nep-cba New Economics Papers
on Central Banking
Issue of 2019‒12‒16
twelve papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. In Pursuit of a Stable Stabilization Policy in Sweden. From the Gold Standard to Inflation Targeting and Beyond By Jonung, Lars
  2. Mortgage lending, monetary policy, and prudential measures in small euro-area economies: Evidence from Ireland and the Netherlands By Mary Everett; Jakob de Haan; David-Jan Jansen; Peter McQuade; Anna Samarina
  3. Are Central Banks Out of Ammunition to Fight a Recession? Not Quite. By Joseph E. Gagnon; Christopher G. Collins
  4. The international effects of central bank information shocks By Michael Pfarrhofer; Anna Stelzer
  5. Opacity: Insurance and Fragility By Ryuichiro Izumi
  6. Financial cycles, credit bubbles and stabilization policies By Schuler, Tobias; Corrado, Luisa
  7. Inflation trends in Asia: implications for central banks By García, Juan Angel; Poon, Aubrey
  8. Interbank network characteristics, monetary policy "News" and sensitivity of bank stock returns By Aref Ardekani; Isabelle Distinguin; Amine Tarazi
  9. Is the unemployment inflation trade-off still alive in the Euro Area and its member countries? It seems so By Antonio Ribba
  10. Complexity, Conventions and Instability: the role of monetary policy By Citera, Emanuele; Sau, Lino
  11. Do Negative Interest Rates Explain Low Profitability of European Banks? By Nicholas Coleman; Viktors Stebunovs
  12. Differences in euro-area household finances and their relevance for monetary-policy transmission By Hintermaier, Thomas; Koeniger, Winfried

  1. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: In a historical perspective, the stabilization policy regime in Sweden is in a state of constant change, affected by economic crises, international impulses, domestic politics, and developments in macroeconomic theory. Economists have been deeply involved in this process. The current framework for monetary and fiscal policy, with an independent central bank focusing on inflation targeting, and a rule-based fiscal policy, is not the final stage of this process. Future crises will once again change the goals, the instruments, and the institutional framework. In a historical perspective, the rapid expansion of the financial system, with the accompanying accumulation of private debt and high rates of asset inflation, stands out as a likely cause behind the next crisis. The next crisis will be followed by yet another step in the perennial pursuit of a better stabilization policy.
    Keywords: Monetary policy; fiscal policy; gold standard; price-level targeting; inflation targeting; financial repression; the Riksbank; Sweden
    JEL: E12 E30 E60 G01 H63 N14
    Date: 2019–12–06
  2. By: Mary Everett; Jakob de Haan; David-Jan Jansen; Peter McQuade; Anna Samarina
    Abstract: This paper examines whether the increased use of macroprudential policies since the global financial crisis has affected the impact of (euro area and foreign) monetary policy on mortgage lending in Ireland and the Netherlands, which are both small open economies in the euro area. Using bank-level data on domestic lending in both countries during the period 2003-2018, we find that restrictive euro area monetary policy shocks reduce the growth of mortgage lending. We find evidence that stricter domestic prudential regulation mitigates this effect in Ireland, but not so in the Netherlands. There is weak evidence for an international bank lending channel.
    Keywords: monetary policy; prudential policy; mortgage lending; European monetary union
    JEL: G21 E42 F36
    Date: 2019–11
  3. By: Joseph E. Gagnon (Peterson Institute for International Economics); Christopher G. Collins (Peterson Institute for International Economics)
    Abstract: Central banks in the three largest advanced economies (the United States, Japan, and the eurozone) have only limited ammunition to fight a recession based on the tools used to date. The Federal Reserve has the most amount of tried and tested ammunition in this group. If a recession were to hit the US economy now, the Fed would be able to deliver monetary stimulus equivalent to a cut in the short-term policy interest rate of about 5 percentage points, which is sufficient to fight a mild but not severe recession. The European Central Bank and the Bank of Japan have little ability to ease policy with tools used to date, about the equivalent of a 1 percentage point cut in the policy rate. But they can engage in more exotic forms of monetary policy, such as large-scale purchases of equity and real estate and direct transfers to households, which the Fed cannot do. These tools, however, are largely untested and face political resistance. An important implication of this analysis is that raising expected inflation before a recession hits has a much larger benefit than has been widely recognized. A higher long-run inflation rate gives central banks more room to not only cut their policy rates but also use forward guidance and quantitative easing to reduce longer-term rates.
    Date: 2019–11
  4. By: Michael Pfarrhofer; Anna Stelzer
    Abstract: We explore the international transmission of monetary policy and central bank information shocks by the Federal Reserve and the European Central Bank. Identification of these shocks is achieved by using a combination of high-frequency market surprises around announcement dates of policy decisions and sign restrictions. We propose a high-dimensional macroeconometric framework for modeling aggregate quantities alongside country-specific variables to study international shock propagation and spillover effects. Our results are in line with the established literature focusing on individual economies, and moreover suggest substantial international spillover effects in both directions for monetary policy and central bank information shocks. In addition, we detect heterogeneities in the transmission of ECB policy actions to individual member states.
    Date: 2019–12
  5. By: Ryuichiro Izumi (Department of Economics, Wesleyan University)
    Abstract: What are the effects of banks holding opaque, complex assets? Should regulators require bank assets to be more transparent? I study these questions in a model of fnancial intermediation where opacity determines how long the realized value of an asset remains unknown. By allowing a bank to sell assets before the realization is known, opacity provides insurance to the bank's depositors. However, higher opacity also increases depositors' incentives to join a bank run. In choosing the level of opacity, therefore, a bank faces a trade-off between providing insurance and increasing fragility. If depositors can accurately observe the level of opacity, banks will choose the socially-effcient level. If depositors are unable to observe this choice, however, banks will have an incentive to become overly opaque and regulation to limit opacity can improve welfare.
    Keywords: Opacity, Bank runs, Insurance, Banking regulation
    JEL: G01 G21 G28
    Date: 2019–12
  6. By: Schuler, Tobias; Corrado, Luisa
    Abstract: This paper analyzes the effects of several policy instruments for mitigating financial bubbles generated in the banking sector. We augment a New Keynesian macroeconomic framework by endogenizing boundedly-rational expectations on asset values of loan portfolios, allow for interbank trading and show how a credit bubble can develop from a financial innovation. We then evaluate the efficacy of several policy instruments in counteracting financial bubbles. We find that an endogenous capital requirement reduces the impact of a financial bubble significantly while central bank intervention (“leaning against the wind”) proves to be less effective. A welfare analysis ranks the policy reaction through an endogenous capital requirement highest. We therefore provide a rationale for the use of countercyclical capital buffers. JEL Classification: E44, E52
    Keywords: Basel III, CCyB, credit-to-GDP gap
    Date: 2019–12
  7. By: García, Juan Angel; Poon, Aubrey
    Abstract: Trend inflation estimates for 12 of the largest Asian economies over 1995-2018 offer important insights on inflation dynamics and inflation expectations. The disinflationary shocks that hit the region since 2014 were partly transitory, but their effects have been different depending on the behaviour of trend inflation in each country. Countries with relatively high inflation (India, Philippines, Indonesia) benefited, and some were impacted very mildly (China, Taiwan, Hong Kong SAR, Malaysia). Among countries with inflation below target, in those with trend inflation low but constant (Australia, New Zealand) low inflation maybe lasting, but temporary, while those in which trend inflation has declined (South Korea, Thailand) risk low inflation to become entrenched and a de-anchoring of expectations. This diverse international evidence could offer important lessons for monetary policy worldwide. JEL Classification: C11, C32, E31, F41
    Keywords: Asian economies, state space model, stochastic volatility, survey inflation expectations, trend inflation
    Date: 2019–12
  8. By: Aref Ardekani (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Isabelle Distinguin (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - IR SHS UNILIM - Institut Sciences de l'Homme et de la Société - UNILIM - Université de Limoges)
    Abstract: This paper investigates whether interbank network topology influences the impact of monetary policy announcements on bank cumulative abnormal returns (CAR's). Although recent studies have emphasized the channels of non-conventional monetary policy actions and the sensitivity of bank stock prices to "News", how such reaction could be influenced by the shape of bank networks remains an open issue. We look at how banks' interconnectedness within interbank loan and deposit networks affects investors' expectations of future bank performance in response to monetary policy "News". Our sample consists of commercial, investment, real estate and mortgage banks in 10 Euro-zone countries. Our results show that the stock prices of banks with stronger local network positions are less sensitive to monetary policy announcements while those of banks with stronger system-wide positions are more sensitive to them.
    Keywords: Interbank network topology,Monetary policy,bank's stock reaction,event study
    Date: 2019–11–28
  9. By: Antonio Ribba
    Abstract: The unemployment inflation trade-off can be interpreted as a proposition concerning the response of these two variables to aggregate demand shocks. In this paper we study the possible presence of the trade-off in the Euro Area and in a wide group of Euroarea countries in the last 20 years, i.e. since the start of EMU. We use the structural VAR methodology that allows the separation between supply and demand shocks. Our main finding is that the existence of a trade-off is largely confirmed both at the Euro Area and at the national level. Nevertheless, the size of the trade-off, measured at different horizons,shows some heterogeneity among countries. No less important, when we augment the VAR model by introducing monetary policy in the context of an open economy, we find that monetary policy shocks push inflation and unemployment in opposite directions in the Currency Area. Another interesting result concerns the evidence of a relatively flat relation between unemployment and inflation, conditionally to monetary policy shocks.
    Keywords: Unemployment, Inflation, Structural VARs, Euro Area
    JEL: C32 E24 E31 E32
    Date: 2019–12
  10. By: Citera, Emanuele; Sau, Lino (University of Turin)
    Abstract: Ever since the 2008 financial crisis, there has been both a widespread recognition that the mainstream approach on financial markets has failed to anticipate and to justify the crisis and on the need of ex ante and ex post adequate economic policies to cope with such phenomena. The aim of our paper is to provide a theoretical and methodological analysis of the role of conventions as emergent phenomena in financial markets, the latter being thought of as dynamically complex systems. Drawing upon the notion of ‘dynamic complexity’ and Keynes’ view of financial markets, we claim that social conventions can only provisionally stabilize the system, but they will eventually lead to financial instability and crisis. Then, we adopt this framework to investigate the implications for monetary policy to stabilize the system by virtue of the role of central bank to intervene, and thus shape, a convention. In this respect, we consider the credibility of the monetary authority and how it can be exerted through ‘moral suasion’ to control the financial fragility of investors’ balance-sheet positions as well as to affect the convention around the longterm interest rate.
    Date: 2019–11
  11. By: Nicholas Coleman; Viktors Stebunovs
    Abstract: In this note, we examine the effects of low and negative sovereign yields on net interest margins and the general profitability of European banks.
    Date: 2019–11–29
  12. By: Hintermaier, Thomas; Koeniger, Winfried
    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

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