nep-cba New Economics Papers
on Central Banking
Issue of 2020‒01‒20
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy in an Era of Global Supply Chains By Shang-Jin Wei; Yinxi Xie
  2. Evolution of monetary policy frameworks in the post-crisis environment By Anna Samarina; Nikos Apokoritis
  3. Bank Risk-Taking in a Small Open Economy. By Pozo, Jorge
  4. Adding rooms onto a house we love: Central banking after the Global Financial Crisis By Johnson, Juliet; Arel-Bundock, Vincent; Portniaguine, Vladislav
  5. Is the negative interest rate policy effective? By Robert L. Czudaj
  6. Money's Past is Fintech's Future: Wildcat Crypto, the Digital Dollar, and Citizen Central Banking By Hockett, Robert C.; Library, Cornell
  7. The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules By Guangling Liu; Thabang Molise
  8. Macroprudential Policies and House Prices in Europe By Marco Arena; Tingyun Chen; Seung M Choi; Nan Geng; Cheikh A. Gueye; Tonny Lybek; Evan Papageorgiou; Yuanyan Sophia Zhang
  9. An Analysis of the 2008 Global Financial Crisis: Was Quantitative Easing Appropriate? By Naape, Baneng
  10. Search-for-Yield under Prolonged Monetary Easing and Aging By Yoshiaki Ogura
  11. Industry Impacts of Unconventional Monetary Policy By Eiji Goto
  12. Sovereign exposures of European banks: it is not all doom By Martien Lamers; Thomas Present; Rudi Vander Vennet
  13. Exchange Rate Volatility and Pass-Through to Inflation in South Africa By Ken Miyajima
  14. Inflation and Public Debt Reversals in Advanced Economies By Ichiro Fukunaga; Takuji Komatsuzaki; Hideaki Matsuoka
  15. Household Portfolios and Monetary Policy By Sarah Brown; Alexandros Kontonikas; Alberto Montagnoli
  16. A Calibration of the Term Premia to the Euro Area By Eric McCoy
  17. The Welfare Costs of Inflation By Luca Benati; Juan-Pablo Nicolini
  18. Rationally Inattentive Savers and Monetary Policy Changes: A Laboratory Experiment By Andrea Civelli; Cary Deck; Antonella Tutino
  19. Systematic Banking Crises: The Relationship Between Concentration and Interbank Connections. By Andrea Calef
  20. Central banking in challenging times By Claudio Borio

  1. By: Shang-Jin Wei; Yinxi Xie
    Abstract: We study the implications of global supply chains for the design of monetary policy, using a small-open economy New Keynesian model with multiple stages of production. Within the family of simple monetary policy rules with commitment, a rule that targets separate producer price inflation at different production stages, in addition to output gap and real exchange rate, is found to deliver a higher welfare level than alternative policy rules. As an economy becomes more open, measured by the export share, the optimal weight on the upstream inflation rises relative to that on the final stage inflation. If we have to choose among aggregate price indicators, targeting PPI inflation yields a smaller welfare loss than targeting CPI inflation alone. As the production chain becomes longer, the optimal weight on PPI inflation in the policy rule that targets both PPI and CPI inflation will also rise. A trade cost shock such as a rise in the import tariff can alter the optimal weights on different inflation variables.
    JEL: E52 F4
    Date: 2020–01
  2. By: Anna Samarina; Nikos Apokoritis
    Abstract: This paper evaluates the changes in monetary policy frameworks made by 14 central banks in advanced economies over the period 2007-2018. We draw several conclusions about the evolution of their monetary policy strategies. There has been a tendency among central banks to move towards more narrowly defined inflation targets and to lower the (mid)point of the target. Additionally, transparency and commitment of central banks have been enhanced, and monetary policy toolkit has been expanded.
    Keywords: advanced economies; monetary policy framework
    JEL: E52 E58
    Date: 2020–01
  3. By: Pozo, Jorge (Banco Central de Reserva del Perú)
    Abstract: I develop an open economy model with banks facing foreign borrowing limits. The interaction of banks' limited liability and deposit insurance leads banks into socially excessive risk-taking, which involves credit volume and not the type of credit. The novel result is that, under a realistic calibration, a lower foreign interest rate reduces the excessive bank risk-taking. Since the foreign borrowing limit is binding, this lower rate does not boost banks' credit, but rather decreases it, since for a given capital the lower rate reduces the default probability of banks, which diminishes their risk-taking incentives. Through the same mechanism, a greater access to the international credit markets reduces the excessive risk-taking by banks. Hence, less banking regulation to achieve socially efficient risk-taking is required after a foreign rate reduction and a higher foreign borrowing limit.
    Keywords: Macroprudential policies, financial stability, monetary policy and bank risk-taking.
    JEL: E44 E52 F41 G01 G21 G28
    Date: 2019–12
  4. By: Johnson, Juliet; Arel-Bundock, Vincent (Université de Montréal); Portniaguine, Vladislav
    Abstract: This article examines the extent to which central bankers have been willing and able to rethink their beliefs about monetary policy in the wake of the Global Financial Crisis. We show that despite the upheaval, the core pre-crisis monetary policy paradigm remains relatively intact: central bankers believe that they should primarily pursue price stability through targeting low inflation in a transparent manner, and that they need operational independence to achieve this goal. In a bid to address post-crisis conditions and maintain their credibility, however, central bankers have also layered new elements onto the old core. We document both the resilience of pre-crisis beliefs and the process of layering using computer-assisted text analysis and qualitative analysis of 13,586 speeches given between 1997 and 2017 by central bankers from around the world.
    Date: 2018–10–26
  5. By: Robert L. Czudaj
    Abstract: This paper examines the effectiveness of the negative interest rate policy conducted by several central banks to stabilize economic growth and inflation exectations through the signaling channel. In doing so, we assess survey-based expectations data for up to 44 economies from 2002 to 2017 and analyze the impact of the adoption of a negative interest rate policy on expectations made by professionals based on a difference-in-differences approach. Our main ï¬ ndings are as follows: First, we show that the introduction of negative policy rates signiï¬ cantly reduces expectations regarding 3-month money market interest rates and also 10-year government bond yields. Second, we also provide evidence for a signiï¬ cantly positive effect of this unconventional monetary policy tool on GDP growth and inflation expectations. This implies that the negative interest rate policy appears to be effective in boosting economic growth and overcoming a deflationary spiral. Consequently, the effect of negative nominal interest rates on real interest rate expectations is also negative.
    Keywords: Expectations, Inflation, Monetary policy, Negative interest rates, Survey data
    JEL: E31 E43 E52
    Date: 2019–12
  6. By: Hockett, Robert C.; Library, Cornell
    Abstract: I argue that crypto-currencies will soon go the way of the ‘wildcat’ banknotes of the mid-19th century. As central banks worldwide upgrade their payments systems, the Fed will begin issuing a ‘digital dollar’ that leaves no licit function for what I call ‘wildcat crypto.’ But the imminent change heralds far more than a shakeout in ‘fintech.’ It will also make possible a new era of what I call ‘Citizen Central Banking.’ The Fed will administer a national system of what I call ‘Citizen Accounts.’ This will not only end the problem of the ‘unbanked,’ it also will simplify monetary policy. Instead of working through private bank ‘middlemen’ that it hopes will lend QE money to borrowers during a downturn, the Fed will be able to do ‘helicopter drops’ directly into Fed Citizen Accounts. And rather than rely solely on interbank lending rate hikes or countercyclical capital buffering during periods of froth, the Fed will be able to impound money through the more ‘carrot-like’ measure of interest credited to those accounts. We are at last on the verge of establishing a true ‘Fed for the People.’
    Date: 2019–02–08
  7. By: Guangling Liu (Department of Economics, University of Stellenbosch); Thabang Molise (Department of Economics, University of Stellenbosch)
    Abstract: This paper considers the implications of the counter-cyclical loan-to-value (CcLTV) regulation in a setting where different types of borrowers from distinct sectors of the credit market co-exist. To identify the optimal policy design, we consider two macro-prudential policy regimes, nanely generic and sector-specific, and compare their effectiveness in enhancing financial and macroeconomic stability. The results show that both regimes are effective in this regard, especially when the economy is hit by financial and housing demand shocks. The effectiveness of both regimes is, however, shock-dependent. To enhance the effectiveness of CcLTV regulation, we argue that the regulator should consider borrowers' heterogeneity and the origin of the shocks, and tailor the CcLTV regulation according to the specific conditions of each sector of the credit market, rather than to the aggregate conditions. In this way, the regulator can directly target the specific sector or borrower type.
    Keywords: Macro-prudential policy, Counter-cyclical LTV regulation, DSGE, Financial stability, Household credit, Corporate credit
    JEL: E32 E37 E44 E51 G28
    Date: 2019
  8. By: Marco Arena; Tingyun Chen; Seung M Choi; Nan Geng; Cheikh A. Gueye; Tonny Lybek; Evan Papageorgiou; Yuanyan Sophia Zhang
    Abstract: Macroprudential policy in Europe aligns with the objective of limiting systemic risk, namely the risk of widespread disruption to the provision of financial services that is caused by an impairment of all or parts of the financial system and that can cause serious negative consequences for the real economy.
    Keywords: Macroprudential policies and financial stability;Financial stability;Housing prices;Europe;
  9. By: Naape, Baneng
    Abstract: This essay aimed to investigate the effects of Quantitative Easing (QE) on selected macroeconomic and financial variables. By means of a desktop approach, we find that QE1 had a strong, beneficial impact on the real economy through the banking sector whereas QE2 and QE3 had small positive or neutral effects on banks and life Insurers. Although QE did not close the gap left by the 2008 global financial crisis, it helped reduce the rate at which the crisis was rising and proved to be an effective crisis management tool. QE helps in the short run but weakens the economy in the long run. Hence, this calls for a complete clean-up of the financial sector and a new approach to monetary policy.
    Keywords: Quantitative Easing, Global Financial Crisis, economic downturn, Advanced Economies
    JEL: E5 G1 G14
    Date: 2019–12–15
  10. By: Yoshiaki Ogura
    Abstract: We find several facts that suggest the Japanese regional loan market conforms to the "search-for-yield" phenomenon, in which banks are driven to provide more risky loans by diminished loan spreads. We use a structural model to estimate demand elasticity and the degree of competition in local loan markets simultaneously. Our estimates show that competition intensifies in markets where banks hold more slack liquidity caused by monetary easing, and where loan demand is less elastic against lowering interest rates due to a rapidly aging population. We find reasonably robust evidence that banks in such competitive markets are driven to extend riskier loans.
    Date: 2019–10
  11. By: Eiji Goto
    Abstract: While conventional monetary policy has been shown to create differential impacts on industry output, how unconventional monetary policy affects industries is not yet known. Conducting an industry level analysis provides insights of the relative response of industries, monetary transmission mechanisms, and the role of industry composition on the aggregate impact. This paper studies the effects of unconventional monetary policy on industry output in the United States, the United Kingdom, and Japan, three countries that have recently implemented unconventional monetary policy. I use a structural Bayesian vector autoregressive model with zero and sign restrictions to identify an unconventional monetary policy shock. The effects on output across industries within a country have substantial heterogeneity. For example, industry peak output responses in the United States vary from -0.01% to +0.35% in response to a one standard deviation shock to the central bank total asset. Industries across the three countries have some variation in output response to unconventional monetary policy, however, on average the effects are similar to conventional monetary policy. Furthermore, regression analysis shows that lower working capital is associated with a larger industry output response to unconventional monetary policy. The finding indicates the relevance of the interest rate channel to unconventional monetary policy while the policy rates adhere to the zero lower bound.
    JEL: E32 E52 G32
    Date: 2020–01–12
  12. By: Martien Lamers; Thomas Present; Rudi Vander Vennet (-)
    Abstract: In this paper we investigate whether or not observed changes in the composition of the sovereign bond portfolios of European banks are determined by a risk-return trade-off. Banks have been shown to disproportionally invest in bonds issued by their domestic sovereign, causing a negative bank-sovereign doom loop. Several motivations for such behavior have been demonstrated in the extant literature, such as e.g., search for yield or moral suasion, which from an investment perspective all involve some degree of irrational behavior. We depart from this approach and investigate the risk-return trade-off in the bank sovereign bond portfolios. We use data from all stress tests and transparency exercises conducted by the EBA between 2011 and 2018 for a sample of 76 European banks. Using the Sharpe ratio for the risk-return assessment, we find that over the entire period banks’ investments and divestments of sovereign bonds are characterized by rational risk-return considerations. Moreover, both bond risk (measured by the standard deviation of bond returns) as well as sovereign risk (sovereign CDS spreads) are negatively related to bond buying, implying that, on average, banks do not engage in excessive risk-taking behavior in their sovereign bond portfolios. Our main conclusion is that over the 2011-2018 period banks may have exhibited spells of excessive risk behavior in their sovereign bond buying, but over the entire period their sovereign bond investments exhibit a sound risk-return trade-off. These findings have implications for policy initiatives to tackle concentrations in sovereign bond holdings by European banks.
    Keywords: Sovereign Exposures, Risk Return, Securities portfolio, Bank balance sheet
    JEL: G11 G18 G21 G28
    Date: 2019–12
  13. By: Ken Miyajima
    Abstract: Does the South African rand’s relatively large volatility affect inflation? To shed some light on this question, a standard estimation technique of exchange rate pass-through to inflation is extended to incorporate exchange rate volatility. Estimated results suggest that higher exchange rate volatility tends to increase core inflation but to a relatively limited extent in South Africa. The finding lends support to the policy of allowing the rand to float freely and work as a shock absorber, consistent with the nation’s successful inflation targeting regime.
    Date: 2019–12–13
  14. By: Ichiro Fukunaga; Takuji Komatsuzaki; Hideaki Matsuoka
    Abstract: This paper quantitatively assesses the effects of inflation shocks on the public debt-to-GDP ratio in 19 advanced economies using simulation and estimation approaches. The simulations based on the debt dynamics equation and estimations of impulse responses by local projections both suggest that a 1 percentage point shock to inflation rate reduces the debt-to-GDP ratio by about 0.5 to 1 percentage points. The results also suggest that the impact is larger and more persistent when the debt maturity is longer, but the difference from the benchmark case is not significant. These results imply that modestly higher inflation, even if accompanied by some financial repression, could reduce public debt burden only marginally in many advanced economies.
    Date: 2019–12–27
  15. By: Sarah Brown (Department of Economics, University of Sheffield, UK); Alexandros Kontonikas (Essex Business School, University of Essex, UK); Alberto Montagnoli (Department of Economics, University of Sheffield)
    Abstract: We show that expansionary monetary policy is associated with higher household portfolio allocation to high risk assets and lower allocation to low risk assets, in line with “reaching for yield” behaviour. Our findings are based on analysis of US household level panel data using two measures of monetary policy shifts over the period 1999-2007. We also show that the impact of monetary policy changes is stronger for active investors. In addition, our hurdle model estimates reveal that monetary shocks strongly affect the decision to hold high risk assets, but not the decision to hold low risk assets. Finally, our results highlight the role of self-reported risk attitudes as well as that of mortgage-holder status in affecting the response of household portfolios to monetary policy changes.
    Keywords: Household Financial Portfolio Allocation; Monetary Policy
    JEL: D14 G11 E52
    Date: 2020–01
  16. By: Eric McCoy
    Abstract: Credit risk-free long-term interest rates can typically be decomposed into two components: expectations of the future path of the short-term policy rate and the term premium. Changes in term premium are considered to have been an important driver behind developments in long-term bond yields in recent years. As policy rates of major central banks approached their effective lower bound in the aftermath of the global financial crisis, their ability to provide the necessary degree of monetary stimulus using conventional policy measures became very limited. In this particular context, central banks had to move beyond conventional policy instruments and instead deploy a set of unconventional tools (such as large-scale asset purchase programs and forward guidance) that were tailored to target the longer-end of the yield curve. There is a growing body of empirical evidence suggesting that these unconventional measures turned out to be effective in compressing the term premium component of interest rates. This paper, after providing a definition of the term premium and a succinct overview of different ways to measure it, presents the empirical results obtained from calibrating a Gaussian affine term structure (GATSM) based term premia model to the euro area. In addition to discussing the GATSM model’s assumptions and specifications, it also describes the calibration algorithm employed, which is based on genetic algorithms. Thereafter, it provides some insight into the time profile of the euro area term premium in the post global financial crisis (GFC) era and in particular how it has evolved after key ECB policy decisions since 2008.
    JEL: E43 E44 E52 E58
    Date: 2019–09
  17. By: Luca Benati; Juan-Pablo Nicolini
    Abstract: We estimate the welfare costs of inflation originating from lack of liquidity satiation–as in Bailey (1956), Friedman (1969), Lucas (2000), and Ireland (2009)–for the U.S., U.K., Canada, and three countries/economic areas (Switzerland, Sweden, and the Euro area) in which interest rates have recently plunged below zero. We pay special attention to (i) the fact that, as shown by recent experience, zero cannot be taken as the effective lower bound (ELB); (ii) the possibility that, as discussed by Mulligan and Sala-i-Martin (2000), the money demand curve may become flatter at low interest rates; (iii) the functional form for money demand.; and (iv) what the most relevant proxy for the opportunity cost is. We report three main findings: (1) allowing for an empirically plausible ELB (e.g., -1%) materially increases the welfare costs compared to the standard benchmark of zero; (2) there is nearly no evidence that at low interest rates money demand curves may become flatter: rather, evidence for the U.S. (the country studied by Mulligan and Sala-i-Martin (2000)) clearly points towards a steeper curve at low rates; and (3) welfare costs are, in general, non-negligible: this is especially the case for the Euro area, Switzerland, and Sweden, which, for any level of interest rates, demand larger amounts of M1 as a fraction of GDP. For policy purposes the implication is that, ceteris paribus, inflation targets for these countries should be set at a comparatively lower level.
    Date: 2019–12
  18. By: Andrea Civelli; Cary Deck; Antonella Tutino
    Abstract: We present a model where rationally inattentive agents decide how much to save while imperfectly tracking interest rate changes. Suitable assumptions on agents’ preferences and interest rate distribution allow us to derive testable theoretical predictions and their implications for monetary policy. We probe these predictions using a laboratory experiment with induced inattention that closely reflects the theoretical assumptions. We find that, empirically, the laboratory data corroborates the results of the theoretical model. In particular, we show that experimental subjects respond to changes in the interest rate policy environment with: (1) a decrease in savings when the utility gain from savings does not compensate for the cognitive cost of tracking the interest rate; (2) more informed and deliberate consumption/investment choices when the monetary authority stabilizes the economy by lowering the volatility of the policy rate, implementing a version of Delphic forward guidance; (3) a slight decrease in information processing but no behavioral changes in consumption when the monetary authority signals current monetary policy stance, implementing a version of Odyssean forward guidance; (4) a sizable decrease in investment when their perception of the outlook deteriorates. These experimental and theoretical findings agree with the empirical literature on the effect of monetary policy on households’ consumption behavior in U.S. data and abroad.
    Keywords: Rational Inattention; Experimental Evidence; Informational Processing Capacity; Consumption
    JEL: C91 D11 D8 E20
    Date: 2019–12–19
  19. By: Andrea Calef (University of East Anglia)
    Abstract: In this paper I study the extent to which the nexus between concentration and interbank linkages affects financial stability, using data for a sample of 19,689 banks in 69 countries from 1995 to 2014. I find that high levels of interbank exposures decrease the probability of observing a systemic banking crisis, when the banking system is either highly concentrated or fragmented. The relationship between concentration and stability is found to be non-monotonic, as predicted by Martinez-Miera & Repullo (2010), although not U-shaped.
    Keywords: banking crisis, systemic risk, market structure; interbank linkages, network, contagion.
    JEL: G01 G21 G28
    Date: 2020–01–15
  20. By: Claudio Borio
    Abstract: Since the Great Financial Crisis, central banks have been facing a triple challenge: economic, intellectual and institutional. The institutional challenge is that central bank independence - a valuable institution - has come in for greater criticism. This essay takes a historical perspective and draws parallels with the previous waxing and waning of central bank independence. It suggests that this institution is closely tied to globalisation, as both spring from the same fountainhead: an intellectual and political environment that supports an open system in which countries adhere to the same principles and governments remain at arm′s length from the functioning of a market economy. This suggests that the fortunes of independence are also tied to those of globalisation. The essay then proceeds to explore ways that can help safeguard independence. A key one is to narrow the growing expectations gap between what central banks are expected to deliver and what they can actually deliver. In that context, it also considers and dismisses the usefulness of recently proposed schemes that involve controlled deficit monetisation.
    Keywords: central bank independence, globalisation, business cycles, fiscal dominance
    JEL: E5
    Date: 2019–12

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