depend on several countries whose legislations are very different. The future of this kind of project is discussed through the emergence of the Central Bank Digital Currencies.
    Keywords: Blockchain Protocol, Central Bank Digital Currency, Cryptocurrency, Governance, Libra, Regulation, Risk
    JEL: C88 E5 G28 K2
    Date: 2019
  13. By: A.O. Karas; William Pyle; Koen Schoors
    Abstract: Using evidence from Russia, we explore the effect of the introduction of deposit insurance on bank risk. Drawing on within-bank variation in the ratio of firm deposits to total household and firm deposits, so as to capture the magnitude of the decrease in market discipline after the introduction of deposit insurance, we demonstrate for private, domestic banks that larger declines in market discipline generate larger increases in traditional measures of risk. These results hold in a difference-in-difference setting in which state and foreign-owned banks, whose deposit insurance regime does not change, serve as a control.
    Keywords: deposit insurance, market discipline, moral hazard, risk taking, banks, Russia
    Date: 2019–01
  14. By: Stijn Claessens
    Abstract: The many regulatory reforms following the Great Financial Crisis of 2007-09 have most often been designed and adopted through an international cooperative process. As such, actions have tended to harmonise national approaches and diminish inconsistencies. Nevertheless, some market participants and policymakers have recently raised concerns over an unwanted and unnecessary degree of fragmentation in financial markets globally, with possibly adverse effects for financial stability. This paper reviews the degree of fragmentation in various markets and classifies its possible causes. It then reviews whether fragmentation is necessarily detrimental to financial stability, suggesting that, as is more likely, various trade-offs exist. To identify and assess the scope for Pareto improvements, it concludes by outlining areas for further analysis.
    Keywords: financial stability, fragmentation, segmentation, financial integration, regulation, international cooperation
    JEL: G15 F30 G11 G12
    Date: 2019–10
  15. By: Christian Pfister
    Abstract: This paper investigates the real effects of short-term financial constraints in the light of the working capital channel: cash credit constraints may force SMEs to forgo investment opportunities in order to finance their working capital needs. Building on unique indicators of cash and investment credit constraints derived from survey data, I find that: (1) short-term credit constraints are as important as long-term ones in SMEs' investment decisions; (2) the detrimental effect of cash credit constraints on corporate investment is even stronger for firms with higher working capital needs; (3) the negative relationship between working capital and fixed investment is associated with short-term financial frictions; and (4) only liquid SMEs are able to offset short-term financial frictions by adjusting their accounts receivable and inventories.
    Keywords: : Central Bank, Currency, Digitalisation, Financial Stability, Monetary Policy.
    JEL: E40 E42 E52 E58
    Date: 2019
  16. By: Roger Farmer; Pawel Zabczyk
    Abstract: The Fiscal Theory of the Price Level (FTPL) is the claim that, in a popular class of theoretical models, the price level is sometimes determined by fiscal policy rather than monetary policy. The models where this claim has been established assume that all decisions are made by an infinitely-lived representative agent. We present an alternative, arguably more realistic model, populated by sixty-two generations of people. We calibrate our model to an income profile from U.S. data and we show that the FTPL breaks down. In our model, the price level and the real interest rate are indeterminate, even when monetary and fiscal policy are both active. Our findings challenge established views about what constitutes a good combination of fiscal and monetary policies.
    Date: 2019–10–11
  17. By: Carolyn Sissoko (University of the West of England, Bristol)
    Abstract: This paper argues that Britain’s monetary system at the start of the Napoleonic Wars was substantially different from its monetary system at their end, and that the Restriction and the Bank of England’s discount policy during the Restriction played a determining role in the transformation of the monetary system. Specifically, I argue that Britain’s monetary system through the second half of the 18th century was built on transaction-based credit, and that by the end of the war this monetary system had been transformed into one based on personal credit. I find that the Bullion Committee deliberately reset the public’s inflation expectations in order to stabilize the monetary system. And that the Bank was acting as a lender of last resort with an explicit duty to support commercial interests in the crisis of 1810-11.
    Date: 2019–01–06
  18. By: Ernst Juerg Weber (Economics Programme, University of Western Australia)
    Abstract: The quantity theory of money remains a cornerstone of modern macroeconomics that provides a benchmark for the long-run behaviour of macroeconomic models. The direct empirical evidence for it is, however, less conclusive than suggested by scatterplots and the exaggerated correlations between money growth and inflation that can be found in the macroeconomic literature. Copulas with upper tail dependence show a considerably weaker relationship between money growth and inflation than Pearson’s r. Even so, the quantity theory will continue to be part of macroeconomics because economics as a science is driven both by observation and by the inherent structure of the accumulated body of economic theory.
    Date: 2019

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