nep-cba New Economics Papers
on Central Banking
Issue of 2020‒01‒27
24 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy, rational confidence, and Neo- Fisherian depressions By Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini
  2. The long-run information effect of central bank communication By Hansen, Stephen; McMahon, Michael; Tong, Matthew
  3. Heterogeneous effects of unconventional monetary policy on bond yields across the euro area By Demir, Ishak; Eroglu, Burak A.; Yildirim-Karaman, Secil
  4. New paradigms and old promises: central banks and the market for sovereign debt in the interwar period By Flores Zendejas, Juan; Lopez Soto, David; Sanchez Amador, David
  5. Monetary Policy Is Not Always Systematic and Data-Driven: Evidence from the Yield Curve By Ales Bulir; Jan Vlcek
  6. The impact of the ECB’s targeted long-term refinancing operations on banks’ lending policies: the role of competition By C. Andreeva, Desislava; García-Posada, Miguel
  7. The case for reform of the RBA's policy and communication strategy By Bruce Preston
  8. Should Monetary Policy Target Financial Stability? By William Chen; Gregory Phelan
  9. The portfolio theory of inflation and policy (in)effectiveness revisited: Corroborating evidence By Bossone, Biagio; Cuccia, Andrea
  10. Macroprudential policy and its impact on the Credit Cycle By Selien De Schryder; Frederic Opitz
  11. Money Creation in Fiat and Digital Currency Systems By Marco Gross; Christoph Siebenbrunner
  12. Central Banks, Systemic Risk and Financial Sector Structural Reform By Omarova, Saule T.; Library, Cornell
  13. The real effects of loan-to-value limits: Empirical evidence from Korea By Victor Pontines
  14. Monetary Policy and Shadow Banking: Trapped between a Rock and a Hard Place By Martin Hodula
  15. Don't End or Audit the Fed: Central Bank Independence in an Age of Austerity By Buchanan, Neil H.; Dorf, Michael C.; Library, Cornell
  16. A cointegration model of money and wealth By Assenmacher, Katrin; Beyer, Andreas
  17. Macroprudential Policy in Asian Economies By Kim, Soyoung
  18. Capital Account Policies in Emerging Asian Economies: Are They Effective in the 2000s? By Jongwanich, Juthathip
  19. A note on currency-hedging By Rodrigo Alfaro; Natan Goldberger
  20. The Long-Run Effects of Monetary Policy By Òscar Jordà; Sanjay R. Singh; Alan M. Taylor
  21. TwinDefault Crises By Caterina Mendicino; Kalin Nikolov; Juan Rubio-Ramirez; Javier Suarez
  22. Non-linear exchange rate pass-through to euro area inflation: a local projection approach By Rubene, Ieva; Colavecchio, Roberta
  23. Time vs. Risk Preferences, Bank Liquidity Provision and Financial Fragility By Ettore Panetti
  24. Is Monetary Policy Gender Neutral? Evidence from the Stock Market By Caterina Forti Grazzini; Chi Hyun Kim

  1. By: Lucio Gobbi; Ronny Mazzocchi; Roberto Tamborini
    Abstract: We examine the so-called "Neo-Fisherian" claim that, at the zero lower bound (ZLB) of the monetary policy interest rate, and the economy in a depression equilibrium, in order to restore the desired inflation rate the policy rate should be raised consistently with the Fisher equation. This claim has been questioned on the ground that the Fisher equation cannot be used mechanically to peg the long-run inflation expectations. It is necessary to examine how inflation expectations are formed in response to, and interact with, policy actions and the evolution of the economy. Hence we study a New Keynesian economy where agents' inflation expectations are based on their correct understanding of the data generations process, and on their probabilistic confidence in the central bank's ability to keep inflation on target, driven by the observed state of the economy. We find that the Neo-Fisherian claim is a theoretical possibility depending on the interplay of a set of parameters and very low levels of agents' confidence. Yet, on the basis of simulations of the model, we may say that this possibility is remote for most commonly found empirical values of the relevant parameters. Moreover, the Neo-Fisherian policy-rate peg is not sustained by the expectations formation process.
    Keywords: conventional monetary policy, Neo-Fisherian theory, formation of inflation expectations, monetary policy at the zero lower bound
    JEL: D84 E31 E52
    Date: 2019
  2. By: Hansen, Stephen; McMahon, Michael; Tong, Matthew
    Abstract: Why do long-run interest rates respond to central bank communication? Whereas existing explanations imply a common set of signals drives short and long-run yields, we show that news on economic uncertainty can have increasingly large effects along the yield curve. To evaluate this channel, we use the publication of the Bank of England’s Inflation Report, from which we measure a set of high-dimensional signals. The signals that drive long-run interest rates do not affect short-run rates and operate primarily through the term premium. This suggests communication plays an important role in shaping perceptions of long-run uncertainty. JEL Classification: E52, E58, C55
    Keywords: communication, machine learning, monetary policy
    Date: 2020–01
  3. By: Demir, Ishak; Eroglu, Burak A.; Yildirim-Karaman, Secil
    Abstract: This paper investigates the impact of European Central Bank's unconventional monetary policies between 2008-2016 on the government bond yields of eight European Monetary Union countries and up to eleven different maturities. In identifying this impact, it adopts a novel econometric approach that combines data-rich dynamic factor analysis and VAR with heteroskadasiticy based identification. This novel approach allows a single model to estimate the impact of a common unconventional monetary policy shock across different countries, maturities, yield components and over time. The results identify a significant and substantial impact for all countries and all maturities in the sample. The evidence also suggests that the impact was stronger and persistent in the periphery countries which have higher financial distress, uncertainty, country risk and lower liquidity. When we decompose the impact into separate yield components, we find that unconventional shocks decreased the common market component of the yields in all countries. As for the risk component, unconventional policies decreased it for the periphery countries permanently at the cost of a small increase in the core countries, as consistent with the international portfolio balance channel. These findings contribute to the literature by providing a comprehensive characterization of the impact of unconventional monetary policies for different economic environments.
    Keywords: Unconventional monetary policy,ECB,QE,international monetary transmission,portfolio balance,cross-country difference,yield curves,risk premia
    JEL: C38 E43 E52 E58 F42 G12
    Date: 2019
  4. By: Flores Zendejas, Juan; Lopez Soto, David; Sanchez Amador, David
    Abstract: This paper analyses the motives behind the establishment of central banks during the interwar period. We argue that most governments with difficulties in accessing financial markets established central banks, as this was a general recommendation provided by contemporary money doctors. However, even if central banks served to facilitate the issue of foreign loans on the New York financial market, we find that governments with central banks did not obtain more favorable terms for those loans. Our analysis further demonstrates that investors concentrated on macroeconomic achievements such as inflation and monetary stability, and whether a lender-of-last resort facility existed, regardless of whether or not this was pursued by a central bank.
    Keywords: Money doctors, Central banking, Great depression, Sovereign debt
    JEL: N00 N1 N20 E50 H63
    Date: 2020
  5. By: Ales Bulir; Jan Vlcek
    Abstract: Does monetary policy react systematically to macroeconomic innovations? In a sample of 16 countries - operating under various monetary regimes - we find that monetary policy decisions, as expressed in yield curve movements, do react to macroeconomic innovations and these reactions reflect the monetary policy regime. While we find evidence of the primacy of the price stability objective in the inflation-targeting countries, the links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.
    Keywords: Monetary transmission, yield curve
    JEL: E43 E52 G12
    Date: 2019–09
  6. By: C. Andreeva, Desislava; García-Posada, Miguel
    Abstract: We assess the impact of the Eurosystem’s Targeted Long-Term Refinancing Operations (TLTROs) on the lending policies of euro area banks. We first build a theoretical model in which banks compete in the credit and deposit markets. We distinguish between direct and indirect effects. Direct effects take place because bidding banks expand their loan supply due to the lower marginal costs implied by the TLTROs. Indirect effects on non-bidders operate via changes in the competitive environment in banks’ credit and deposit markets. We then test these predictions with a sample of 130 banks from 13 countries focusing on the first TLTRO series. Regarding direct effects, we find an easing impact on margins on loans to relatively safe borrowers, but no impact on credit standards. Regarding indirect effects, there is a positive impact on the loan supply on non-bidders which operates via an easing of credit standards. JEL Classification: G21, E52, E58
    Keywords: competition, lending policies, TLTROs, unconventional monetary policy
    Date: 2020–01
  7. By: Bruce Preston
    Abstract: At any time, the public should be able to evaluate whether the Reserve Bank of Australia’s interest rate decisions are consistent with achieving statutory mandates. The current policy and communication strategy makes this difficult. The mandates, as interpreted by the RBA, fail to provide a clearly identifiable performance benchmark. And the supporting communication strategy falls short of a commitment to explain the economic basis of why and how interest-rate decisions achieve mandated objectives. Examples of both concerns are given from various public documents. Basic reforms would improve the accountability and effectiveness of monetary policy.
    Keywords: Monetary policy, central bank communication, transparency, accountability
    JEL: E32 D83 D84
    Date: 2020–01
  8. By: William Chen (Williams College); Gregory Phelan (Williams College)
    Abstract: We theoretically investigate the state-dependent effects of monetary policy on aggregate stability. In the model, banks borrow using deposits and invest in productive projects, and monetary policy affects risk-premia. Because banks do not actively issue equity, aggregate outcomes depend on the level of equity in the financial sector and equilibrium is inefficient. Monetary policy can improve household welfare by affecting banks’ leverage decisions and the rate of bank equity growth. A Fed Put is ex-ante stabilizing, decreasing volatility and the likelihood of crises; it does not lead to excessive leverage in good times but enables higher leverage in bad times.
    Keywords: Monetary policy, Leaning against the wind, Financial stability, Macroeconomic instability, Banks, Liquidity.
    JEL: E44 E52 E58 G01 G12 G20 G21
    Date: 2020–01–03
  9. By: Bossone, Biagio; Cuccia, Andrea
    Abstract: This study revisits and tests empirically the Portfolio Theory of Inflation (PTI), which analyzes how the effectiveness of macroeconomic policy in open and globally financially integrated economies is influenced by global investor decisions (Bossone, The portfolio theory of inflation and policy (in)effectiveness, 2019). The PTI shows that when an economy is heavily indebted and is perceived by the market to be poorly credible, investors hold it to a tighter intertemporal budget constraint and policies aimed to stimulate output growth dissipate into domestic currency depreciation and higher inflation, with limited or no impact on output, or with lower output and lower inflation. On the other hand, markets afford highly credible economies much greater space for effective and noninflationary macro policies. The study leads to a very basic advice: policymakers of an internationally highly integrated economy should keep public liabilities (the stock of both central bank money and public debt) at low levels: the larger the liabilities, the higher the degree of surrender of the country's national policy sovereignty to external forces and interests.
    Keywords: credibility,exchange rate,financial integration,fiscal and monetary policies,global investor(s),inflation,intertemporal budget constraint,policy effectiveness,public debt
    JEL: E31 E4 E5 E62 F31 G15 H3
    Date: 2020
  10. By: Selien De Schryder; Frederic Opitz (-)
    Abstract: We identify a novel set of macroprudential policy shocks and estimate their effects on credit cycle variables in a panel of 13 EU countries during 1999-2018. We find that a typical macroprudential policy tightening shock reduces bank credit-to-GDP by 1.8% points and household credit-to-GDP by 1.6% points over a period of four years. The non-financial corporations and total credit-to-GDP ratios, however, do not react significantly. Using state-dependent local projections, we further find that the effects on the credit-to-GDP ratios are stronger in credit cycle upturns than in downturns. We also detect a sizable leakage of firm credit from the banking to the non-banking sector next to a shift from firm to household credit.
    Keywords: Macroprudential policy, Effectiveness, State dependency
    JEL: C23 E58 G18 G28
    Date: 2019–12
  11. By: Marco Gross; Christoph Siebenbrunner
    Abstract: To support the understanding that banks’ debt issuance means money creation, while centralized nonbank financial institutions’ and decentralized bond market intermediary lending does not, the paper aims to convey two related points: First, the notion of money creation as a result of banks’ loan creation is compatible with the notion of liquid funding needs in a multi-bank system, in which liquid fund (reserve) transfers across banks happen naturally. Second, interest rate-based monetary policy has a bearing on macroeconomic dynamics precisely due to that multi-bank structure. It would lose its impact in the hypothetical case that only one (“singular”) commercial bank would exist. We link our discussion to the emergence and design of central bank digital currencies (CBDC), with a special focus on how loans would be granted in a CBDC world.
    Date: 2019–12–20
  12. By: Omarova, Saule T.; Library, Cornell
    Abstract: This chapter contribution to an edited volume examines financial sector structural reform as a critical, though largely under-appreciated to date, dimension of central banks’ post-crisis systemic risk prevention agenda. By limiting the range of permissible transactions or organizational affiliations among different types of financial firms, structural reforms alter the fundamental pattern of interconnectedness in the financial system. In that sense, the chapter argues, reforming the institutional structure of the financial industry operates as a deeper form of the currently evolving macroprudential regulation. The chapter identifies three principal models that form a continuum of potential financial sector structural reform choices and applies this conceptual framework to analysis of post-crisis structural reforms in the U.K., EU, and U.S. It further examines how deeply issues of financial industry structure are embedded in central banks’ regulatory and policy agenda and, in light of this connection, discusses potential implications of current structural reforms for central banks’ post-crisis financial stability mandate.
    Date: 2018–01–11
  13. By: Victor Pontines
    Abstract: This study adds to a recent and growing literature that assesses the effects of macroprudential policy. We compare the effects of monetary policy and loan-to-value ratio shocks for Korea, an inflation targeting economy and an active user of loan-to-value limits. We identify shocks using sign-restricted structural VARs and rely on a recent approach within this method to conduct structural inference. This study finds that both monetary policy and loan-to-value ratio shocks have effects on different measures of credit, i.e., real bank credit, real total credit and real household credit. We also find that both shocks have non-negligible effects on real house prices, including effects on real output, real consumption and real investment. We do, however, find that loan-to-value ratio shocks have negligible effects on the price level. These findings indicate that for the period covered by this study, limits on loan-to-value achieved their financial stability objectives in Korea in terms of limiting credit and house price appreciation under an inflation targeting regime. Furthermore, it attained these objectives without posing any threat to its price stability objective. Overall, these findings suggest that limits on loan-to-value have important aggregate consequences despite it being a sectoral, targeted policy instrument.
    Keywords: Macroprudential Policy, Limits on Loan-to-Value, Monetary Policy, Sign Restrictions, Impulse Response, Forecast Error Variance Decomposition
    JEL: E31 E32 E52 E58 G28
    Date: 2020–01
  14. By: Martin Hodula
    Abstract: In this paper, I collect data on the euro area shadow banking system and demonstrate that tightening of monetary policy conditions in the run-up to the global financial crisis successfully reduced the growth of traditional banking but strengthened the growth of shadow banking due to a general escape from high funding costs. After the crisis, when interest rates were depressed to all-time lows, the empirical link between monetary policy and traditional banking was significantly weakened, while the relationship with shadow banking turned from positive to negative, i.e., the post-crisis monetary easing is found to have caused massive inflows into investment funds as a result of search for yield induced by persistently low interest rates.
    Keywords: Interactions, monetary policy, shadow banking, traditional banking
    JEL: E52 G21 G23
    Date: 2019–12
  15. By: Buchanan, Neil H.; Dorf, Michael C.; Library, Cornell
    Abstract: 102 Cornell Law Review (2016) The Federal Reserve (the Fed) is the central bank of the United States. Because of its power and importance in guiding the economy, the Fed's independence from direct political influence has made it a target of ideologically motivated attacks throughout its history, with an especially aggressive round of attacks coming in the wake of the 2008 financial crisis and ongoing today. We defend Fed independence. We point to the Fed's exemplary performance during and after the 2008 crisis, and we offer the example of a potential future crisis in which Congress falls to increase the debt ceiling to show how the Fed's independence makes it the only entity that can minimize the damage during crises (both market-driven and policy-induced). We further argue that the Fed's independence is justified to prevent self-dealing by politicians, even when no crisis is imminent. Although the classic justification for Fed independence focuses on the risk that political actors will keep interest rates lower than appropriate for the long-term health of the economy, we show that Fed independence addresses the risk of self-dealing and other pathologies even when, as now, political actors favor tighter monetary policy than appropriate for the long-term health of the economy.
    Date: 2018–01–09
  16. By: Assenmacher, Katrin; Beyer, Andreas
    Abstract: Extending the data set used in Beyer (2009) from 2007 to 2017, we estimate I(1) and I(2) money demand models for euro area M3. We find that the elasticities in the money demand and the real wealth relations identified previously in Beyer (2009) have remained remarkably stable throughout the extended sample period, once only a few additional deterministic variables in the long run relationships for the period after the start of the global financial crisis and the ECB’s non- standard monetary policy measures are included. Testing for price homogeneity in the I(2) model we find that the nominal-to-real transformation is not rejected for the money relation whereas the wealth relation cannot be expressed in real terms. JEL Classification: E41, C32, C22
    Keywords: cointegration, I(2) analysis, money demand, vector error correction model, wealth
    Date: 2020–01
  17. By: Kim, Soyoung (Seoul National University)
    Abstract: This paper analyzes the conduct and effects of macroprudential policy in 11 Asian economies. Of these, India, the People’s Republic of China, and the Republic of Korea frequently used loan-to-value ratios and required reserve ratios even before the global financial crisis. India and the People’s Republic of China are the most frequent users of macroprudential policy tools. Since 2000, tightening actions have been more frequent than loosening in the 11 economies. Most took tightening actions more frequently after the global financial crisis than before it. In most of these economies, macroprudential policy tends to be tightened when credit expands. The main empirical results from the analysis, which uses panel vector autoregression models, are that contractionary macroprudential policy has significant negative effects on credit and output; and that these effects are qualitatively similar to those of monetary policy. This suggests that policy authorities may experience potential policy conflicts when credit conditions are excessive and the economy is in recession.
    Keywords: credit; macroprudential policy; monetary policy; output; vector autoregression
    JEL: E58 E60 G28
    Date: 2019–04–16
  18. By: Jongwanich, Juthathip (Thammasat University)
    Abstract: This paper examines the effectiveness of capital account policy in terms of its ability to affect the volume and composition of capital flows, relieve pressures on real exchange rates, and foster monetary policy independence. Ten emerging Asian economies are used as case studies to assess the effectiveness of capital account policy during 2000–2015. The results suggest that some types of capital controls are effective in reducing the volume of capital flows and pressure on real exchange rates. The choice of exchange rate regime matters in terms of the effectiveness of capital controls for fostering monetary policy independence. Although some types of capital controls are effective in creating macroeconomic stability, implementing capital account policy needs to be undertaken with caution. This is because substitution or complementarity among capital controls is evident, both within and across countries in the region. It seems that strong economic fundamentals are more important than capital account policy for changing the composition of capital inflows toward more stable and long-term flows.
    Keywords: capital flows; capital restrictions; emerging Asia
    JEL: F31 F32 O53
    Date: 2019–04–26
  19. By: Rodrigo Alfaro; Natan Goldberger
    Abstract: In this note we analyze if currency hedging reduces the volatility of a portfolio. Based on historical data (2000m1-2018m12), we found that optimal levels of hedging will depend on the degree of risk of the underlying asset, being full-hedging for the case of high-quality sovereign bonds and very small hedging for equity indexes. Finding are consistent across both US and EU assets and different Latam currencies.
    Date: 2020–01
  20. By: Òscar Jordà; Sanjay R. Singh; Alan M. Taylor (University of California Davis; National Bureau of Economic Research; University of Virginia; Harvard University; University of California Berkeley; Morgan Stanley; Centre for Economic Policy Research (CEPR); ebrary Inc; Northwestern University)
    Abstract: Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can reconcile all these empirical observations.
    Keywords: monetary policy; money neutrality; hysteresis; trilemma; instrumental variables; local projections
    JEL: E01 E30 E32 E44 E47 E51 F33 F42 F44
    Date: 2020–01–16
  21. By: Caterina Mendicino; Kalin Nikolov; Juan Rubio-Ramirez; Javier Suarez
    Abstract: Twin Default Crises are rare and severe episodes of borrower and bank defaults. We build a quantitativemodel that links borrower and bank solvency. This is crucial to reproduce key features of thedata both in normal times and in Twin Default Crises. Specialization exposes banks to non-diversifiableborrowers’ default risk. Fluctuations in the non-diversifiable component of credit risk and bank leverageare important determinants of Twin Default Crises. Capturing the frequency and severity of Twin DefaultCrises is key for the correct calibration of bank capital requirements. Our framework implies highercapital requirements than alternative frameworks that do not model the link between borrower and bankdefault.
    Date: 2020–01
  22. By: Rubene, Ieva; Colavecchio, Roberta
    Abstract: How long does it take for exchange rate changes to pass through into inflation? Does it make a difference whether the exchange rate depreciates or appreciates? Do relatively large exchange rate changes entail more exchange rate pass-through? In this paper, we examine possible non-linearities in the transmission of exchange rate movements to import and consumer prices in all 19 euro area countries as well as the euro area as a whole from 1997 to 2019Q1. We extend a standard single-equation linear framework with additional interaction terms to account for possible non-linearities and apply local projections to obtain state-dependent impulse response functions. We find that (i) euro area consumer and import prices respond significantly to exchange rate movements after one year, responding more when the exchange rate change is relatively large; and (ii) euro appreciations and depreciations affect the level of euro area exchange rate pass-through in a symmetric fashion; (iii) for euro area countries results differ for import and consumer prices and across countries. JEL Classification: E31, F41
    Keywords: exchange rate pass-through, inflation, local projections, non-linearities
    Date: 2020–01
  23. By: Ettore Panetti
    Abstract: How important is it to distinguish relative risk aversion (RRA) from the intertemporal elasticity of substitution (IES) to understand bank liquidity provision and financial fragility? To answer this question, I develop a banking theory in which depositors feature Epstein-Zin preferences. In equilibrium, banks provide liquidity when RRA is sufficiently high (low) only for IES larger (smaller) than 1. Under the same conditions, banks might be fragile, i.e. subject to possible self-fulfilling depositors' runs. A time-consistent deposit freeze resolves banks' fragility if RRA is sufficiently low and IES is sufficiently larger than 1.
    JEL: D81 G21 G28
    Date: 2019
  24. By: Caterina Forti Grazzini; Chi Hyun Kim
    Abstract: We use US household survey data from 2001-2017 to investigate whether monetary policy has heterogeneous effects on women's and men's financial portfolio decisions by analyzing their equity investment. On the one hand, monetary policy significantly affects the entry decisions of women, but not of men: after a contractionary shock, the probability of women entering the stock market decreases. On the other hand, monetary policy is gender-neutral for stock market participants: there are no significant differences in exit or in portfolio rebalancing decisions between women and men. Our results suggest that monetary policy does not have a heterogeneous effect on portfolio decisions across genders once women participate in the stock market.
    Keywords: Monetary policy, gender, stock market participation, portfolio choices
    JEL: E58 J16 G11
    Date: 2020

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