nep-cba New Economics Papers
on Central Banking
Issue of 2019‒12‒09
seventeen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Quantitative easing and exuberance in stock markets: Evidence from the euro area By Tom Hudepohl; Ryan van Lamoen; Nander de Vette
  2. Spread the Word: International Spillovers from Central Bank Communication By Hanna Armelius; Christoph Bertsch; Isaiah Hull; Xin Zhang
  3. Does Central Bank Communication Signal Future Monetary Policy? The Case of the ECB By Hamza Bennani; Nicolas Fanta; Pavel Gertler; Roman Horvath
  4. Real and Nominal Effects of Monetary Shocks under Time-Varying Disagreement By Vania Esady
  5. Household Income, Portfolio Choice and Heterogeneous Consumption Responses to Monetary Policy Shocks By Fumitaka Nakamura
  6. A Re-Evaluation of the Choice of an Inflation Target in the Wake of the Global Financial Crisis By Richard T. Froyen; Alfred V. Guender
  7. Inflation Targeting Flexibility: The CNB's Reaction Function under Scrutiny By Jan Filacek; Ivan Sutoris
  8. The Effect of Higher Capital Requirements on Bank Lending: The Capital Surplus Matters By Dominika Kolcunová; Simona Malovaná
  9. The effects of capital requirements on good and bad risk-taking By Pancost, N. Aaron; Robatto, Roberto
  10. The Effect of U.S. Stress Tests on Monetary Policy Spillovers to Emerging Markets By Emily Liu; Friederike Niepmann; Tim Schmidt-Eisenlohr
  11. Monetary Unions and National Welfare By Cem Gorgun
  12. The global financial cycle and us monetary policy in an interconnected world By Stéphane Dées; Alessandro Galesi
  13. Global Liquidity and Impairment of Local Monetary Policy By Salih Fendo?lu; Eda Gül?en; José-Luis Peydró
  14. A Partial Equilibrium Analysis of Current US Monetary Policy with a Prediction By Middleton, Elliott III
  15. Prolonged Low Interest Rates and Banking Stability By Kosuke Aoki; Ko Munakata; Nao Sudo
  16. Mortgage-Related Bank Penalties and Systemic Risk Among U.S. Banks By Vaclav Broz; Evzen Kocenda
  17. Risk, Asset Pricing and Monetary Policy Transmission in Europe: Evidence from a Threshold-VAR approach By Joerg Schmidt

  1. By: Tom Hudepohl; Ryan van Lamoen; Nander de Vette
    Abstract: In response to a prolonged period of low inflation, the European Central Bank (ECB) introduced Quantitative Easing (QE) in an attempt to steer inflation to its target of below, but close to, 2% in the medium term. This paper examines whether QE contributes to exuberance in euro area stock markets by using recent advances in bubble detection techniques (the GSADF-test). We do so by linking price developments in 10 euro area stock markets to a series of country specific macro fundamentals and QE. The results indicate that periods of QE coincide with exuberant investor behaviour, even after controlling for improving macro fundamentals.
    Keywords: exuberance; asset price bubbles; unconventional monetary policy; quantitative easing
    JEL: G12 G15 E52 E58
    Date: 2019–12
  2. By: Hanna Armelius; Christoph Bertsch; Isaiah Hull; Xin Zhang
    Abstract: We construct a novel text dataset to measure the sentiment component of communications for 23 central banks over the 2002-2017 period. Our analysis yields three results. First, comovement in sentiment across central banks is not reducible to trade or financial flow exposures. Second, sentiment shocks generate cross-country spillovers in sentiment, policy rates, and macroeconomic variables; and the Fed appears to be a uniquely influential generator of such spillovers, even among prominent central banks. And third, geographic distance is a robust and economically significant determinant of comovement in central bank sentiment, while shared language and colonial ties have weaker predictive power.
    Keywords: communication, monetary policy, international policy transmission
    JEL: E52 E58 F42
    Date: 2019–12
  3. By: Hamza Bennani (Universite Paris Nanterre, 200 Avenue de la République, 92000 Nanterre, France); Nicolas Fanta (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Pavel Gertler (National Bank of Slovakia, Imricha Karvasa 1, 813 25 Bratislava, Slovak Republic); Roman Horvath (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We examine the European Central Bank's ad-hoc communication and explore how it informs future monetary policy decisions. Using the rich dataset of the inter-meeting verbal communication among the members of the European Central Bank's Governing Council between 2008 and 2014, we construct a measure of communication assessing its inclination towards easing, tightening or maintaining the monetary policy stance. We find that this measure provides useful additional information about future monetary policy decisions, even when we control for market-based interest rate expectations and lagged decisions. Our results also suggest that, in particular, communication shortly before monetary policy meetings, related to unconventional measures and/or by the ECB President explain the future ECB rate changes well. Overall, these results point to the importance of transparency in understanding the future course of monetary policy.
    Keywords: Central bank communication, ECB, monetary policy
    JEL: E52 E58
    Date: 2019–05
  4. By: Vania Esady
    Abstract: This paper investigates the heterogeneity of monetary policy transmission under time-varying disagreement regimes using a threshold VAR. Empirically, I establish that during times of high disagreement, prices respond more sluggishly in response to monetary shocks. These stickier prices cause a flatter Phillips curve, leading to the empirical result that monetary policy has stronger real (output) effects in high disagreement periods. I develop a tractable theoretical model that show rationally inattentive price-setters produce this result. The model also links disagreement and uncertainty – two fundamentally different concepts, and bridges the results of this paper to the literature on state-dependent monetary transmission. The main result highlights a role for improved central bank communications that reduce disagreement among economic agents, which lessens output falls when implementing disinflationary monetary policies.
    Keywords: time-varying disagreement, monetary policy, threshold VAR, rational inattention
    JEL: E32 E52 E58 D83
    Date: 2019
  5. By: Fumitaka Nakamura (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: In order to analyze the transmission mechanism of monetary policy, a recent body of literature combines nominal rigidities with heterogeneous agent models. The key property of these models is that the income level of agents is heterogeneous. This paper quantifies the roles played by income level heterogeneity in the response of consumption to monetary policy shocks using U.S. household data. We show empirically that the response of consumption to expansionary monetary policy shocks is larger for high income households than low income households. This result cannot be explained by standard Aiyagari-Bewley-Huggett type heterogeneous agent models, where low income households have a higher marginal propensity to consume due to borrowing constraints. Empirical facts related to household characteristics suggest two potential channels: the presence of illiquid assets and heterogeneity in government transfers. Motivated by these empirical findings, we develop a model that incorporates illiquid assets and heterogeneity in government transfers. Simulations based on the model indicate that the presence of illiquid assets is essential for explaining the heterogeneous consumption response.
    Keywords: Consumption, Household income, Monetary policy, Liquidity
    JEL: E21 E52
    Date: 2019–11
  6. By: Richard T. Froyen; Alfred V. Guender (University of Canterbury)
    Abstract: Through an appropriate choice of inflation objective – a real-exchange-rate-adjusted (REX) inflation target - the central bank can limit fluctuations in real economic activity which have become a cause of great concern in recent years in many small open economies. REX inflation targeting dominates CPI targeting from the standpoint of output gap stabilization. CPI inflation targeting dominates REX inflation targeting from the standpoint of stabilizing inflation, nominal interest rates and real exchange rates. These results help inform ongoing discussions of possible alternatives for the existing flexible inflation targeting framework.
    Keywords: CPI, REX, Domestic Inflation Targets, Broad vs. Narrow Mandate
    JEL: E3 E5 F3
    Date: 2019–11–01
  7. By: Jan Filacek; Ivan Sutoris
    Abstract: This note deals with the issue of inflation targeting flexibility from the perspective of the Czech National Bank and other relevant central banks. We discuss possible ways of increasing the flexibility of the CNB's monetary policy, namely narrowing the targeted and communicated measure of inflation, prolonging the policy horizon, lowering the aggressivity of the rule to deviations of expected inflation from the target, increasing the smoothing of interest rates and responding to real economic developments. Our simulations show that these adjustments in the CNB's reaction function would slightly improve the stability of real output, while at the same time leading to large costs in terms of less stable and less anchored inflation.
    Keywords: Inflation targeting flexibility, monetary policy rules, optimal reaction function
    JEL: C32 E37 E47
    Date: 2019–11
  8. By: Dominika Kolcunová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic); Simona Malovaná (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic; Czech National Bank, Na Prikope 28, 115 03 Prague 1, Czech Republic)
    Abstract: This paper studies the impact of higher additional capital requirements on loan growth to private sector of banks in the Czech Republic. The empirical results indicate that there is a negative effect of higher additional capital requirements on loan growth of banks with relatively low capital surplus. In addition, the results confirm that the relationship between capital surplus and loan growth is important also in the period of stable capital requirements, i.e. it does not serve only as an intermediate channel of higher additional capital requirements.
    Keywords: Bank lending, banks’ capital surplus, regulatory capital requirements
    JEL: C22 E32 G21 G28
    Date: 2019–04
  9. By: Pancost, N. Aaron; Robatto, Roberto
    Abstract: We study optimal capital requirement regulation in a dynamic quantitative model in which nonfinancial firms, as well as households, hold deposits. Firms hold deposits for precautionary reasons and to facilitate the acquisition of production inputs. Our theoretical analysis identifies a novel general equilibrium channel that operates through firms’ deposits and mitigates the cost of increasing capital requirements. We calibrate our model and find that the optimal capital requirement is 18.7% but only 13.6% in a comparable model in which only households hold deposits. Our novel channel accounts for most of the difference. JEL Classification: E21, G21, G32
    Keywords: capital requirements, deposit insurance, idiosyncratic risk, safe assets
    Date: 2019–12
  10. 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. By: Cem Gorgun (Koc University)
    Abstract: This paper studies monetary regime choice between monetary union and flexible exchange rate regime in a large open economy framework. The classical approach emphasizes that monetary unions are inherently costly because a single interest rate cannot respond effectively to different shocks of members of the union. Therefore, it is argued that countries with similar shocks should establish a monetary union so that the cost of one-size-fits-all monetary policy is minimized. This study reveals that when there are inefficient shocks (namely those which distort the economy asymmetrically and break the 'divine coincidence') and countries are large, the classical approach fails. In that case, monetary regime choice should depend on relative variation (mean preserving spread) of inefficient shocks rather than proximity of shocks. A union implicitly imposes cooperation in monetary policy between its members. This cooperation improves response to foreign inefficient shocks while it worsens responses to domestic inefficient shocks slightly less in terms of domestic welfare. Therefore, a country chooses monetary union over flexible exchange rate regime if variation of foreign shocks is close to or larger than variation of domestic shocks. That is on the condition that losing exchange rate flexibility is not costly or has a small cost. In this way, the domestic country 'ties the hand of the foreign country' and prevents foreign monetary policy actions which hurt domestic welfare. Both countries benefit from cooperation provided by the union, if variances (spreads) of domestic and foreign shocks are close enough. Then, a monetary union becomes Pareto Improvement. How close variances should be so that monetary union is welfare increasing or Pareto Improvement, and welfare loss or gain of losing exchange rate flexibility are contingent upon price rigidity and trade elasticity.
    Keywords: monetary unions, fl exible exchange rate, monetary policy, national welfare.
    JEL: E52 E58 F33 F41 F42
    Date: 2019–11
  12. By: Stéphane Dées (Banque de France and University of Bordeaux); Alessandro Galesi (Banco de España)
    Abstract: We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macrofinancial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. This amplification increases as countries get more globally integrated over time, suggesting that the evolving network is an important driver for the increasing role of US monetary policy in shaping the Global Financial Cycle.
    Keywords: trilemma, Global Financial Cycle, monetary policy spillovers, network effects
    JEL: C32 E52 F40
    Date: 2019–12
  13. By: Salih Fendo?lu; Eda Gül?en; José-Luis Peydró
    Abstract: We show that global liquidity limits the effectiveness of local monetary policy on credit markets. The mechanism is via a bank carry trade in international markets when local monetary policy tightens. For identification, we exploit global (VIX, U.S. monetary policy) shocks and loan-level data —the credit and international interbank registers— from a large emerging market, Turkey. Softer global liquidity conditions attenuate the pass-through of local monetary policy tightening on loan rates, especially for banks with more access to international wholesale markets. Effects are also important for other credit margins and for risk-taking, e.g. riskier borrowers in FX loans or defaults.
    Keywords: global financial cycle, monetary policy, emerging markets, banks, carry trade
    JEL: G01 G15 G21 G28 F30
    Date: 2019–12
  14. By: Middleton, Elliott III
    Abstract: A partial equilibrium analysis of US credit markets reveals that the Federal Reserve System’s current mechanism for raising short-term interest rates has placed the US short-term markets in a position that is far from apparent equilibria achieved over the postwar period.
    Date: 2018–11–16
  15. By: Kosuke Aoki (Professor, University of Tokyo (E-mail:; Ko Munakata (Associate Director, Research and Statistics Department, Bank of Japan (E-mail:; Nao Sudo (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Banks in developed countries share a common concern that prolonged low nominal interest rates may pose a threat to their business, as the level of nominal interest rates is often positively correlated with bank profits in the data. It is not well understood, however, how low nominal interest rates impact bank profits and what they imply for banking stability. To address these issues, this study theoretically explores how the level of nominal interest rates affects bank profits and banking stability in the long run by extending a model of bank runs constructed by Gertler and Kiyotaki (American Economic Review, 2015). The model, calibrated to Japan and other developed countries, makes three predictions: (1) low interest rates do indeed reduce bank profits by compressing the deposit spread; (2) due to the presence of the effective lower bound of the policy rate and a slow recovery of bank net worth after a run, low interest rates bring the economy closer to a state where a bank run equilibrium can exist; (3) although there are quantitative differences across countries, a decline in nominal interest rates does not necessarily bring the economy to a state with a bank run equilibrium on its own, except for in severe cases where the TFP growth rate or the target inflation rate falls below zero.
    Keywords: Prolonged low interest rates, Bank profits, Banking stability
    JEL: E20 J11
    Date: 2019–11
  16. By: Vaclav Broz (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic); Evzen Kocenda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic)
    Abstract: We analyze link between mortgage-related regulatory penalties levied on banks and the level of systemic risk in the U.S. banking industry. We employ a frequency decomposition of volatility spillovers to draw conclusions about system-wide risk transmission with short-, medium-, and long-term dynamics. We find that after the possibility of a penalty is first announced to the public, long-term systemic risk among banks tends to increase. In contrast, a settlement with regulatory authorities leads to a decrease in the long-term systemic risk. Our analysis is relevant both to authorities imposing penalties as well as to those in charge of financial stability.
    Keywords: Bank, financial stability, global financial crisis, mortgage, penalty, systemic risk
    JEL: C14 C58 G14 G21 G28 K41
    Date: 2019–09
  17. By: Joerg Schmidt (Justus-Liebig-University Giessen)
    Abstract: This paper investigates in how far monetary policy shocks impact European asset markets, conditional on different risk states. It focuses on four different asset classes: equity of industrial firms, equity of banks, high-grade corporate bonds, and high-yielding corporate bonds. We distinguish between macroeconomic risk, political risk, and financial risk. In a first step, we separately extract three factors via principal component analysis from a set of candidate variables that are assumed to be driven by these latent types of risk. Next, these factors augment a threshold-VAR model that contains assets and a short-rate. Our model is estimated with Bayesian techniques and identified recursively. We illustrate that during periods of severe crisis, different risk regimes coincide. This impedes a clear delimitation among these three types of risk. Further on, impulse responses show that we indeed see state-dependency in the reaction of asset prices to monetary policy shocks. AA-rated corporate bond yields only show minor state-dependency if we distinguish between states of high and macroeconomic or financial risk, but show very pronounced state-dependency for political risk. Their sensitivity to monetary policy shocks is highest if political risk is . Non-investment-grade corporate bond yields as well as equity of industrial firms face the strongest state-dependency when we differentiate between macroeconomic or financial risk. If these risks are high, junk bond yields are very sensitive to monetary policy shocks while the opposite holds for equity of industrial corporations. Surprisingly, financial equity in general reacts positively or insignificant to hikes in short-rates. The positive reaction is most pronounced for states of high financial risk. As a consequence, monetary policy transmission via distinct asset markets highly depends on the degree of these different kinds of risk inherent in European asset markets. This also has strong implications for investors: they have to be aware of this varying degree of sensitivity of asset prices to changes in policy rates as they highly depend on the respective prevailing risk-regime.
    Keywords: state-dependency, asset pricing, monetary policy
    JEL: E44 G12 C11
    Date: 2019

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