nep-cba New Economics Papers
on Central Banking
Issue of 2019‒12‒02
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary policy regimes and inflation persistence in the United Kingdom By Shayan Zakipour-Saber
  2. Optimal monetary and macroprudential policies for financial stability in a commodity-exporting economy By Ivan Khotulev; Konstantin Styrin
  3. Policy Maker's Credibility with Predetermined Instruments for Forward-Looking Targets By Jean-Bernard Chatelain; Kirsten Ralf
  4. Negative Monetary Policy Rates and Systemic Banks’ Risk-Taking: Evidence from the Euro Area Securities Register By Johannes Bubeck; Angela Maddaloni; José-Luis Peydró
  5. Average Inflation Targeting and Interest-Rate Smoothing By Eo, Yunjong; Lie, Denny
  6. Quantitative Easing and the Term Premium as a Monetary Policy Instrument By Etienne Vaccaro-Grange
  7. Disinflationary shocks and inflation target uncertainty By Stefano Neri; Tiziano Ropele
  8. Central bank tone and the dispersion of views within monetary policy committes By Paul Hubert; Fabien Labondance
  9. Anchored or de-anchored? That is the question By Francesco Corsello; Stefano Neri; Alex Tagliabracci
  10. Estimates of the Natural Rate of Interest and the Stance of Monetary Policies: A Critical Assessment By Enrico S. Levrero
  11. Interconnected Banks and Systemically Important Exposures By Alan Roncoroni; Stefano Battiston; Marco D’Errico; Grzegorz Halaj; Christoffer Kok
  12. The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets By Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
  13. Monetary Easing, Leveraged Payouts and Lack of Investment By Viral V. Acharya; Guillaume Plantin
  14. The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy By Pasten, Ernesto; Schoenle, Raphael
  15. Nonbanks, Banks, and Monetary Policy: U.S. Loan-Level Evidence since the 1990s By David Elliott; Ralf R. Meisenzahl; José-Luis Peydró; Bryce C. Turner
  16. Harnessing international remittances for financial development: The role of monetary policy By Haruna, Issahaku
  17. Forecasting inflation in the euro area: countries matter! By Angela Capolongo; Claudia Pacella
  18. Domestic and global determinants of inflation: evidence from expectile regression By Fabio Busetti; Michele Caivano; Davide Delle Monache
  19. Monetary Policy and Wealth Inequality over the Great Recession in the UK An Empirical Analysis By Haroon Mumtaz; Angeliki Theophilopoulou
  20. Heterogeneous Beliefs, Monetary Policy, and Stock Price Volatility By Katsuhiro Oshima
  21. Differences in Euro-Area Household Finances and their Relevance for Monetary-Policy Transmission By Hintermaier, Thomas; Koeniger, Winfried

  1. By: Shayan Zakipour-Saber (Central Bank of Ireland)
    Abstract: This paper conducts a structural analysis of inflation persistence in the United Kingdom between 1965-2009. I allow for the possibility of shifts in the UK economy by estimating open-economy dynamic stochastic general equilibrium models in which parameters of a Taylor-type monetary policy rule, New Keynesian Phillips curve, and volatilities of structural economic shocks, follow Markov processes (Markov-switching DSGEs). The best-fitting model allows for changes in monetary policy and stochastic shock volatility. The first policy regime responds passively to movements in inflation, adjusting the nominal interest rate less than one-for-one and is estimated to be in place from the early 1970s until the late 1980s. The other regime responds actively to inflation and places less weight on exchange rate movements. This regime is present for the rest sample and almost coincides with the period after the Bank of England explicitly adopted an inflation target in 1992. I find a small but insignificant decrease in inflation persistence in the policy regime that responds more actively to inflation.
    Keywords: Markov-Switching, DSGE, Inflation persistence, Bayesian estimation
    JEL: C11 E31 E52
    Date: 2019–10–15
  2. By: Ivan Khotulev (Bank of Russia, Russian Federation); Konstantin Styrin (Bank of Russia, Russian Federation)
    Abstract: We develop a model to analyze the optimal combination of macroprudential and monetary policies in a small open commodity-exporting economy. Unlike a closed economy, where monetary and macroprudential policies tend to be substitutes, in a small open economy the optimal policy mix depends on the specifics of shocks and economic structure. Monetary and macroprudential policies tend to be complements when the degree of pass-through of credit spreads into marginal costs and prices is sufficiently high, or when a credit boom is caused by a commodity boom, a fraction of consumers lacks access to financial markets, and the government follows a fiscal policy rule. The two policies are substitutes when the complementarity between domestic and imported production inputs is sufficiently high.
    Keywords: Monetary policy, macroprudential policy, financial stability, commodity exporter, small open economy.
    JEL: E52 E58 G01 G28
    Date: 2019–11
  3. 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, INSEEC - INSEEC Business School - Institut des hautes études économiques et commerciales Business School (INSEEC))
    Abstract: The aim of the present paper is to provide criteria for a central bank of how to choose among di¤erent monetary-policy rules when caring about a number of policy targets such as the output gap and expected in ‡ation. Special attention is given to the question if policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, the forward-looking case implies an extreme lack of robustness and of credibility of stabilization policy. The backward-looking case is such that the simple-rule parameters can be the solution of Ramsey optimal policy under limited commitment. As a consequence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumption leading to policy advice that is neither robust nor credible.
    Keywords: Determinacy,Proportional Feedback Rules,Dynamic Stochastic General Equilibrium,Ramsey Optimal Policy under Quasi-Commitment Keywords: Determinacy,Ramsey Optimal Policy under Quasi-Commitment
    Date: 2019–11
  4. By: Johannes Bubeck; Angela Maddaloni; José-Luis Peydró
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: negative rates, non-standard monetary policy, reach-for-yield, securities, banks
    JEL: E43 E52 E58 G01 G21
    Date: 2019–11
  5. By: Eo, Yunjong; Lie, Denny
    Abstract: We study the welfare implication of average inflation targeting as a simple interest-rate rule, in which the monetary authority adjusts its short-term policy rate in response to the output gap as well as average inflation deviation from its target instead of reacting to the contemporaneous inflation rate as in a Taylor-type rule. We find that the welfare improvement achieved by switching to average inflation targeting from a standard Taylor rule is modest with a high degree of interest-rate smoothing, whereas it is significant without interest-rate smoothing. We show that average inflation targeting is welfare-improving in the same way as interest-rate smoothing by making the conduct of monetary policy history-dependent. Thus, the high degree of monetary policy inertia in the estimated interest-rate rules in many advanced economies implies that the welfare gain from adopting the average inflation targeting rule would be modest.
    Keywords: New Keynesian model; History-dependent policy; Welfare analysis; Ramsey policy; Interest-rate rule; Monetary policy inertia;
    Date: 2019–11
  6. By: Etienne Vaccaro-Grange (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - Ecole Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: The transmission of Quantitative Easing to aggregate macroeconomic variables through the yield curve is disentangled in two yield channels: the term premium channel, captured by a term premium series, and the signaling channel, that corresponds to the interest rate expectations counterpart. Both yield components are extracted from a term structure model and plugged into a Structural VAR with Euro Area macroeconomic variables in which shocks are identified using sign restrictions. With this set-up, I show how the central bank can use the term premium as a single monetary policy instrument to foster output and prices. However, I also show that there has been a cost channel in the transmission of QE to inflation between 2015 and 2017. This cost channel provides a new explanation as to why inflation has been so muted during this period, despite the easing monetary environment. Finally, a policy rule for the term premium is estimated.
    Keywords: quantitative easing,shadow-rate term structure model,BVAR,sign restrictions
    Date: 2019–11
  7. By: Stefano Neri (Bank of Italy); Tiziano Ropele (Bank of Italy)
    Abstract: In New Keynesian models favourable cost-push shocks lower inflation and increase output. Yet, when the central bank�s inflation target is not perfectly observed these shocks turn contractionary as agents erroneously perceive a temporary reduction in the target. This effect is amplified when monetary policy is constrained by the effective lower bound on the policy rate.
    Keywords: inflation target, imperfect information, monetary policy
    JEL: E31 E52 E58
    Date: 2019–07
  8. By: Paul Hubert (Sciences Po - OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté, CRESE)
    Abstract: Does policymakers’ choice of words matter? We explore empirically whether central bank tone conveyed in FOMC statements contains useful information for financial market participants. We quantify central bank tone using computational linguistics and identify exogenous shocks to central bank tone orthogonal to the state of the economy. Using an ARCH model and a high-frequency approach, we find that positive central bank tone increases interest rates at the 1-year maturity. We therefore investigate which potential pieces of information could be revealed by central bank tone. Our tests suggest that it relates to the dispersion of views among FOMC members. This information may be useful to financial markets to understand current and future policy decisions. Finally, we show that central bank tone helps predicting future policy decisions.
    Date: 2019–11
  9. By: Francesco Corsello (Bank of Italy); Stefano Neri (Bank of Italy); Alex Tagliabracci (Bank of Italy)
    Abstract: This paper shows that long-term inflation expectations have de-anchored from the ECB Governing Council’s inflation aim. Long-term expectations from the ECB’s Survey of Professional Forecasters have not returned to the levels that prevailed before the 2013-14 disinflation, and their distribution remains tilted to the downside. Long-term expectations have become sensitive to short-term ones and to negative surprises to inflation. Forecasters who have participated to most of the survey rounds are the most responsive to short-term developments in inflation.
    Keywords: inflation expectations, anchoring, monetary policy
    JEL: E31 E52 E58
    Date: 2019–10
  10. By: Enrico S. Levrero (Roma Tre University)
    Abstract: Starting with the literature on the estimates of the natural rate of interest, this paper critically analyzes the modern practice of identifying the benchmark rate of monetary policy with an equilibrium or neutral interest rate reflecting `fundamental forces` unaffected by monetary factors. After briefly mentioning the determinants of the natural rate of interest in the New- Keynesian models, the paper discusses the different notions of it that we find in these models and the problems encountered when the natural rate is estimated. It states that these problems are not only related to the difficulties in distinguishing the kind and persistency of economic shocks, but pertain to theory, namely to model specification and the alleged independence of the average or normal interest rate from monetary policy. Following Keynes`s suggestion regarding the monetary nature of interest rates, some final remarks will thus be advanced on their effects on prices and income distribution as well as on the objectives and stance of monetary policies.
    Keywords: Natural rates of interest, Structural and semi-structural models, Monetary policies,Taylor-rule, Interest rates and income distribution
    JEL: E43 E52 E58 E13 E12 E11
    Date: 2019–01
  11. By: Alan Roncoroni; Stefano Battiston; Marco D’Errico; Grzegorz Halaj; Christoffer Kok
    Abstract: How do banks' interconnections in the euro area contribute to the vulnerability of the banking system? We study both the direct interconnections (banks lend to each other) and the indirect interconnections (banks are exposed to similar sectors of the economy). These complex linkages make the banking system more vulnerable to contagion risks. We use a unique supervisory dataset of the European Central Bank with the 26 largest banks in the euro area. Introducing a new measure of indirect interconnections, we assess to what extent banks are significantly exposed to devaluation risk of commonly held assets. We find that for small shocks, banks that operate in multiple countries make the banking system more resilient. But for large shocks, international diversification makes the banking system less resilient. While contagion risk is usually ignored in supervisory stress tests, it can have significant impacts on banks' solvency and should influence how supervisors design regulations. However, we find there is no one-size-fits-all solution: the optimal financial architecture depends on the shocks considered and the international diversification.
    Keywords: Financial stability
    JEL: C63 G G1 G15 G2 G21
    Date: 2019–11
  12. By: Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
    Abstract: This paper shows that monetary policy and prudential policies interact. U.S. banks issue more commercial and industrial loans to emerging market borrowers when U.S. monetary policy eases. The effect is less pronounced for banks that are more constrained through the U.S. bank stress tests, reflected in a lower minimum capital ratio in the severely adverse scenario. This suggests that monetary policy spillovers depend on banks’ capital constraints. In particular, during a period of quantitative easing when liquidity is abundant, banks are more flexible, and the scope for adjusting lending is larger when they have a bigger capital buffer. We conjecture that bank lending to emerging markets during the zero-lower bound period would have been even higher had the United States not introduced stress tests for their banks.
    Keywords: U.S. bank lending ; Stress tests ; Emerging markets ; Monetary policy spillovers
    JEL: E44 F31 G15 G21 G23
    Date: 2019–11–22
  13. By: Viral V. Acharya; Guillaume Plantin
    Abstract: This paper studies a model in which a low monetary policy rate lowers the cost of capital for entrepreneurs, potentially spurring productive investment. Low interest rates, however, also induce entrepreneurs to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit entrepreneurs, they come at the social cost of reducing their incentives thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, due to the presence of a shadow-banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first-best. The optimal monetary policy may even consist of “leaning against the wind,” i.e., not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.
    JEL: E52 E58 G01 G21 G23 G28
    Date: 2019–11
  14. By: Pasten, Ernesto (Central Bank of Chile); Schoenle, Raphael (Federal Reserve Bank of Cleveland)
    Abstract: Realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages in the transmission of monetary policy shocks. Quantitatively, heterogeneity in price stickiness is the central driver for real effects. Input-output linkages and consumption shares alter the identity of the most important sectors to the transmission. Reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.
    Keywords: input-output linkages; multi-sector Calvo model; monetary policy;
    JEL: E31 E32 O40
    Date: 2019–11–15
  15. By: David Elliott; Ralf R. Meisenzahl; José-Luis Peydró; Bryce C. Turner
    Abstract: We show that credit supply effects and associated real effects of monetary policy depend on the size of nonbank presence in the respective lending market. Nonbank presence also alters how monetary policy affects the distribution of risk. For identification, we use exhaustive loan-level data since the 1990s and Gertler-Karadi (2015) monetary policy shocks. First, different from the literature showing that low monetary policy rates increase credit supply and risk-taking by banks, we find that higher monetary policy rates shifts credit supply for corporates, mortgages, and consumers shifts from regulated banks to less regulated, more fragile nonbanks. Moreover, this shift is more pronounced for ex-ante riskier borrowers. Second, nonbanks reduce the effectiveness of the bank lending channel of monetary policy at the loan-level. However, this reduction varies substantially across lending markets. Total credit and real effects are largely neutralized in consumer loans and the associated consumption, but not in corporate loans and investment.
    Keywords: negative rates, non-standard monetary policy, reach-for-yield, securities, banks
    JEL: E51 E52 G21 G23 G28
    Date: 2019–11
  16. By: Haruna, Issahaku
    Abstract: This study investigates how remittances and monetary policy independently and interactively shape the financial system of developing countries. It employs single equation instrumental variable based estimation procedures to test the hypothesis that, to boost financial development, remittances require a complementary domestic monetary policy framework which ensures price stability while limiting price distortions. The results show that remittances stimulate financial development only in countries with a favourable monetary environment. Building on these results and employing various indicators of financial development, the results suggest that remittances rise to cushion migrant households from the repercussions of poor financial intermediation, weak institutions and unfavourable business environment in the home country. By extension, the findings are germane to monetary and financial policy in developing countries.
    Keywords: Remittances, Monetary Policy, Financial Development, Developing Country, Financial Development Index
    JEL: E5 E52 F3 G2
    Date: 2019–03–19
  17. By: Angela Capolongo (ECARES, Université Libre de Bruxelles); Claudia Pacella (Bank of Italy)
    Abstract: We construct a Bayesian vector autoregressive model with three layers of information: the key drivers of inflation, cross-country dynamic interactions, and country-specific variables. The model provides good forecasting accuracy with respect to the popular benchmarks used in the literature. We perform a step-by-step analysis to shed light on which layer of information is more crucial for accurately forecasting euro area inflation. Our empirical analysis reveals the importance of including the key drivers of inflation and taking into account the multi-country dimension of the euro area. The results show that the complete model performs better overall in forecasting inflation excluding energy and unprocessed food, while a model based only on aggregate euro area variables works better for headline inflation.
    Keywords: inflation, forecasting, euro area, Bayesian estimation
    JEL: C32 C53 E31 E37
    Date: 2019–06
  18. By: Fabio Busetti (Bank of Italy); Michele Caivano (Bank of Italy); Davide Delle Monache (Bank of Italy)
    Abstract: The paper investigates the role of domestic and global determinants of euro area core inflation. We analyse the entire conditional distribution of inflation by estimating a Phillips curve type relationship using an expectile regression approach, extended to capture time-varying effects. The main findings are as follows. First, both the domestic and foreign output gap are significant drivers of euro area core inflation, once external demand pressures are properly orthogonalized in a modified measure of domestic gap. However, the inflationary impact of the domestic component is relatively stronger. Second, the domestic output gap has a bigger influence in the right tail of the conditional distribution of inflation. Third, adding international price pressures in the regression weakens the link between inflation and the foreign output gap. Fourth, in a time- varying perspective, there is an increase in the response of inflation to the domestic gap in the last decade but only at the lower quantiles. Overall, the evidence on the so-called “globalization hypothesis” is mixed: while the pass-through to inflation of foreign prices and the exchange rate increased over time at all quantiles, the impact of global slack remained broadly stable, particularly in the central part of the distribution.
    Keywords: asymmetric least squares, globalization, inflation quantiles, Phillips curve, time varying parameters
    JEL: C53 E17
    Date: 2019–06
  19. By: Haroon Mumtaz (Queen Mary, University of London); Angeliki Theophilopoulou (Brunel University London)
    Abstract: We use detailed micro information at household level from the Wealth and Assets Survey to construct measures of wealth inequality from 2005 to 2016 at the monthly frequency. We investigate the dynamic relationship between monetary policy and the evolution of wealth inequality measures. Our findings suggest that expansionary monetary policy shocks lead to an increase in wealth inequality and contributed significantly to its fluctuations. This effect is heterogeneous across the wealth distribution with the monetary shock affecting the median household relative to the 20th percentile by a larger amount than the right tail. Our results suggest that the shock is transmitted through changes in net property and financial wealth that constitute the bulk of total wealth of households near the median of the wealth distribution.
    Keywords: Inequality, Wealth, FAVAR, Monetary Policy Shocks
    JEL: D31 E21 E44 E52
    Date: 2019–10–31
  20. By: Katsuhiro Oshima (Graduate School of Economics, Kyoto University)
    Abstract: This paper investigates how the stance of monetary policy affects stock price volatilities in an economy where two types of households with subjective and objective beliefs about expected capital gains from stock prices exist. I assume that investors construct subjective beliefs about expected capital gains by Bayesian learning from observed growth rates of stock prices. In a model with only homogenous subjective beliefs, the effect of the interest rate on stock prices tends to be unrealistically strong. In contrast, assuming heterogeneity by including investors with both subjective and objective beliefs improves the fit of theoretical moments to the data and especially helps to explain stock price volatility under interest rate shocks with conventional sizes. This quantitative improvement in stock price reactions to interest rate shocks allows me to conduct realistic analysis about how the stance of monetary policy affects stock price volatilities. Strong inertia of monetary policy rule does not necessarily reduce asset price volatilities. This depends on what kind of shock the economy is experiencing. When the monetary policy is persistent, stock price volatilities magnify under an unexpected monetary policy shock
    Keywords: stock price, asset pricing, heterogeneity, subjective belief, monetary policy, sticky prices, New Keynesian
    JEL: D83 D84 E44 E52 G12 G14
    Date: 2019–11
  21. By: Hintermaier, Thomas (University of Bonn); Koeniger, Winfried (University of St. Gallen)
    Abstract: This paper quantifies the extent of heterogeneity in consumption responses to changes in real interest rates and house prices in the four largest economies in the euro area: France, Germany, Italy, and Spain. We first calibrate a life-cycle incomplete-markets model with a financial asset and housing to match the large heterogeneity of households asset portfolios, observed in the Household Finance and Consumption Survey (HFCS) for these countries. We then show that the heterogeneity in household finances implies that responses of consumption to changes in the real interest rate and in house prices differ substantially across countries, and within countries by household characteristics such as age, housing tenure, and asset positions. The different consumption responses quantified in this paper point towards important heterogeneity in monetary-policy transmission in the euro area.
    Keywords: european household portfolios, consumption, monetary policy transmission, international comparative finance, housing
    JEL: D14 D31 E21 E43 G11
    Date: 2019–11

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