nep-cba New Economics Papers
on Central Banking
Issue of 2019‒11‒11
23 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The emerging market reaction to Fed tightening By Beniak, Patrycja
  2. Spillover Effects of Foreign Monetary Policy on the Foreign Indebtedness of Banks and Corporations By Paola Morales-Acevedo
  3. On the Special Role of Deposits for Long-Term Lending By Perazzi, Elena
  4. Libra - Concept and Policy Implications By Groß, Jonas; Herz, Bernhard; Schiller, Jonathan
  5. Going Negative at the Zero Lower Bound: The Effects of Negative Nominal Interest Rates By Ulate, Mauricio
  6. The Dollar and Emerging Market Economies: Financial Vulnerabilities Meet the International Trade System By Samer Shousha
  7. Forward Guidance under Imperfect Information: Instrument Based or State Contingent? By Jia, Chengcheng
  8. Embedded Supervision: How to Build Regulation into Blockchain Finance By Auer, Raphael
  9. On the Risk of Leaving the Euro By Macera, Manuel; Marcet, Albert; Nicolini, Juan Pablo
  10. How to Starve the Beast: Fiscal and Monetary Policy Rules By Martin, Fernando M.
  11. Micro-prudential regulation and banks' systemic risk By Jakob de Haan; Zhenghao Jin; Chen Zhou
  12. Optimal Policy for Macro-Financial Stability By Benigno, Gianluca; Chen, Huigang; Otrok, Christopher; Rebucci, Alessandro; Young, Eric R.
  13. Optimal Monetary Policy in Small Open Economies: Producer Currency Pricing By Mikhail Dmitriev; Jonathan Hoddenbagh
  14. Binary Conditional Forecasts By McCracken, Michael W.; McGillicuddy, Joseph; Owyang, Michael T.
  15. Forward Guidance: Communication, Commitment, or Both? By Bassetto, Marco
  16. Do Monetary Policy Announcements Shift Household Expectations? By Lewis, Daniel J.; Makridis, Christos; Mertens, Karel
  17. Negative Nominal Interest Rates Can Worsen Liquidity Traps By Glover, Andrew
  18. The Tyranny of the Tenths. The Rise and Gradual Fall of Forward Guidance in Sweden 2007-2018 By Andersson, Fredrik N. G.; Jonung, Lars
  19. The impact of central bank liquidity support on banks’ balance sheets By de Haan, Leo; Holton, Sarah; van den End, Jan Willem
  20. Dominant-Currency Pricing and the Global Output Spillovers from U.S. Dollar Appreciation By Georgiadis, Georgios; Schumann, Ben
  21. Precautionary Pricing: The Disinflationary Effects of ELB Risk By Amano, Robert; Carter, Thomas; Leduc, Sylvain
  22. MoNK: Mortgages in a New-Keynesian Model By Carlos Carriga; Finn E. Kydland; Roman Sustek
  23. The Federal Funds Market over the 2007-09 Crisis By Copeland, Adam

  1. By: Beniak, Patrycja
    Abstract: This paper provides one of the first comprehensive assessments of spillovers from 2015-2018 monetary policy tightening phase in the United States to emerging markets, as well as their determinants. It shows that the spillovers were concentrated in the fixed income markets, with a relatively small impact of Fed policy on foreign exchange and stock market price behaviour. The bulk of the impact on fixed income was channeled through rising interest rate expectations rather than an increase in term premia. The decisions on monetary policy tightening in the United States are found to be of less importance for EM pricing than the preceding speeches. The markets were differentiating across individual countries, yet, with exception of the Central and Eastern European economies, based not on macroeconomic fundamentals but the economic policies shaping them. On the top of that, the paper investigates the importance of economic and political risk perception as well as ECB policy for the magnitude of EM spillovers from the Fed tightening, finding both factors irrelevant.
    Keywords: unconventional monetary policy, central bank communication, international capital flows, emerging markets, open source software in support of policy analysis
    JEL: E43 E44 E52 F31 F36 F65
    Date: 2019–09–01
  2. By: Paola Morales-Acevedo (Monetary and International Investment Office of the Central Bank of Colombia)
    Abstract: This paper analyses the impact of foreign monetary policy — from a broad range of countries — on the foreign indebtedness of Colombian banks and corporations, and evaluates if capital controls can help to mitigate these spillover effects. The paper uses two unique loan-level datasets on cross-border lending that cover all the foreign loans granted by foreign-located financial institutions to domestically located financial and non-financial companies, respectively. The results support the existence of spillover effects of foreign monetary policy over the characteristics of cross-border loans. In particular, periods of foreign monetary policy easing (tightening) are associated with: i) increases (decreases) on the cross-border lending to banks, and decreases (increases) on the cross-border lending to corporations; and ii) decreases (increases) on the loan interest rates to banks and corporations. The paper also finds that capital controls play an important role in mitigating these spillover effects, however, their effectiveness depends on the stance of both foreign and domestic monetary policy.
    Keywords: cross-border lending, monetary policy, capital control
    JEL: E44 F34 G01
    Date: 2019–11–05
  3. By: Perazzi, Elena
    Abstract: I build a general equilibrium model to show that deposits are a special form of financing, that makes banks more suitable to extend long-term loans when confronted with the risks of monetary policy. In the model, banks borrow short-term and lend long-term, are subject to a minimum equity requirement consistent with Basel III, and face a financial friction: they cannot raise equity on the market. Consistent with the "bank-capital channel" of monetary policy, when the risk-free rate increases, the value of the banks' assets and equity are eroded, and banks deleverage by cutting their lending. I show that, thanks to a combination of banks' market power in the deposit market and of the money-like properties of deposits, the profits on deposits are strongly countercyclical, and reduce the contraction of lending at high interest rates due to the bank capital channel. Amid current proposals for narrow banking, this effect provides a rationale for the coexistence of lending and deposit-taking activities in current commercial banks.
    Keywords: Deposits, Banks, Long-Term Lending, Narrow Banking
    JEL: E5 G21
    Date: 2019–10–25
  4. By: Groß, Jonas; Herz, Bernhard; Schiller, Jonathan
    Abstract: The announcement of the Libra Association to issue a private global currency has triggered a heated debate about the concomitantadvantages and risks. Proponents expectLibra to unfetter money from its "governmental chains" and liberalize and cheapen monetary transactions around the globe. Opponents argue that a private currency imposes unforeseeable risks forboth individualsand the whole financial system. Furthermore, Libra could hamper monetary policies of national central banks. This paper contributes to the debate in two ways. First, we offer a comprehensive overview of the concept of Libra and its possible benefits and downsides to analyze its market potential. Second, we discuss potential implications that a private currency as Libra poses for monetary policy and financial regulation.
    Keywords: Libra,Cryptocurrency,Monetary Policy,Currency Regime
    JEL: E42 E52 G28
    Date: 2019
  5. By: Ulate, Mauricio (Federal Reserve Bank of San Francisco)
    Abstract: After the Great Recession several central banks started setting negative nominal interest rates in an expansionary attempt, but the effectiveness of this measure remains unclear. Negative rates can stimulate the economy by lowering the rates that commercial banks charge on loans, but they can also erode bank profitability by squeezing deposit spreads. This paper studies the effects of negative rates in a new DSGE model where banks intermediate the transmission of monetary policy. I use bank-level data to calibrate the model and find that monetary policy in negative territory is between 60% and 90% as effective as in positive territory.
    JEL: E32 E44 E52 E58 G21
    Date: 2019–08–27
  6. By: Samer Shousha
    Abstract: This paper shows that dollar appreciations lead to declines in GDP, investment, and credit to the private sector in emerging market economies (EMEs). These results imply that the transmission of dollar movements to EMEs occurs mainly through financial conditions rather than net exports, contrary to what would be expected from the conventional Mundell-Fleming model. Moreover, the central role of the U.S. dollar in global trade invoicing and financing - the dominant currency paradigm - and the increased integration of EMEs into international supply chains weaken the traditional trade channel. Finally, as expected if financial vulnerabilities are prominent, EMEs with higher exposure to credit denominated in dollars and lower monetary policy credibility experience greater contractions during dollar appreciations.
    Keywords: Dollar ; Balance sheet mismatch ; Dominant currency paradigm ; Global value chain ; Monetary policy credibility
    JEL: F31 F34 F36 F41 F44
    Date: 2019–10–04
  7. By: Jia, Chengcheng (Federal Reserve Bank of Cleveland)
    Abstract: I study the optimal type of forward guidance in a flexible-price economy in which both the private sector and the central bank are subject to imperfect information about the aggregate state of the economy. In this case, forward guidance changes the private sector’s expectations about both future monetary policy and the state of the economy. I study two types of forward guidance. The first type is instrument based, in which case the central bank commits to a value of the policy instrument. The second type is state contingent, in which case the central bank reveals its imperfect information and commits to a policy response rule. The key message is that forward guidance allows the central bank to reduce ex-ante price fluctuations by making the optimal trade-off between price deviations after the actual shock and after the noise shock. However, this benefit comes with a cost under the instrument-based forward guidance; that is, since firms perfectly know the change in monetary policy and prices are fully flexible, the real output level becomes independent of monetary policy. Consequently, while state-contingent forward guidance guarantees ex-ante welfare improvement, instrument-based forward guidance improves ex-ante welfare only if the central bank’s information is sufficiently precise.
    JEL: D82 D83 E52 E58
    Date: 2019–11–05
  8. By: Auer, Raphael (Bank of International Settlements)
    Abstract: The spread of distributed ledger technology (DLT) in finance could help to improve the efficiency and quality of supervision. This paper makes the case for embedded supervision, i.e., a regulatory framework that provides for compliance in tokenized markets to be automatically monitored by reading the market’s ledger, thus reducing the need for firms to actively collect, verify and deliver data. After sketching out a design for such schemes, the paper explores the conditions under which distributed ledger data might be used to monitor compliance. To this end, a decentralized market is modelled that replaces today’s intermediary-based verification of legal data with blockchain-enabled data credibility based on economic consensus. The key results set out the conditions under which the market’s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger’s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.
    Keywords: tokenisation; stablecoins; asset-based tokens; cryptoassets; cryptocurrencies; regtech; suptech; regulation; supervision; Basel III; proportionality; blockchain; distributed ledger technology; central bank digital currencies; proof-of-work; proof-of-stake; permissioned DLT; economic consensus; economic finality; fintech; compliance; auditing; accounting; privacy; digitalisation; finance; banking
    JEL: D20 D40 E42 E51 F31 G12 G18 G28 G32 G38 K22 L10 L50 M40
    Date: 2019–10–01
  9. By: Macera, Manuel (Universidad Torcuato Di Tella); Marcet, Albert (Univeritat Autonoma de Barcelona); Nicolini, Juan Pablo (Federal Reserve Bank of Minneapolis)
    Abstract: Following the sovereign debt crisis of 2012, some southern European countries have debated proposals to leave the Euro. We evaluate this policy change in a standard monetary model with seigniorage financing of the deficit. The main novel feature is that we depart from rational expectations while maintaining full rationality of agents in a sense made very precise. Our first contribution is to show that small departures from rational expectations imply that inflation upon exit can be orders of magnitude higher than under rational expectations. Our second contribution is to provide a framework for policy analysis in models without rational expectations.
    Keywords: Internal rationality; Inflation; Seigniorage
    JEL: E41 E52 E63
    Date: 2019–08–08
  10. By: Martin, Fernando M. (Federal Reserve Bank of St. Louis)
    Abstract: Societies often rely on simple rules to restrict the size and behavior of governments. When fiscal and monetary policies are conducted by a discretionary and profligate government, I find that revenue ceilings vastly outperform debt, deficit and monetary rules, both in effectiveness at curbing public spending and welfare for private agents. However, effective revenue ceilings induce an increase in deficit, debt and inflation. Under many scenarios, including recurrent adverse shocks, the optimal ceiling on U.S. federal revenue is about 15% of GDP, which leads to welfare gains for private agents worth about 2% of consumption. Austerity programs should be sudden instead of gradual, and focus on lowering revenue to reduce spending rather than raising revenue to lower debt.
    Keywords: time-consistency; fiscal rules; discretion; government debt; inflation; deficit; institutional design; political frictions; austerity; debt sustainability
    JEL: E52 E58 E61 E62
    Date: 2019–10–11
  11. By: Jakob de Haan; Zhenghao Jin; Chen Zhou
    Abstract: This paper investigates how countries' micro-prudential regulatory regimes are related to banks' systemic risk. We use a bank-level systemic risk indicator that can be decomposed into a bank's individual risk and its systemic linkage. To proxy the strictness of a country's regulatory regime, we employ World Bank survey data. Our results suggest that entry regulations increased systemic risk before and after the crisis. Liquidity and entry regulations seem to reduce individual risk in the post-crisis era, with little impact on systemic linkage. Other regulation categories, including capital regulation, do not have a robust relationship with systemic risk or its subcomponents.
    Keywords: systemic risk; regulatory regime; micro-prudential regulation
    JEL: G21 G28
    Date: 2019–09
  12. By: Benigno, Gianluca (Federal Reserve Bank of New York); Chen, Huigang (Uber Technologies Inc.); Otrok, Christopher (University of Missouri, Federal Reserve Bank of St. Louis); Rebucci, Alessandro (John Hopkins University, CEPR); Young, Eric R. (University of Virginia)
    Abstract: There is a new and now large literature analyzing government policies for financial stability based on models with endogenous borrowing constraints. These normative analyses build upon the concept of constrained efficient allocation, where the social planner is constrained by the same borrowing limit that agents face. In this paper, we show that the same set of policy tools that implement the constrained efficient allocation can be used by a Ramsey planner to replicate the unconstrained allocation, thus achieving higher welfare. The constrained social planner approach may lead to inaccurate characterizations of welfare-maximizing policies relative to the Ramsey approach.
    Keywords: constrained efficiency; financial crises; macroprudential policies and capital controls; pecuniary externalities; Ramsey optimal policy; social planner
    JEL: E61 F38 F44 H23
    Date: 2019–10–01
  13. By: Mikhail Dmitriev (Department of Economics, Florida State University); Jonathan Hoddenbagh (Department of Economics, Johns Hopkins University)
    Abstract: We establish the share of exports in production as a sufficient statistic for optimal noncooperative monetary policy. Under financial autarky, markups positively co-move with the export share. For complete markets, markups should be procyclical if the export share is procyclical. When central banks cooperate, markups are constant under complete markets, and countercyclical under financial autarky.
    Keywords: Open economy macroeconomics, Optimal monetary policy. Price stability
    JEL: E50 F41 F42
    Date: 2019–10
  14. By: McCracken, Michael W. (Federal Reserve Bank of St. Louis); McGillicuddy, Joseph (Federal Reserve Bank of St. Louis); Owyang, Michael T. (Federal Reserve Bank of St. Louis)
    Abstract: While conditional forecasting has become prevalent both in the academic literature and in practice (e.g., bank stress testing, scenario forecasting), its applications typically focus on continuous variables. In this paper, we merge elements from the literature on the construction and implementation of conditional forecasts with the literature on forecasting binary variables. We use the Qual-VAR [Dueker (2005)], whose joint VAR-probit structure allows us to form conditional forecasts of the latent variable which can then be used to form probabilistic forecasts of the binary variable. We apply the model to forecasting recessions in real-time and investigate the role of monetary and oil shocks on the likelihood of two U.S. recessions.
    Keywords: Qual-VAR; recession; monetary policy; oil shocks
    JEL: C22 C52 C53
    Date: 2019–10–01
  15. By: Bassetto, Marco (Federal Reserve Bank of Chicago)
    Abstract: A policy of forward guidance has been suggested either as a form of commitment ("Odyssean") or as a way of conveying information to the public ("Delphic"). I analyze the strategic interaction between households and the central bank as a game in which the central bank can send messages to the public independently of its actions. In the absence of private information, the set of equilibrium payoffs is independent of the announcements of the central bank: forward guidance as a pure commitment mechanism is a redundant policy instrument. When private information is present, central bank communication can instead have social value. Forward guidance emerges as a natural communication strategy when the private information in the hands of the central bank concerns its own preferences or beliefs: while forward guidance per se is not a substitute for the central bank's commitment or credibility, it is an instrument that allows policymakers to leverage their credibility to convey valuable information about their future policy plans. It is in this context that "Odyssean forward guidance" can be understood.
    Keywords: Forward guidance; monetary policy; interest rates
    JEL: C5 E4 E5
    Date: 2019–07–25
  16. By: Lewis, Daniel J. (Federal Reserve Bank of New York); Makridis, Christos (MIT Sloan School of Management); Mertens, Karel (Federal Reserve Bank of Dallas)
    Abstract: We use daily survey data from Gallup to assess whether households' beliefs about economic conditions are influenced by surprises in monetary policy announcements. We first provide more general evidence that public confidence in the state of the economy reacts to certain types of macroeconomic news very quickly. Next, we show that surprises about the federal funds target rate are among the news that have statistically significant and instantaneous effects on economic confidence. In contrast, surprises about forward guidance and asset purchases do not have similar effects on household beliefs, perhaps because they are less well understood. We document heterogeneity in the responsiveness of sentiment across demographics.
    Keywords: monetary policy shocks; central bank communication; information rigidities; consumer confidence; high-frequency identification
    JEL: E30 E40 E50
    Date: 2019–09–01
  17. By: Glover, Andrew (Federal Reserve Bank of Kansas City)
    Abstract: Can central banks use negative nominal interest rates to overcome the adverse effects of the zero lower bound? I show that negative rates are likely to be counterproductive in an expectations-driven liquidity trap. In a liquidity trap, firms expect low demand and cut prices, which leads the central bank to reduce nominal rates to their lower bound. If the resulting decline in real rates is not enough to stabilize demand, then the pessimism of price setters is fulfilled. Theoretically, the effect of a negative nominal rate is non-monotonic: a marginally negative rate is not enough to escape the liquidity trap, but allows for more pessimistic expectations and deflation, while a sufficiently negative rate eliminates the trap altogether. However, plausible estimates of the cost and benefits of price adjustments in the U.S. suggest that negative rates are contractionary in a liquidity trap, even at −100 percent.
    Keywords: Interest Rates; Nominal Negative Rates; Liquidity Traps
    JEL: E50 E52 E58
    Date: 2019–10–03
  18. By: Andersson, Fredrik N. G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper examines the Swedish experience of forward guidance 2007-2018. We focus on three interrelated issues: first, the effects of forward guidance on the discussion within the Board of Directors of the Riksbank, second, on the communication between the Riksbank and the public, and third, on the interest rate expectations held by various groups in Swedish society. We conclude that forward guidance has had negative effects on the dialogue within the Board as well on the communication between the Riksbank and the public. In addition, forward guidance has failed to affect expectations about interest rates in a systematic and significant way. We trace the roots of these consequences to the inability of the Riksbank to forecast its future policy rate three years ahead with any reasonable accuracy. The Riksbank has learned from this dismal performance and partially abandoned forward guidance, returning to a focus on the rate of inflation – as it did prior to the introduction of forward guidance.
    Keywords: forward guidance; central bank communication; interest rate forecasting; inflation targeting; the Riksbank; monetary policy; Sweden
    JEL: E40 E43 E47 E50 E52 E65
    Date: 2019–10–11
  19. By: de Haan, Leo; Holton, Sarah; van den End, Jan Willem
    Abstract: We empirically analyse the relationship between longer term central bank liquidity support and banks’ balance sheet ratios, using difference-in-differences panel regressions and propensity score matching on a large sample of banks in the euro area. The research question is whether the liquidity operations, which were introduced to prevent disorderly deleveraging, can also be linked to unintended changes in banks’ funding policies and asset allocations. The results show that unconditional and conditional refinancing operations are associated with different developments on banks’ balance sheets. Unconditional longer-term refinancing operations went together with higher maturity transformation by banks in stressed countries, and also more carry trades, i.e. banks borrowing more while increasing their holdings of government bonds. In contrast, refinancing operations that were conditional on banks’ lending were not associated with such carry trades, highlighting the benefits of conditionality attached to long-term refinancing operations. JEL Classification: E51, G21, G32
    Keywords: banking, central bank liquidity, financial intermediation
    Date: 2019–11
  20. By: Georgiadis, Georgios (European Central Bank); Schumann, Ben (European Central Bank)
    Abstract: Different export-pricing currency paradigms have different implications for a host of issues that are critical for policymakers such as business cycle co-movement, optimal monetary policy, optimum currency areas and international monetary policy coordination. Unfortunately, the literature has not reached a consensus on which pricing paradigm best describes the data. Against this background, we test for the empirical relevance of dominant-currency pricing (DCP). Specifically, we first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing (PCP) and local-currency pricing (LCP). In the model, under DCP the output spillovers from shocks that appreciate the U.S. dollar multilaterally decline with an economy's export-import U.S. dollar pricing share differential, i.e., the difference between the share of an economy's exports and imports that are priced in the dominant currency. Underlying this prediction is a change in an economy's net exports in response to multilateral changes in the U.S. dollar exchange rate that arises because of differences in the extent to which exports and imports are priced in the dominant currency. We then confront this prediction of DCP with the data in a sample of up to 46 advanced and emerging-market economies for the time period from 1995 to 2018. Specifically, controlling for other cross-border transmission channels, we document that consistent with the prediction from DCP the output spillovers from U.S. dollar appreciation correlate negatively with recipient economies' export-import U.S. dollar invoicing share differentials. We document that these findings are robust to considering U.S. demand, U.S. monetary policy and exogenous exchange rate shocks as a trigger of U.S. dollar appreciation, as well as to accounting for the role of commodity trade in U.S. dollar invoicing.
    Keywords: Dominant-currency pricing; U.S. shocks; spillovers
    JEL: C50 E52 F42
    Date: 2019–09–04
  21. By: Amano, Robert (Bank of Canada); Carter, Thomas (Bank of Canada); Leduc, Sylvain (Federal Reserve Bank of San Francisco)
    Abstract: We construct a model to evaluate the role that the risk of future effective lower bound (ELB) episodes plays as a factor behind the persistently weak inflation witnessed in many advanced economies since the Great Recession. In our model, a range of precautionary channels cause ELB risk to affect inflation and other macroeconomic outcomes even during “normal times” when nominal rates are far away from the ELB. This behavior is enhanced through a growth channel that captures possible long-lasting output declines at the ELB. We show that ELB risk substantially weighs on inflation even when the policy rate is above the ELB. Our model also predicts substantially below-target inflation expectations and negative inflation risk premia.
    Date: 2019–10–15
  22. By: Carlos Carriga (Federal Reserve Bank of St. Louis); Finn E. Kydland (University of California – Santa Barbara; NBER); Roman Sustek (Centre for Macroeconomics (CFM))
    Abstract: We propose a tractable framework for monetary policy analysis in which both short - and long-term debt affect equilibrium outcomes. This objective is motivated by observations from two literatures suggesting that monetary policy contains a dimension affecting expected future interest rates and thus the costs of long-term financing. In New-Keynesian models, however, long-term loans are redundant assets. We use the model to address three questions: what are the effects of statement vs. action policy shocks; how important are standard New-Keynesian vs. cash flow effects in their transmission; and what is the interaction between these two effects?
    Keywords: Mortgages, Cash-flow effects, Sticky prices, Monetary policy transmission, Monetary policy communication
    JEL: E52 G21 R21
    Date: 2019–10
  23. By: Copeland, Adam (Federal Reserve Bank of New York)
    Abstract: This paper measures how the 2007-09 financial crisis affected the U.S. federal funds market. I accomplish this by developing and estimating a structural model of this market, in which intermediation plays a crucial role and borrowing banks differ in their unobserved probability of default. The estimates imply that the expected probability of default increases 0.29 percentage point at the start of the crisis in mid-2007 and then gains a further 1.91 percentage points after the bankruptcy of Lehman Brothers. These increases do not cause a market freeze, however, because simultaneously there is a shift outward in the supply of funds. The model indicates that amid the turmoil of the crisis, lenders viewed the fed funds market as a relatively attractive place to invest cash overnight.
    Keywords: asymmetric information; fed funds; intermediation; financial crisis
    JEL: D82 G01 G14
    Date: 2019–11–01

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