nep-cba New Economics Papers
on Central Banking
Issue of 2019‒11‒25
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The ECB after the crisis: existing synergies among monetary policy, macroprudential policies and banking supervision By Cassola, Nuno; Kok, Christoffer; Mongelli, Francesco Paolo
  2. Average Inflation Targeting Would Be a Weak Tool for the Fed to Deal with Recession and Chronic Low Inflation By David Reifschneider; David Wilcox
  3. Monetary union and financial integration By Luca Fornaro
  4. Cybersecurity and Financial Stability; 2019 Financial Stability Conference – Financial Stability: Risks, Resilience, and Policy, 11.21.19; Federal Reserve Bank of Cleveland and the Office of Financial Research, Cleveland, OH By Mester, Loretta J.
  5. Inflation Targets in Latin America By José De Gregorio
  6. Unconventional Monetary Policy, (A)Synchronicity and the Yield Curve By Dilts Stedman, Karlye
  7. Achieving the Bank of Japan’s Inflation Target By Gee Hee Hong; Rahul Anand; Yaroslav Hul
  8. Monetary Policy and Bank Equity Values in a Time of Low and Negative Interest Rates By Miguel Ampudia; Skander J. Van den Heuvel
  9. The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission By Zhengyang Chen
  10. Technological Progress and Monetary Policy: Managing the Fourth Industrial Revolution By Stephen S. Poloz
  11. Is Neo-Fisherian ‘alive’ in South Africa? A frequency domain causality approach By Andrew Phiri
  12. Exchange rate dynamics and unconventional monetary policies: it�s all in the shadows By Andrea De Polis; Mario Pietrunti
  13. Interconnected banks and systemically important exposures By Roncoroni, Alan; Battiston, Stefano; D'Errico, Marco; Hałaj, Grzegorz; Kok, Christoffer
  14. The impact of (un)conventional expansionary monetary policy on income inequality - Lessons from Japan By Israel, Karl-Friedrich; Latsos, Sophia
  15. Estimation and Evaluation of Monetary Policy in Korea Before and After the Global Financial Crisis By Jeonghun Choi
  16. Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions By Jean-Bernard Chatelain; Kirsten Ralf
  17. Hindsight vs. Real time measurement of the output gap: Implications for the Phillips curve in the Chilean Case By Camila Figueroa; Jorge Fornero; Pablo García
  18. Bayesian state-space modeling for analyzing heterogeneous network effects of US monetary policy By Niko Hauzenberger; Michael Pfarrhofer
  19. Prudential Policies and Bailouts - A Delicate Interaction By Ernesto Pasten
  20. A Phillips Curve for the Euro Area By Laurence M. Ball; Sandeep Mazumder
  21. Dual Exchange Markets and Intervention By Haaparanta, Pertti

  1. By: Cassola, Nuno; Kok, Christoffer; Mongelli, Francesco Paolo
    Abstract: The prolonged crisis exposed the vulnerability of a monetary union without a banking union. The Single Supervisory Mechanism (SSM), which started operating in November 2014, is an essential step towards restoring banks to health and rebuilding trust in the banking system. The ECB is today responsible for setting a single monetary policy applicable throughout the euro area and for supervising all euro area banks in order to ensure their safety and soundness, some directly and some indirectly. Its role in the area of financial stability has also expanded through the conferral of macroprudential tasks and tools that include tightening national measures when necessary. It thus carries out these complementary functions, while its primary objective of pursuing price stability remains unchanged. What are the working arrangements of this enlarged ECB, and what are the similarities and existing synergies among these functions? In the following pages, focusing on the organisational implications of the “new” ECB, we show the relative degrees of centralisation and decentralisation that exist in discharging these functions, the cycles of policy preparation and the rules governing interaction between them. JEL Classification: E42, E58, F36, G21
    Keywords: banking supervision, banking union, decision-making process, European Central Bank, financial stability, macroprudential policies, monetary policy, systemic risks
    Date: 2019–11
  2. By: David Reifschneider (former Federal Reserve); David Wilcox (Peterson Institute for International Economics)
    Abstract: The Federal Reserve faces two important monetary policy challenges: First, since the Great Recession it has struggled to move inflation convincingly up to the 2 percent target level. Second, during the next recession it will struggle to deliver enough support to the economy unless the recession is unusually mild. As a result, the search is on for alternative policy frameworks that might allow the Fed to achieve its monetary policy objectives more effectively. Among the alternatives is average inflation targeting (AIT). The basic idea is simple: Instead of aiming to return inflation over the medium term to the target rate of 2 percent, the Fed would aim to return the average of inflation over some period to the target rate. The crucial innovation of AIT is that when inflation has been running below the target rate, it would have the Fed aim for above-target inflation in the future, in order to bring average inflation up toward the target. Simulations of the Fed’s workhorse econometric model of the US economy (the FRB/US model) suggest that AIT would be a weak addition to the Fed’s policy toolkit for dealing with recessions and persistently low inflation. In addition, simple versions of AIT would sometimes compel the Fed to run an undesirably restrictive monetary policy. AIT is thus not a very appealing alternative to the current framework.
    Date: 2019–11
  3. By: Luca Fornaro
    Abstract: Since the creation of the euro, capital flows among member countries have been large and volatile. Motivated by this fact, I provide a theory connecting the exchange rate regime to financial integration. The key feature of the model is that monetary policy affects the value of collateral that creditors seize in case of default. Under flexible exchange rates, national governments can expropriate foreign investors by depreciating the exchange rate. Anticipating this, investors impose tight limits on international borrowing. In a monetary union this source of exchange rate risk is absent, because national governments do not control monetary policy. Forming a monetary union thus increases financial integration by boosting borrowing capacity toward foreign investors. This process, however, does not necessarily lead to higher welfare. The reason is that a high degree of financial integration can generate multiple equilibria, with bad equilibria characterized by inefficient capital flights. Capital controls or fiscal transfers can eliminate bad equilibria, but their implementation requires international cooperation.
    Keywords: Monetary union, international financial integration, exchange rates, optimal currency area, capital flights, euro area.
    JEL: E44 E52 F33 F34 F36 F41 F45
    Date: 2019–11
  4. By: Mester, Loretta J. (Federal Reserve Bank of Cleveland)
    Abstract: Advances in research, data collection, and risk-monitoring have given us all a better appreciation of the interlinkages underlying the global financial system and the ability of a disturbance in one part of the system to propagate across the system. The horizontal approach to risk-monitoring, including stress testing, has been an important advance in the supervisory tool kit. Policymakers are gaining a better sense of how macroprudential policy and monetary policy interact, the appropriate role of liquidity and capital regulations, and the importance of taking a balanced approach to supervision and regulation, which supports both financial system resilience and the ability of financial firms to offer sound credit, liquidity, and payments services throughout the business cycle. Regulatory changes and the steps bankers themselves have taken to shore up their risk-management practices have led to a stronger and safer financial system. But as much as we have learned and accomplished, there is still more to do. The financial system is dynamic: it is constantly evolving. In a financial system that is rapidly adopting new technologies, our knowledge can rapidly become obsolete, as can the constructs we use to monitor and manage risks to financial stability. When the nature of the risks is changing, we need to ensure that our methods of assessing risks are nimble enough to adapt to the changing landscape. In my limited time this morning, I will focus on one area of rapid change pertinent to financial stability: namely, the risks to cybersecurity and our ability to handle these risks.
    Date: 2019–11–21
  5. By: José De Gregorio (Peterson Institute for International Economics)
    Abstract: Many emerging-market economies have adopted inflation targeting regimes since they were introduced by New Zealand in 1990. Latin America has not been the exception. Currently eight Latin American countries conduct monetary policy through inflation targeting regimes: Brazil, Chile, Colombia, Guatemala, Mexico, Paraguay, Peru, and Uruguay. This paper reviews the history of chronic inflation in Latin America and describes these countries’ experience with inflation targets and their performance during the global financial crisis.
    Keywords: Inflation, Inflation Targets, Latin America, Monetary Policy
    JEL: E52 E58
    Date: 2019–11
  6. By: Dilts Stedman, Karlye (Federal Reserve Bank of Kansas City)
    Abstract: This paper examines international spillovers from unconventional monetary policy between the United States, the euro area, the United Kingdom and Japan, and assesses the influence of asynchronous policy normalization on the slope of the yield curve. Using high frequency futures data to identify monetary policy surprises and controlling for contemporaneous news, I find that spillovers increase during periods of unconventional monetary policy and strengthen during asynchronous policy normalization. Local projections suggest persistent spillovers from the Federal Reserve, whereas other spillovers fade quickly. Through the lens of a shadow rate term structure model, I find that such spillovers elicit revisions, domestically and internationally, to both the expected path of short-term interest rates and required risk compensation, with the latter gaining importance at the effective lower bound of interest rates.
    Keywords: Monetary Policy; Spillovers
    JEL: E5 F42 G15
    Date: 2019–10–31
  7. By: Gee Hee Hong; Rahul Anand; Yaroslav Hul
    Abstract: The Bank of Japan has introduced various unconventional monetary policy tools since the launch of Abenomics in 2013, to achieve the price stability target of 2 percent inflation. In this paper, a forward-looking open-economy general equilibrium model with endogenously determined policy credibility and an effective lower bound is developed for forecasting and policy analysis (FPAS) for Japan. In the model’s baseline scenario, the likelihood of the Bank of Japan reaching its 2 percent inflation target over the medium term is below 40 percent, assuming the absence of other policy reactions aside from monetary policy. The likelihood of achieving the inflation target is even lower under alternative risk scenarios. A positive shock to central bank credibility increases this likelihood, and would require less accommodative macroeconomic policies.
    Date: 2019–11–01
  8. By: Miguel Ampudia; Skander J. Van den Heuvel
    Abstract: Does banks' exposure to interest rate risk change when interest rates are very low or even negative? Using a high-frequency event study methodology and intraday data, we find that the effect of surprise interest rate cuts announced by the ECB on European bank equity values – an effect that is normally positive – has become negative since interest rates in the euro area reached zero and below. Since then, a further unexpected cut of 25 basis points in the short-term policy rate lowered banks' stock prices by about 2% on average, compared to a 1% increase in normal times. In the cross section, this 'reversal' was far more pronounced for banks with a more traditional, deposit-intensive funding mix. We argue that the reversal as well as its cross-sectional pattern can be explained by the zero lower bound on interest rates on retail deposits.
    Keywords: Bank profitability ; Interest rate risk ; Monetary policy ; Negative interest rates ; ECB
    JEL: G21 E52 E58
    Date: 2019–08
  9. By: Zhengyang Chen
    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 Reserveâs 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.
    JEL: E3 E4 E5
    Date: 2019–10–15
  10. By: Stephen S. Poloz
    Abstract: This paper looks at the implications for monetary policy of the widespread adoption of artificial intelligence and machine learning, which is sometimes called the “fourth industrial revolution.” The paper reviews experiences from the previous three industrial revolutions, developing a template of shared characteristics: * new technology displaces workers; * investor hype linked to the new technology leads to financial excesses; * new types of jobs are created; * productivity and potential output rise; * prices and inflation fall; and * real debt burdens increase, which can provoke crises when asset prices crash. The experience of the Federal Reserve during 1995–2006 is particularly instructive. The paper uses the Bank of Canada’s main structural model, ToTEM (Terms-of-Trade Economic Model), to replicate that experience and consider options for monetary policy. Under a Taylor rule, monetary policy may allow growth to run as long as inflation remains subdued, easing the burden of adjustment on those workers directly affected by the new technology, while macroprudential policies help check financial excesses. This argues for a family of Taylor rules enhanced by the addition of financial stability considerations.
    Keywords: Economic models; Financial stability; Monetary policy framework; Uncertainty and monetary policy
    JEL: C5 E3 O11 O33
    Date: 2019–11
  11. By: Andrew Phiri (Department of Economics, Nelson Mandela University)
    Abstract: There is a new wave of monetary thought popularized in industrialized economies going under the banner of Neo-Fisherism. Proponents of this school of thought assume that there exists reverse causality in the conventional Fisher effect in which interest rates cause movements in expected inflation instead of interest rates being driven by inflation expectations. We examine whether the Neo-Fisherian hypothesis holds for the South African economy as an inflation-targeting emerging economy characterized by moderate inflation and policy rates. Using frequency domain causality tests on quarterly repo rate and inflation expectations data collected between 2002:q3 and 2019:q2, we find evidence of uni-directional causality from repo rates to inflation expectations over the short- and long-run. Policy implications of these findings are discussed.
    Keywords: Neo-fisher effect; interest rates; inflation expectations; South Africa; emerging economies; spectral causality tests.
    JEL: C32 C52 E31 E42 E58
    Date: 2019–11
  12. By: Andrea De Polis (Warwick Business School, University of Warwick); Mario Pietrunti (Bank of Italy)
    Abstract: In this paper we estimate an open economy New-Keynesian model to investigate the impact of unconventional monetary policies on the exchange rate, focusing on those adopted since the Global Financial Crisis in the euro area and in the United States. To this end we replace effective, short-term, interest rates with shadow rates, which provide a measure of the monetary stance when the former reach their effective lower bound. We find that since 2009 unconventional monetary policies significantly affected the dynamics of the euro-dollar exchange rate both in nominal and real terms: while the stimulus provided by the Fed prevailed between 2011 and 2014, contributing to the weakening of the dollar, in most recent years the depreciation of the euro mainly reflected the measures adopted by the ECB.
    Keywords: exchange rates, shadow rates, unconventional policies
    JEL: C11 E52 F31 F41
    Date: 2019–07
  13. By: Roncoroni, Alan; Battiston, Stefano; D'Errico, Marco; Hałaj, Grzegorz; Kok, Christoffer
    Abstract: We study the interplay between two channels of interconnectedness in the banking system. The first one is a direct interconnectedness, via a network of interbank loans, banks' loans to other corporate and retail clients, and securities holdings. The second channel is an indirect interconnectedness, via exposures to common asset classes. To this end, we analyze a unique supervisory data set collected by the European Central Bank that covers 26 large banks in the euro area. To assess the impact of contagion, we apply a structural valuation model NEVA (Barucca et al., 2016a), in which common shocks to banks' external assets are reflected in a consistent way in the market value of banks' mutual liabilities through the network of obligations. We identify a strongly non-linear relationship between diversification of exposures, shock size, and losses due to interbank contagion. Moreover, the most systemically important sectors tend to be the households and the financial sectors of larger countries because of their size and position in the financial network. Finally, we provide policy insights into the potential impact of more diversified versus more domestic portfolio allocation strategies on the propagation of contagion, which are relevant to the policy discussion on the European Capital Market Union. JEL Classification: C45, C63, D85, G21
    Keywords: bank stress test, cross-border contagion channels, financial contagion, financial networks, financial stability, systemic risk
    Date: 2019–11
  14. By: Israel, Karl-Friedrich; Latsos, Sophia
    Abstract: This paper analyzes the impact of conventional and unconventional monetary policy on income inequality in Japan, using hitherto unexplored data from the Japan Household Panel Survey. Empirical evidence shows that expansionary monetary policy in Japan has contributed to diminishing the gender pay gap, but also to increasing the education pay gap. These effects may have materialized via the aggregate demand channel and the labor productivity channel. In contrast, expansionary monetary policy has had no significant impact on the development of the age pay gap.
    Keywords: income inequality,Japan,monetary policy,low interest rate policy,unconventional monetary policy,monetary easing
    JEL: D31 D63 E52 E58
    Date: 2019
  15. By: Jeonghun Choi
    Abstract: This study estimates a simple small open dynamic stochastic general equilibrium model through the Bayesian approach using Korean data. It mainly analyzes the monetary policy conducted by the central bank of Korea in relation to the 2008{2009 global nancial crisis. Speci cally, it aims to answer three questions. (1) Is there any change in the Korean monetary policy before and after the global nancial crisis? (2) If so, what is the di erence between them? (3) What are the subsequent change in the role and e ect of the monetary policy alteration? To answer these questions, we rst implement a rolling estimation, which enables us to control the influence of the crisis and to find the time-varying characteristics of the Korean economy. Based on the results from the rst stage, we re-estimate the model by dividing the whole sample period into two sub-periods, namely, pre-crisis and post-crisis. According to our estimation results, exchange rate movements become an additional interest in deciding the policy rate of Korea after the peak of the crisis. In addition, the behavior of the Korean monetary authority becomes relatively more aggressive. When models including the data of the peak of the crisis are estimated, model ts become worse and the posterior estimates are distorted. Finally, we conduct simulations to gauge the altered role and e ect of the change. As measures of performance, volatilities of inflation, output, and exchange rate of the simulated series obtained by stochastic simulation show that the central bank of Korea can achieve more stabilized inflation and exchange rates under the post-crisis policy rule. Our results are robust for various speci cations of the monetary policy rule, alternative prior distribution, and data that can be used as proxies for the exchange rate and inflation of Korea.
  16. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: The reference model of frictionless endowment economies includes a Fisher relation for the real interest rate and government intertemporal budget constraint. For this model, Ramsey optimal policy mix is a unique equilibrium with an interest rate peg and a "passive" fiscal rule with a negative-feedback value of its parameter stabilizing public debt. This is a third equilibrium with respect to the two usual equilibria with ad hoc policy rules. The first one has passive fiscal policy and an active monetary policy rule parameter destabilizing in.ation. The second one has an active fiscal policy rule parameter destabilizing public debt and a passive monetary policy which includes the case of an interest rate peg. :
    Keywords: Frictionless endowment economy,Fiscal theory of the Price Level,Ramsey optimal policy,Interest Rate Rule,Fiscal Rule Keywords: Frictionless endowment economy,Fiscal Rule
    Date: 2019–09
  17. By: Camila Figueroa; Jorge Fornero; Pablo García
    Abstract: We examine sources of output gap revisions in Chile and document how the informational content of these measures affects forecasts of inflation using estimated Phillips curves. Data and forecasts come from Monetary Policy Reports. Output gap revisions are found well behaved because cannot be predicted. We consider backward and forward-looking specifications and also real time, quasi-real time and final output gap estimates. Median and common-factor inflation present lower forecast errors. Results suggest that the passage of time is informative to measure output gap. Inflation forecasts more accurate are found using forward-looking specifications and CB of Chile Staff’s gap estimates.
    Date: 2019–10
  18. By: Niko Hauzenberger; Michael Pfarrhofer
    Abstract: Understanding disaggregate channels in the transmission of monetary policy to the real and financial sectors is of crucial importance for effectively implementing policy measures. We extend the empirical econometric literature on the role of production networks in the propagation of shocks along two dimensions. First, we set forth a Bayesian spatial panel state-space model that assumes time variation in the spatial dependence parameter, and apply the framework to a study of measuring network effects of US monetary policy on the industry level. Second, we account for cross-sectional heterogeneity and cluster impacts of monetary policy shocks to production industries via a sparse finite Gaussian mixture model. The results suggest substantial heterogeneities in the responses of industries to surprise monetary policy shocks. Moreover, we find that the role of network effects varies strongly over time. In particular, US recessions tend to coincide with periods where between 40 to 60 percent of the overall effects can be attributed to network effects; expansionary economic episodes show muted network effects with magnitudes of roughly 20 to 30 percent.
    Date: 2019–11
  19. By: Ernesto Pasten
    Abstract: This paper calls attention to the non-trivial (and sometimes pervasive) effects of ex- ante policies, such as prudential policies, on banks’ risk taking through their effects on the ex-post incentives to bailouts when the authority lacks commitment. In particular, liquidity requirements, a crisis resolution fund and prudential taxes are examples of policies that may backfire. Conversely, public debt is an example of an ex-ante policy usually with no prudential motivation that may play such a role.
    Date: 2019–10
  20. By: Laurence M. Ball; Sandeep Mazumder
    Abstract: This paper asks whether a textbook Phillips curve can explain the behavior of core inflation in the euro area. A critical feature of the analysis is that we measure core inflation with the weighted median of industry inflation rates, which is less volatile than the common measure of inflation excluding food and energy prices. We find that fluctuations in core inflation since the creation of the euro are well explained by three factors: expected inflation (as measured by surveys of forecasters); the output gap (as measured by the OECD); and the pass-through of movements in headline inflation. Our specification resolves the puzzle of a “missing disinflation” after the Great Recession, and it diminishes the puzzle of a “missing inflation” during the recent economic recovery.
    JEL: E31 E32
    Date: 2019–11
  21. By: Haaparanta, Pertti
    Abstract: It is argued that the theoretical literature on dual exchange markets has completely neglected the form of central bank intervention emphasized by the "classics". They advocated neutral intervention where the central bank sells in the capital market all foreign exchange it acquires from the current transactions. Current literature concentrates on the non-sterilized intervention. In a choice-theoretic framework it is shown that the form of intervention matters very much for the transmission of changes in foreign rate of interest and in terms of trade. On normative side it is shown that one can always design the dual exchange system in such a way that it is superior to the uniform fixed rate system.
    Keywords: International Development

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