nep-cba New Economics Papers
on Central Banking
Issue of 2020‒01‒13
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy, Price Setting, and Credit Constraints By Almut Balleer; Peter Zorn
  2. A two-tier system for remunerating banks’ excess liquidity in the euro area: aims and possible side effects By Alessandro Secchi
  3. Country-Level Effects of the ECB's Expanded Asset Purchase Programme By Andrejs Zlobins
  4. The role of households’ borrowing constraints in the transmission of monetary policy By Cumming, Fergus; Hubert, Paul
  5. A tale of two decades: the ECB’s monetary policy at 20 By Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Guilhem, Arthur Saint; Yiangou, Jonathan; Rostagno, Massimo
  6. Monetary Union and Financial Integration By Luca Fornaro
  7. Capital and liquidity interaction in banking By Acosta-Smith, Jonathan; Arnould, Guillaume; Milonas, Kristoffer; Vo, Quynh-Anh
  8. An Economical Business-Cycle Model By Pascal Michaillat; Emmanuel Saez
  9. How Do Changing U.S. Interest Rates Affect Banks in the Gulf Cooperation Council (GCC) Countries? By Olumuyiwa S Adedeji; Yacoub Alatrash; Divya Kirti
  10. Macroeconomic Effects of the ECB's Forward Guidance By Andrejs Zlobins
  11. Monetary Policy Independence in a Managed Floating Regime: An ARDL Approach By Aiswarya Thomas
  12. Furor over the Fed : Presidential Tweets and Central Bank Independence By Antoine Camous; Dmitry Matveev
  13. Systemic liquidity contagion in the European interbank market By V. Macchiati; G. Brandi; G. Cimini; G. Caldarelli; D. Paolotti; T. Di Matteo
  14. Disentanglement of natural interest rate shocks and monetary policy shocks nexus By Kurovskiy, Gleb
  15. Strengthening The Role of Macroprudential Policies to Support A Sustainable Development. The Case of Indonesia By Mohamad Fadhil Hasan; Achmad Nur Hidayat; Tutut Dewanto
  16. Sovereign Risk in Macroprudential Solvency Stress Testing By Andreas A. Jobst; Hiroko Oura
  17. Corporate Leverage and Monetary Policy Effectiveness in the Euro Area By Simone Auer; Marco Bernardini; Martina Cecioni
  18. Hedger of Last Resort: Evidence from Brazilian FX Interventions, Local Credit and Global Financial Cycles By Rodrigo Barbone Gonzalez; Dmitry Khametshin; RJose-Luis Peydro; Andrea Polo
  19. The effectiveness of the ECB’s asset purchases at the lower bound By Giuseppe Grande; Adriana Grasso; Gabriele Zinna
  20. Monetary policy and birth rates: the effect of mortgage rate pass-through on fertility By Cumming, Fergus; Dettling, Lisa
  21. Feedbacks: Financial Markets and Economic Activity By Markus K. Brunnermeier; Darius Palia; Karthik A. Sastry; Christopher A. Sims
  22. Speedy Bankruptcy Procedures and Bank Bailouts By UEDA Kenichi
  23. Believing in bail-in? Market discipline and the pricing of bail-in bonds By Ulf Lewrick; José María Serena Garralda; Grant Turner
  24. A reconsideration of the doctrinal foundations of monetary-policy rules: Fisher versus Chicago By George S. Tavlas
  25. Optimal Fiscal and Monetary Policy with Distorting Taxes By Christopher A. Sims
  26. Renewing our Monetary Vows: Open Letters to the Governor of the Bank of England By Jagjit S Chadha; Richard Barwell
  27. Optimalmonetary policy in a model of vertical productionand tradewith reference currency By Liutang Gong; Chan Wang; Heng-fu Zou
  28. Mortgage servicing burdens and LTI caps By Kelly, Jane; Mazza, Elena

  1. By: Almut Balleer; Peter Zorn
    Abstract: We estimate the effects of monetary policy on price-setting behavior in administrative micro data underlying the German producer price index. We find a strong degree of monetary non-neutrality. After expansionary monetary policy, the mass of additional price adjustments is economically small and the average absolute size across all price changes falls. The aggregate price level hardly adjusts, and monetary policy has real effects. These estimates rule out quantitative structural models that generate small and transient effects of monetary policy through selection on large price adjustments. We provide evidence that monetary policy propagates primarily through production units with weak financial positions.
    Keywords: price setting, extensive margin, intensive margin, monetary policy, local projections, menu cost, credit constraints
    JEL: E30 E31 E32 E44 E52
    Date: 2019
  2. By: Alessandro Secchi (Bank of Italy)
    Abstract: This note focuses on a two-tier excess reserve remuneration system, a measure recently introduced by the ECB Governing Council that aims at supporting the bank-based transmission of monetary policy by exempting part of banks’ excess reserves from the negative remuneration resulting from the current application of the deposit facility rate. The analysis shows how this tool helps to preserve the positive contribution of negative rates to the accommodative stance of monetary policy, although a careful calibration is necessary to avoid unwarranted effects on euro short-term rates. The initial experience with the two-tier excess reserve remuneration system has been positive so far: its introduction has taken place without any major tensions in money market rates.
    Keywords: interest rates, monetary policy implementation, unconventional monetary measures, liquidity management
    JEL: E42 E43 E52 E58
    Date: 2019–12
  3. By: Andrejs Zlobins (Bank of Latvia)
    Abstract: This paper evaluates the macroeconomic effects of the European Central Bank's (ECB) expanded asset purchase programme (APP) on Latvia and other euro area countries and investigates the cross-border transmission mechanism. To that end, we employ two different vector autoregressive (VAR) models often used to evaluate the spillovers stemming from the monetary policy actions, namely a bilateral structural VAR with block exogeneity (BSVAR-BE) and a multi-country mixed cross-section global VAR with stochastic volatility (MCS-BGVAR-SV), both estimated using Bayesian techniques. We find that the APP had a limited and weakly significant impact on Latvia's output and that most of the effect was generated by spillovers from other countries. However, we provide evidence that the APP had a robust impact on Latvian inflation due to depreciation of the euro. Regarding other jurisdictions, our results suggest that the ECB's asset purchases had a larger impact on industrial production in the countries where the portfolio rebalancing channel was activated. Despite that, our evidence suggests that the APP was mainly transmitted to inflation via exchange rate depreciation rather than through aggregate demand-driven shifts in the Phillips curve.
    Keywords: expanded asset purchase programme, quantitative easing, euro area, GVAR, SVAR, Bayesian estimation
    JEL: C54 E47 E58 F42
    Date: 2019–09–03
  4. By: Cumming, Fergus (Bank of England); Hubert, Paul (Sciences Po)
    Abstract: This paper investigates how the transmission of monetary policy to the real economy depends on the distribution of household debt. Using an original loan‑level dataset covering the universe of UK mortgages, we assess the effect of monetary shocks on aggregate consumption by exploiting time variation in a measure of the proportion of households close to their borrowing constraint. We find that monetary policy is most potent when there is a large share of constrained households. In contrast, we find no evidence that the average level of borrowing relative‑to‑income of the household sector affects the transmission of monetary policy.
    Keywords: Heterogeneity; distributions; mortgage debt; state-dependence
    JEL: E21 E52 E58
    Date: 2019–12–20
  5. By: Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Guilhem, Arthur Saint; Yiangou, Jonathan; Rostagno, Massimo
    Abstract: The 20th anniversary of Economic and Monetary Union (EMU) offers an opportunity to look back on the ECB’s record and learn lessons that can improve the conduct of policy in the future. This paper charts the way the ECB has defined, interpreted and applied its monetary policy framework – its strategy – over the years from its inception, in search of evidence and lessons that can inform those reflections. Our “Tale of Two Decades” is largely a tale of “two regimes”: one – stretching slightly beyond the ECB’s mid-point – marked by decent growth in real incomes and a distribution of shocks to inflation almost universally to the upside; and the second – starting well into the post-Lehman period – characterised by endemic instability and crisis, with the distribution of shocks eventually switching from inflationary to continuously disinflationary. We show how the most defining element of the ECB’s monetary policy framework, its characteristic definition of price stability with a hard 2% ceiling, functioned as a key shock-absorber in the relatively high-inflation years prior to the crisis, but offered a softer defence in the face of the disinflationary forces that hit the euro area in its aftermath. The imperative to halt persistent disinflation in the post-crisis era therefore called for a radical, unprecedented policy response, comprising negative policy rates, enhanced forms of forward guidance, a large asset purchase programme and targeted long-term loans to banks. We study the multidimensional interactions among these four instruments and quantify their impact on inflation and economic activity. JEL Classification: E50, E51, E52
    Keywords: financial crises, monetary policy, non-standard measures ECB, policy strategy
    Date: 2019–12
  6. 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: 2019–12
  7. By: Acosta-Smith, Jonathan (Bank of England); Arnould, Guillaume (Bank of England); Milonas, Kristoffer (Moodys); Vo, Quynh-Anh (Bank of England)
    Abstract: We study the interaction between banks’ capital and their liquidity transformation in both a theoretical and empirical set-up. We first construct a simple model to develop hypotheses which we test empirically. Using a confidential Bank of England dataset that includes bank-specific capital requirement changes since 1989, we find that banks engage in less liquidity transformation when their capital increases. This finding suggests that capital and liquidity requirements are at least to some extent substitutes. By establishing a robust causal relationship, these results can help guide the optimal joint calibration of capital and liquidity requirements and inform macro-prudential policy decisions.
    Keywords: Banking; liquidity transformation; capital requirements and financial regulation
    JEL: G21 G28 G32
    Date: 2019–12–20
  8. By: Pascal Michaillat; Emmanuel Saez
    Abstract: In recent decades, in developed economies, slack on the product and labor markets has fluctuated a lot over the business cycle, while inflation has been very stable. At the same time, these economies have been prone to enter long-lasting liquidity traps with stable positive inflation and high unemployment. Motivated by these observations, this paper develops a simple policy-oriented business-cycle model in which (1) fluctuations in aggregate demand and supply lead to fluctuations in slack but not in inflation; and (2) the aggregate demand structure is consistent with permanent liquidity traps. The model extends the money-in-the-utility-function model by introducing matching frictions and including real wealth into the utility function. Matching frictions allow us to represent slack and to consider a general equilibrium with constant inflation. Wealth in the utility function enriches the aggregate demand structure to be consistent with permanent liquidity traps. We use the model to study the effects of various aggregate demand and supply shocks, and to analyze several stabilization policies---such as conventional monetary policy, helicopter drop of money, tax on wealth, and government spending.
    Date: 2019–12
  9. By: Olumuyiwa S Adedeji; Yacoub Alatrash; Divya Kirti
    Abstract: Given their pegged exchange rate regimes, Gulf Cooperation Council (GCC) countries usually adjust their policy rates to match shifting U.S. monetary policy. This raises the important question of how changes in U.S. monetary policy affect banks in the GCC. We use bank-level panel data, exploiting variation across banks within countries, to isolate the impact of changing U.S. interest rates on GCC banks funding costs, asset rates, and profitability. We find stronger pass-through from U.S. monetary policy to liability rates than to asset rates and bank profitability, largely reflecting funding structures. In addition, we explore the role of shifts in the quantity of bank liabilities as policy rates change and the role of large banks with relatively stable funding costs to explain these findings.
    Date: 2019–12–06
  10. By: Andrejs Zlobins (Bank of Latvia)
    Abstract: This paper empirically evaluates the macroeconomic effects of the European Central Bank's (ECB) forward guidance (FG) on the euro area economy and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (SVARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB's FG (Odyssean since July 2013, Delphic prior to that). The FG shock is identified via both traditional sign and zero restrictions of Arias et al. (2014) and narrative sign restrictions of Antolin-Diaz and Rubio-Ram?rez (2018) which allow us to incorporate additional information about the timing of the shock to sharpen the inference. We find that the ECB's FG on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09%–0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the expanded asset purchase programme (APP) in 2015 considerably enhanced the FG credibility. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms.
    Keywords: forward guidance, central bank communication, unconventional monetary policy, euro area, structural VAR
    JEL: C54 E32 E52 E58
    Date: 2019–11–25
    Abstract: Though a highly debated and contested idea, the open economy trilemma started to gain significant attention recently after Rey?s argument that; in an open economy setting there is no trilemma but only a dilemma between two choices: capital mobility and independent monetary policy. In other words, Rey concludes that exchange rate regimes do not play any role in deciding between capital mobility and independent monetary policy. Further, a lot of studies have come up which largely discuss about the monetary policy independence in countries that allow free mobility of capital flows, by making comparisons between countries with fixed exchange rate regime and floating exchange rate regime. However, the studies on monetary policy independence of countries with managed floating exchange rate regimes are very scant. Given this context, it becomes quite imperative to undertake a study on the monetary policy independence in India for the fact that India is a unique case in itself with not complete free mobility of capital and a managed float exchange rate regime. . Therefore, this paper employed the auto regressive distributed lag (ARDL) approach to study the monetary policy independence in India. The results of the study reveal that the Indian monetary policy stance is highly integrated with the US and the European Union monetary policy stance.
    Keywords: Mundell's trilemma, Monetary policy Independence, Financial Integration, Globalization
    JEL: F41 E52 E58
    Date: 2019–10
  12. By: Antoine Camous; Dmitry Matveev
    Abstract: We illustrate how market data can be informative about the interactions between monetary and fiscal policy. Federal funds futures are private contracts that reflect investor’s expectations about monetary policy decisions. By relating price movements of these contracts with President Trump’s tweets on monetary policy, we explore how markets have perceived presidential attempts to influence monetary policy decisions. Overall, our results indicate markets expected the Federal Reserve to adjust monetary policy in the direction suggested by President Trump.
    Keywords: Central bank research; Credibility; Financial markets; Monetary Policy
    JEL: E44 E52 E58
    Date: 2019–12
  13. By: V. Macchiati; G. Brandi; G. Cimini; G. Caldarelli; D. Paolotti; T. Di Matteo
    Abstract: Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate funding liquidity risk and contagion are available but they require not only banks' bilateral exposures data but also balance sheet data with sufficient granularity, which are hardly available. Alternatively, risk analyses on interbank networks have been done via centrality measures of the underlying graph capturing the most interconnected and hence more prone to risk spreading banks. In this paper, we propose a model which relies on an epidemic model which simulate a contagion on the interbank market using the funding liquidity shortage mechanism as contagion process. The model is enriched with country and bank risk features which take into account the heterogeneity of the interbank market. The proposed model is particularly useful when full set of data necessary to run specialized models is not available. Since the interbank network is not fully available, an economic driven reconstruction method is also proposed to retrieve the interbank network by constraining the standard reconstruction methodology to real financial indicators. We show that the contagion model is able to reproduce systemic liquidity risk across different years and countries. This result suggests that the proposed model can be successfully used as a valid alternative to more complex ones.
    Date: 2019–12
  14. By: Kurovskiy, Gleb
    Abstract: This paper proposes a novel two-step identification procedure of natural interest rate shocks. Altogether, monetary policy and natural interest shocks explain about 90% of total inflation dynamics. The paper exploits (J.E. Arias et al., 2019) procedure, which allows getting canonical impulse response functions to monetary policy shocks. I find no evidence of price and output puzzles. The estimated natural interest rate declines from 2015 to 2019 years. Furthermore, Bank of Russia follows the mandate and reacts to inflation in monetary policy feedback rule, while does not respond to output fluctuations.
    Keywords: SVAR, monetary policy, natural interest rate, Russia
    JEL: C32 E52 E58
    Date: 2019–12–12
  15. By: Mohamad Fadhil Hasan (Supervisory Board of Bank Indonesia); Achmad Nur Hidayat (Supervisory Board of Bank Indonesia); Tutut Dewanto (Supervisory Bank of Indonesia)
    Abstract: The external pressures on the domestic economic stability has prompted Bank Indonesia to focus on its monetary policy on the exchange rate measures. However, as part of the policy mix, the stance of monetary policy has been balanced with accommodative macroprudential policies to continue providing its support for the economic growth. Even though they have different targets and in their implementation there are potential conflicts that may occur when we try to achieve the objectives of both policies, the central bank deems a monetary policy and macroprudential policies to be complementary policies. This situation will provide a space for the macroprudential policies to encourage some kind of bank intermediation and to spur a credit growth. A policy support is needed to accelerate the credit growth to achieve its economic financing targets in the next 5 years, namely at 16% yoy.This study was aimed at identifying proper recommendations on the macroprudential policies such as encouraging a credit growth that included easing Loan to Value (LTV) ratios, targeting sectoral credit, easing the Macroprudential Intermediation Ratio (MIR), decreasing the Macroprudential Liquidity Buffer (MLB) ratios, easing the counter cyclical capital buffer (CCB) requirements, and strengthening coordination with other government agencies.
    Keywords: Macroprudential policy, monetary policy, credit growth, loan to value ratio, coordination, sustainable economic growth, targeted sectoral lending
    JEL: E02 E00 E58
    Date: 2019–10
  16. By: Andreas A. Jobst; Hiroko Oura
    Abstract: This paper explains the treatment of sovereign risk in macroprudential solvency stress testing, based on the experiences in the Financial Sector Assessment Program (FSAP). We discuss four essential steps in assessing the system-wide impact of sovereign risk: scope, loss estimation, shock calibration, and capital impact calculation. Most importantly, a market-consistent valuation approach lies at the heart of assessing the resilience of the financial sector in a tail risk scenario with sovereign distress. We present a flexible, closed-form approach to calibrating haircuts based on changes in expected sovereign defaults affecting bank solvency during adverse macroeconomic conditions. This paper demonstrates the effectiveness of using extreme value theory (EVT) in this context, with empirical examples from past FSAPs.
    Date: 2019–12–06
  17. By: Simone Auer (Bank of Italy); Marco Bernardini (Bank of Italy); Martina Cecioni (Bank of Italy)
    Abstract: We study the differences in the response of industrial production to monetary policy shocks within the euro area manufacturing sector conditional on leverage. Using polynomial state-dependent local projections, we document a non-linear relationship between corporate leverage and the effectiveness of monetary policy. When leverage is low, more indebted industries adjust their production more strongly in response to a monetary policy shock, consistently with a financial accelerator framework. At higher leverage ratios, this positive relation weakens until it reaches a point where additional leverage is associated with a decrease in the sensitivity to monetary policy. We show that this weakening effect is particularly intense within the short-term horizon and in recessions. Our results are consistent with recent studies analyzing the role of default risk in dampening the financial accelerator mechanism.
    Keywords: financial heterogeneity, monetary policy, polynomial state-dependent local projections, high-frequency shocks, panel data
    JEL: C23 E32 E52 G32
    Date: 2019–12
  18. By: Rodrigo Barbone Gonzalez; Dmitry Khametshin; RJose-Luis Peydro; Andrea Polo
    Abstract: Bail-in regulation is a centrepiece of the post-crisis overhaul of bank resolution. It requires major banks to maintain a sufficient amount of "bail-in debt" that can absorb losses during resolution. If resolution regimes are credible, investors in bail-in debt should have a strong incentive to monitor banks and price bail-in risk. We study the pricing of senior bail-in bonds to evaluate whether this is the case. We identify the bail-in risk premium by matching these bonds with comparable senior bonds that are issued by the same banking group but are not subject to bail-in risk. The premium is higher for riskier issuers, consistent with the notion that bond investors exert market discipline on banks. Yet the premium varies pro-cyclically: a decline in marketwide credit risk lowers the bail-in risk premium for all banks, with the compression much stronger for riskier issuers. Banks, in turn, time their bail-in bond issuance to take advantage of periods of low premia.
    Keywords: foreign exchange, monetary policy, central bank, bank credit, hedging
    JEL: E5 F3 G01 G21 G28
    Date: 2019–12
  19. By: Giuseppe Grande (Bank of Italy); Adriana Grasso (Bank of Italy); Gabriele Zinna (Bank of Italy)
    Abstract: In this research note, we assess – both theoretically and empirically – whether net asset purchases by the ECB can further reduce term premiums and bond yields in the euro area. Theory says that, at the effective lower bound, the duration extracted by the central bank is no longer sufficient to assess the price impact of the purchases. In fact, we show empirically that their impact is state-contingent, and is smaller the more the shadow rate is below the short-rate lower bound, and the lower the volatility of bond yields. Nevertheless, central bank asset purchases are still effective in reducing long-term term premiums and bond yields. Moreover, in the euro area, there is room to reduce the duration held by the market. Overall, asset purchases remain a viable tool at the disposal of the ECB for exerting downward pressure on yields.
    Keywords: preferred-habitat theory, term premiums, effective lower bound, quantitative easing, large-scale asset purchases, forward guidance
    JEL: E43 E52 G12
    Date: 2019–12
  20. By: Cumming, Fergus (Bank of England); Dettling, Lisa (Federal Reserve Board of Governors)
    Abstract: This paper examines whether monetary policy pass-through to mortgage rates affects household fertility decisions. Using administrative data on UK mortgages and births, our empirical strategy exploits variation in the timing of when families were eligible for a rate adjustment, coupled with the large reductions in interest rates that occurred during the Great Recession. We estimate that each 1 percentage point drop in the policy rate increased birth rates by 2%. In aggregate, this pass-through of accommodative monetary policy to mortgage rates was sufficiently large to outweigh the headwinds of the Great Recession and prevent a ‘baby bust’ in the UK, in contrast to the US. Our results provide new evidence on the nature of monetary policy transmission and suggest a new mechanism via which mortgage contract structures can affect aggregate demand and supply.
    Keywords: Mortgages; monetary policy; birth rates; fertility; natality; interest rates
    JEL: E43 E52 J13
    Date: 2019–12–20
  21. By: Markus K. Brunnermeier (Princeton University); Darius Palia (Rutgers University); Karthik A. Sastry (Massachusetts Institute of Technology); Christopher A. Sims (Princeton University)
    Abstract: Our structural VAR with 10 monthly variables and identified by heteroscedasticity shows that credit and output growth are mostly positively associated. Negative reduced form responses to credit growth are attributed in our model to the monetary policy response to credit expansion shocks. Financial stress, measured by rises in interest rate spreads, is followed by declines in output and shrinkage of credit. We find two distinct sources of financial stress shocks. Neither credit aggregates nor rate spreads provide much advance warning of the 2008-9 crisis, but the spreads improve the model forecasts during the crisis.
    JEL: G01
    Date: 2019–08
  22. By: UEDA Kenichi
    Abstract: To reduce the future occurrence of bank bailouts, after the global financial crisis of 2008, the financial stability policies seem to settle into stronger prudential regulations (e.g., capital requirements) and speedier bankruptcy procedures especially for big banks (e.g., living wills). Speedier bankruptcy procedures have also been adopted to help heavily indebted households and corporations in many countries. However, I argue here an opposite consequence. Because of simple and speedy bankruptcy procedures, along with prudential regulations, bank bailouts can be justified in a crisis. This result emerges as an implication of optimal contracts in general equilibrium with an endogenous, competitive banking sector.
    Date: 2019–12
  23. By: Ulf Lewrick; José María Serena Garralda; Grant Turner
    Abstract: Bail-in regulation is a centrepiece of the post-crisis overhaul of bank resolution. It requires major banks to maintain a sufficient amount of "bail-in debt" that can absorb losses during resolution. If resolution regimes are credible, investors in bail-in debt should have a strong incentive to monitor banks and price bail-in risk. We study the pricing of senior bail-in bonds to evaluate whether this is the case. We identify the bail-in risk premium by matching these bonds with comparable senior bonds that are issued by the same banking group but are not subject to bail-in risk. The premium is higher for riskier issuers, consistent with the notion that bond investors exert market discipline on banks. Yet the premium varies pro-cyclically: a decline in marketwide credit risk lowers the bail-in risk premium for all banks, with the compression much stronger for riskier issuers. Banks, in turn, time their bail-in bond issuance to take advantage of periods of low premia.
    Keywords: too big to fail, banking regulation, TLAC, financial stability
    JEL: E44 E61 G28
    Date: 2019–12
  24. By: George S. Tavlas (Bank of Greece)
    Abstract: There has long been a presumption that the price-level-stabilization frameworks of Irving Fisher and Chicagoans Henry Simons and Lloyd Mints were essentially equivalent. I show that there were subtle, but important, differences in the rationales underlying the policies of Fisher and the Chicagoans. Fisher’s framework involved substantial discretion in the setting of the policy instruments; for the Chicagoans the objective of a policy rule was to tie the hands of the authorities in order to reduce discretion and, thus, monetary-policy uncertainty. In contrast to Fisher, the Chicagoans provided assessments of the workings of alternative rules, assessed various criteria -- including simplicity and reduction of political pressures -- in the specification of rules, and concluded that rules would provide superior performance compared with discretion. Each of these characteristics provided a direct link to the rules-based framework of Milton Friedman. Like Friedman’s framework, Simons’s preferred rule targeted a policy instrument.
    Keywords: monetary policy rules; Chicago monetary tradition; Irving Fisher; Henry Simons;Lloyd Mints; Milton Friedman
    JEL: B22 E52
    Date: 2019–11
  25. By: Christopher A. Sims (Princeton University)
    Abstract: When the interest rate on government debt is low enough, it becomes possible to roll it over indefinitely, never taxing to retire it, without producing a growing debt to GDP ratio. This has been called a situation with zero “fiscal cost†to debt.But when low interest on debt arises from its providing liquidity services, zero fiscal cost is equivalent to finance through seigniorage. Some finance through seigniorage is generally optimal, however, despite results in the literature seeming to show that this is not so.
    JEL: E52 E62
    Date: 2019–08
  26. By: Jagjit S Chadha; Richard Barwell
    Abstract: Over the past 20 years, considerable progress has been made in the science of monetary policy. This is under threat from a new era of economic populism. There is a clear danger that in the absence of an open and deep debate about the fundamental objectives of the central bank, the political system will try to offload its obligations onto the central bank balance sheet and seek to unwind genuine progress by arguing that we need a new direction from the problems of the past, or perhaps worse still, that those old objectives were the root cause of the problems we now face. To be clear, they were not. Monetary and financial stability does not cause economic strife, but its absence surely will. The National Institute of Economic and Social Research commissioned a number of expert UK-based economists to survey the monetary landscape. When doing so, we chose to move to the next generation and asked a set of younger monetary economists to outline their views. The views in this book are offered on a personal basis and do not necessarily represent those of any of the institutions for which they work or NIESR. But they are new voices to which we should listen.
    Date: 2019–10
  27. By: Liutang Gong (Peking University, Guanghua School of Management and LMEQF); Chan Wang (Central University of Finance and Economics, School of Finance); Heng-fu Zou (Central University of Finance and Economics, China Economics and Management Academy)
    Abstract: This paper examines optimal monetary policy rules in a model of vertical production and trade with reference currency. As evidenced by empirical findings, we assume that final-goods prices are sticky, but intermediategoods prices are flexible. We find that even if intermediate-goods prices are flexible, monetary authorities need to respond to the shocks at the stage of intermediate-goods production. We also find that, when a shock occurs at the stage of final-goods production, monetary responses are independent of the expenditure share of finalgoods producers on intermediate goods. For the first time in the literature, our model gives a condition under which both countries are willing to participate in monetary cooperation. Thus the gains from cooperation are real. In addition, we compare the volatility of the nominal exchange rate in Nash case with that in cooperative case, and compare the volatility of the nominal exchange rate in our model with that in a model without vertical production and trade as well. We also extend the model to consider a case of dual price stickiness. We find that the change in solution methods completely alters the conclusions of the model.
    Keywords: exchange rates, monetary cooperation, optimal monetary policy, reference-currency pricing, vertical production and trade
    JEL: E5 F3 F4
    Date: 2020
  28. By: Kelly, Jane (Central Bank of Ireland); Mazza, Elena (Central Bank of Ireland)
    Abstract: The Central Bank of Ireland regulates Loan to Income (LTI) ratios. The aim is to strengthen both bank and borrower resilience and to reduce the likelihood and impact of a credit-house price spiral emerging. However, the Central Bank also monitors many other measures of household vulnerability, including mortgage service to income ratios (MSTI). Using Irish micro data, we illustrate that mortgage service burdens vary for similar LTI levels due to underlying differences in origination interest rates and mortgage terms.We highlight the variation in origination servicing burdens through the interest rate cycle even within narrow LTI bands.We also show that servicing burdens on loans above the LTI limits are generally more sensitive to interest rate shocks than those below the limits.
    Date: 2019–11

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