nep-cba New Economics Papers
on Central Banking
Issue of 2020‒02‒03
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy and Reserve Requirements in a Small Open Economy By Carlos Alberto Takashi Haraguchi; Jose Angelo Divino
  2. Monetary Policy and Wealth Inequalities in Great Britain: Assessing the role of unconventional policies for a decade of household data By Anastasios Evgenidis; Apostolos Fasianos
  3. Financial frictions,the Phillips curve and monetary policy By Lieberknecht, Philipp
  4. Unconventional monetary policy and inflation expectations in the euro area By Aßhoff, Sina; Belke, Ansgar; Osowski, Thomas
  5. The Cash-Flow Channel of Monetary Policy: Evidence from Mortgage Borrowers By Sang-yoon Song
  6. Dampened expectations in the Phillips Curve: a note By Dennery, Charles
  7. The fundamentals of safe assets By Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
  8. Social Learning and Monetary Policy at the Effective Lower Bound By Jasmina Arifovic; Alex Grimaud; Isabelle Salle; Gauthier Vermandel
  9. The effects of conventional and unconventional monetary policy : identification through the yield curve By Kortela, Tomi; Nelimarkka, Jaakko
  10. Micro Jumps, Macro Humps: Monetary Policy and Business Cycles in an Estimated HANK Model By Adrien Auclert; Matthew Rognlie; Ludwig Straub
  11. The Chair of the U.S. Federal Reserve and the Macroeconomic Causality Regimes By Yunus Aksoy; Rubens Morita; Zacharias PsaradakisAuthor-Workplace-Name: Birkbeck, University of London
  12. Inflation targets and the zero lower bound in a behavioral macroeconomic model By de Grauwe, Paul; Yuemei, Ji
  13. Bank funding costs and solvency By Pancaro, Cosimo; Żochowski, Dawid; Arnould, Guillaume
  14. Household Balance Sheet Channels of Monetary Policy: A Back of the Envelope Calculation for the Euro Area By Jiri Slacalek; Oreste Tristani; Giovanni L. Violante
  15. The Optimal Mix of Monetary and Climate Policy By Chen, Chuanqi; Pan, Dongyang
  16. The 3 E’s of central bank communication with the public By Haldane, Andrew; Macaulay, Alistair; McMahon, Michael
  17. Identifying SVARs from sparse narrative instruments: dynamic effects of U.S. macroprudential policies By Budnik, Katarzyna; Rünstler, Gerhard
  18. Macroeconomic Shocks and Racial Labour Market Differences in the U.S. By Kuhelika De; Ryan A. Compton; Daniel C. Giedeman; Gary A. Hoover
  19. Bad bank resolutions and bank lending By Michael Brei; Leonardo Gambacorta; Marcella Lucchetta; Marcella Lucchetta
  20. Forward Guidance and Corporate Lending By Delis, Manthos; Hong, Sizhe; Paltalidis, Nikos; Philip, Dennis
  21. The effect of the PSI in the relationship between sovereign and bank credit risk: Evidence from the Euro Area By Papafilis, Michalis-Panayiotis; Psillaki, Maria; Margaritis, Dimitris
  22. Time to address the shortcomings of the banking union By Angeloni, Ignazio
  23. Le Pont de Londres: interactions between monetary and prudential policies in cross-border lending By Bussière, Matthieu; Hills, Robert; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Sowerbutts, Rhiannon
  24. Can the Hybridity of Law and Finance Save Central Banking in a Zero-Lower Bound Recession? A Money and Legal View By Saeidinezhad, Elham; Hovhannisyan, Tatev
  25. Mastering Central Bank Communication Challenges via Twitter By Korhonen, Iikka; Newby, Elisa
  26. A Phillips curve for the euro area By Ball, Laurence; Mazumder, Sandeep
  27. Tiered CBDC and the financial system By Bindseil, Ulrich

  1. By: Carlos Alberto Takashi Haraguchi; Jose Angelo Divino
    Abstract: This paper investigates how a combination of monetary and macroprudential policies might affect the dynamics of a small open economy with financial frictions under alternative exogenous shocks. The proposed DSGE model incorporates macroprudential policy rules to the financial sector of an open economy. Exogenous shocks in productivity, domestic and foreign monetary policies are used to identify the roles of the macroprudential and monetary policies in stabilizing the economy. A welfare analysis compares the performance of alternative rules for reserve requirements. The model is calibrated for the Brazilian economy and results indicate the exchange rate plays a central role in the transmission of foreign shocks, but not of domestic shocks. Considering the volatility of the variables and convergence to steady state, the interest rate rule should target domestic inflation and not respond directly to the exchange rate. The reserve requirement rule, in its turn, should react countercyclically to the credit-gap and not have a fixed component. There is complementarity between monetary and macroprudential policies to stabilize the small open economy.
  2. By: Anastasios Evgenidis; Apostolos Fasianos
    Abstract: This paper explores whether unconventional monetary policy operations have redistributive effects on household wealth. Drawing on household balance sheet data from the Wealth and Asset Survey, we construct monthly time series indicators on the distribution of different asset types held by British households for the period that the monetary policy switched as the policy rate reached the zero lower bound (2006-2016). Using this series, we estimate the response of wealth inequalities on monetary policy, taking into account the effect of unconventional policies conducted by the Bank of England in response to the Global Financial Crisis. Our evidence reveals that unconventional monetary policy shocks have significant long-lasting effects on wealth inequality: an expansionary monetary policy in the form of asset purchases raises wealth inequality across households, as measured by their Gini coefficients of net wealth, housing wealth, and financial wealth. The evidence of our analysis helps to raise awareness of central bankers about the redistributive effects of their monetary policy decisions.
    Date: 2019–12
  3. By: Lieberknecht, Philipp
    Abstract: This paper proposes a tractable financial accelerator New Keynesian DSGE modelthat allows for closed-form solutions. In the presence of financial frictions, theNew Keynesian Phillips curve features a flat slope with respect to the output gapand is strongly forward-looking. All shocks cause endogenous cost-push effects inthe Phillips curve, leading to larger inflation responses and a breakdown of divinecoincidence. The central bank's contemporaneous trade-off between output gap andinflation stabilization is aggravated. Optimal monetary policy is strongly forward-looking and geared towards inflation stabilization.
    Keywords: financial frictions,financial accelerator,Phillips curve,optimal monetary policy
    JEL: E42 E44 E52 E58
    Date: 2019
  4. By: Aßhoff, Sina; Belke, Ansgar; Osowski, Thomas
    Abstract: With the ECB's policy rate having reached the zero lower bound, traditional monetary policy tools became ineffective and the ECB was forced to adopt a set of unconventional monetary policy (UMP) measures. This paper examines the effects of the ECB's UMP on inflation expectations in the Euro area as inflation expectations play a key role for achieving the inflation target of below, but close to 2%. Quantifying the impact of UMP is not straightforward, as standard empirical tools such as VAR cannot be applied. Hence, we use the Qual VAR approach pioneered by Dueker (2005) to overcome this problem. We indeed find that UMP leads to a rise in inflation expectations in the short run but that this effect appears to evaporate in the medium term. Our results put some doubt on the common claim that UMP has consistently contributed to a re-anchoring and a stabilisation of inflation expectations at the zero lower bound. Nevertheless, they indicate a rise in medium-term real GDP growth triggered by UMP.
    Keywords: Bayesian VAR,Qual VAR,inflation expectations,euro area,quantitative easing,unconventional monetary policy
    JEL: C22 E31 E44 E52
    Date: 2020
  5. By: Sang-yoon Song (Economic Research Institute, Bank of Korea)
    Abstract: This paper investigates the relationships between consumption and mortgage interest reduction caused by an expansionary monetary policy, using comprehensive borrower-level information on mortgages and credit card purchases from a credit bureau company in South Korea. The main findings are as follows: (i) the significant and negative relationship between mortgagors¡¯ interest payments and consumption comes from borrowers with ARMs (Adjustable-Rate Mortgages), (ii) among mortgagors with ARMs, those with low liquidity and credit accessibility show a high interest-induced MPC (Marginal Propensity to Consume), (iii) the debt burdens of mortgagors have a weaker effect on the interest-induced MPC heterogeneity due to active deleveraging behavior of borrowers with a high debt burden, (iv) while unconstrained borrowers consistently show low and insignificant MPCs, constrained borrowers (those with low liquidity, credit accessibility) maintain long-lasting high MPCs for eight quarters after interest reduction, and (v) the MPC of those with low liquidity becomes lower as time goes by, indicating that windfall gains by mortgage interest reduction help to relax the liquidity constraints they face. These results imply that financial characteristics of mortgage borrowers can affect the magnitude and persistence of the cash flow channels of an expansionary monetary policy.
    Keywords: Mortgage, Consumption, Monetary Policy, Household Debt
    JEL: D14 E21 E52
    Date: 2019–07–29
  6. By: Dennery, Charles
    Abstract: Dampened inflation expectations have a significant impact on the New Keynesian Phillips Curve. This dampening not only flattens the long run Phillips Curve, but it can also lead to a bias in the estimation of its short run slope. It also affects the response of a small NK model to demand shocks, and affects the optimal monetary policy: in particular, the price targeting result of the Ramsey policy is violated when there is dampening.
    Keywords: Anchored expectations, Phillips Curve, Ramsey policy
    JEL: E31 E52
    Date: 2019–08–21
  7. By: Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
    Abstract: We study what makes government bonds a safe asset. Building on a sample of monthly changes in government bond yields in 40 advanced and emerging countries, we analyse the sensitivity of yields to country specific fundamentals interacted with changes in global risk (VIX). We find that inertia (whether the bond behaved as a safe asset in the past) and good institutions foster a safe asset status, while the size of the debt market is also significant, reflecting the special role of the US. Within advanced and emerging markets, drivers are heterogeneous, with external sustainability in particular being relevant for the latter countries after the global financial crisis. Finally, the safe asset status does not appear to depend on whether the change in global risk is driven by financial shocks rather than by US monetary policy. JEL Classification: E42, E52, F31, F36, F41
    Keywords: fundamentals, global risk, monetary policy, safe assets
    Date: 2020–01
  8. By: Jasmina Arifovic; Alex Grimaud; Isabelle Salle; Gauthier Vermandel
    Abstract: The first contribution of this paper is to develop a model that jointly accounts for the missing disinflation in the wake of the Great Recession and the subsequently observed inflation-less recovery. The key mechanism works through heterogeneous expectations that may durably lose their anchorage to the central bank (CB)’s target and coordinate on particularly persistent below-target paths. We jointly estimate the structural and the learning parameters of the model by matching moments from both macroeconomic and Survey of Professional Forecasters data. The welfare cost associated with those dynamics may be reduced if the CB communicates to the agents its target or its own inflation forecasts, as communication helps anchor expectations at the target. However, the CB may lose its credibility whenever its announcements become decoupled from actual inflation, for instance in the face of large and unexpected shocks.
    Keywords: Business fluctuations and cycles; Central bank research; Credibility; Economic models; Monetary Policy; Monetary policy communications
    JEL: C82 E32 E52
    Date: 2020–01
  9. By: Kortela, Tomi; Nelimarkka, Jaakko
    Abstract: Since the Great Recession, the main evolution in monetary policy has been its attempts to affect the medium and the long-term interest rates with instruments other than the policy rate. Consequently, measuring the stance of monetary policy by a single interest rate becomes problematic. This study explores the macroeconomic effects of conventional and unconventional policy measures in the euro area in a unified framework. We identify simultaneously three monetary policy shocks that influence different parts of the yield curve. These shocks reflect various aspects of actions and communications of the European Central Bank in conventional and unconventional monetary policy periods. According to the results, conventional interest rate policy, forward guidance and quantitative easing have asymmetric output and price responses.
    JEL: C32 C36 E43 E52 C54
    Date: 2020–01–22
  10. By: Adrien Auclert; Matthew Rognlie; Ludwig Straub
    Abstract: We estimate a Heterogeneous-Agent New Keynesian model with sticky household expectations that matches existing microeconomic evidence on marginal propensities to consume and macroeconomic evidence on the impulse response to a monetary policy shock. Our estimated model uncovers a central role for investment in the transmission mechanism of monetary policy, as high MPCs amplify the investment response in the data. This force also generates a procyclical response of consumption to investment shocks, leading our model to infer a central role for these shocks as a source of business cycles.
    JEL: E21 E22 E32 E43 E52
    Date: 2020–01
  11. By: Yunus Aksoy (Birkbeck, University of London); Rubens Morita (Birkbeck, University of London); Zacharias PsaradakisAuthor-Workplace-Name: Birkbeck, University of London
    Abstract: We investigate regime-dependent Granger causality between real output, in ation and monetary indicators and map with U.S. Fed Chairperson's tenure since 1965. While all monetary indicators have causal predictive content in certain time periods, we report that the Federal Funds rate (FFR) and Domestic Money (DM) are substitutes in their role as lead or feedback variables to explain variations in real output and in ation. We provide a comprehensive account of evolution of causal relationships associated with all US Fed Chairpersons we consider.
    Keywords: Causality Regimes, Domestic Money, Federal Reserve Chairperson, Markov Switching, Policy Instrument, Vector Autoregression
    JEL: C32 C54 C61 E52 E58
    Date: 2019–12
  12. By: de Grauwe, Paul; Yuemei, Ji
    Abstract: We analyse the relationship between the level of the inflation target and the zero lower bound imposed on the nominal interest rate in the framework of a behavioural New-Keynesian macroeconomic model in which agents, experiencing cognitive limitations, use adaptive learning forecasting rules. The model produces endogenous waves of optimism and pessimism (animal spirits) that lead to non-normal distributions of the output gap. We find that when the inflation target is too close to zero, the economy can get gripped by ‘chronic pessimism’ that leads to a dominance of negative output gaps and recessions, and in turn feeds back on expectations producing long waves of pessimism. Low inflation targets create the risk of persistence of recessions and low growth. In conclusion, our framework suggests that the 2% inflation target, now pursued by many central banks, is too low.
    Keywords: animal spirits; monetary policy; inflation target; behavioraleconomics; zero lower bound
    JEL: E31 E32
    Date: 2019–04–01
  13. By: Pancaro, Cosimo; Żochowski, Dawid; Arnould, Guillaume
    Abstract: This paper investigates the relationship between bank funding costs and solvency for a large sample of euro area banks using two proprietary ECB datasets for both wholesale funding costs and deposit rates. In particular, the paper studies the relationship between bank solvency, on the one hand, and senior bond yields, term deposit rates and overnight deposit rates, on the other. The analysis finds a significant negative relationship between bank solvency and the different types of funding costs. It also shows that this relationship is non-linear, namely convex, for senior bond yields and term deposit rates. It also identifies a positive realistic solvency threshold beyond which the effect of an increase in solvency on senior bond yields becomes positive. The paper also finds that senior bond yields are more sensitive to a change in solvency than deposit rates. Among the deposit rates, the interest rates of the overnight deposits are the least sensitive. Banks' asset quality, profitability and liquidity seem to play only a minor role in driving funding costs while the ECB monetary policy stance, sovereign risk and financial markets uncertainty appear to be material drivers. JEL Classification: G15, G21
    Keywords: banks, funding costs, solvency
    Date: 2020–01
  14. By: Jiri Slacalek; Oreste Tristani; Giovanni L. Violante
    Abstract: This paper formulates a back of the envelope approach to study the effects of monetary policy on household consumption expenditures. We analyze several transmission mechanisms operating through direct, partial equilibrium channels—intertemporal substitution and net interest rate exposure—and indirect, general equilibrium channels—net nominal exposure, as well as wealth, collateral and labor income channels. The strength of these forces varies across households depending on their marginal propensities to consume, their balance sheet composition, the sensitivity of their own earnings to fluctuations in aggregate labor income, and the responsiveness of aggregate earnings, asset prices and inflation to monetary policy shocks. We quantify all these channels in the euro area by combining micro data from the HFCS and the EU-LFS with structural VARs estimated on aggregate time series. We find that the indirect labor income channel and the housing wealth effect are strong drivers of the aggregate consumption response to monetary policy and explain the cross-country heterogeneity in these responses.
    JEL: E21 E52
    Date: 2020–01
  15. By: Chen, Chuanqi; Pan, Dongyang
    Abstract: Given central banks' recent interest in "greening the financial system", this research theoretically investigates the relationship between monetary and climate policy and tries to find their “optimal mix”. We build an Environmental Dynamic Stochastic General Equilibrium (E-DSGE) model with the consideration of illegal emission which is pervasive in many countries. According to the model, we find: First, the dynamic of monetary policy is influenced by the selection of regimes of climate policy and the effectiveness of enforcement of environmental regulation. Second, the coefficients in the traditional Taylor rule of monetary policy can be better set to enhance welfare when a certain regime of climate policy is given in the economy. This helps find the constrained optimums of a policy mix. Third, if the mitigation of climate change is augmented into the target of monetary policy, the economy’s welfare can be enhanced. However, under certain circumstances, a dilemma in such monetary policy makes it incompatible with the traditional mandate of central bank.
    Keywords: Optimal Mix, Monetary Policy, Climate Policy, E-DSGE
    JEL: E52 Q54 Q58
    Date: 2020
  16. By: Haldane, Andrew (Bank of England); Macaulay, Alistair (University of Oxford); McMahon, Michael (University of Oxford)
    Abstract: In this paper we explore both theoretical and empirical evidence on communication with the general public. The model provides guidance for policymakers by highlighting some potentially important risks in communicating simply with a broader audience. In particular, in a model where trust and engagement are low, there are benefits to engaging a wider audience. But doing so risks ultimately lowering welfare unless guided by the 3 E’s of public communication: Explanation, Engagement and Education. Central banks have made great strides in all three, but numerous challenges remain.
    Keywords: Monetary policy; communication; general public
    JEL: E52 E58
    Date: 2020–01–03
  17. By: Budnik, Katarzyna; Rünstler, Gerhard
    Abstract: We study the identification of policy shocks in Bayesian proxy VARs for the case that the instrument consists of sparse qualitative observations indicating the signs of certain shocks. We propose two identification schemes, i.e. linear discriminant analysis and a non-parametric sign concordance criterion. Monte Carlo simulations suggest that these provide more accurate confidence bounds than standard proxy VARs and are more efficient than local projections. Our application to U.S. macroprudential policies finds persistent effects of capital requirements and mortgage underwriting standards on credit volumes and house prices together with moderate effects on GDP and inflation. JEL Classification: C32, E44, G38
    Keywords: Bayesian proxy VAR, capital requirements, discriminant analysis, mortgage underwriting standards, sign concordance
    Date: 2020–01
  18. By: Kuhelika De; Ryan A. Compton; Daniel C. Giedeman; Gary A. Hoover
    Abstract: Using 136 United States macroeconomic indicators from 1973 to 2017, and a factor augmented vector autoregression (FAVAR) framework with sign restrictions, we investigate the effects of three structural macroeconomic shocks - monetary, demand, and supply – on the labour market outcomes of black and white Americans. Our results indicate that adverse macroeconomic shocks have differential effects on labour market outcomes for blacks and whites, hurting blacks disproportionately relative to whites. Black Americans appear to be significantly more sensitive to macroeconomic shocks than white Americans. Evidence from our FAVAR model, which uses information on contractionary initiatives by the Federal Reserve, indicates that the employment-population ratio among black Americans falls close to twice as much as that among white Americans, primarily due to an increase in their unemployment rate and not a decline in labour force participation rate. Policymakers should take account of these heterogeneous effects across racial groups when implementing disinflationary guiding policy.
    Keywords: macroeconomic shocks, monetary policy, business cycles, labour market, unemployment, racial inequality, FAVAR, sign restrictions
    JEL: C32 E24 E32 E52 J10 J15
    Date: 2019
  19. By: Michael Brei; Leonardo Gambacorta; Marcella Lucchetta; Marcella Lucchetta
    Abstract: The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks' lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000-16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank's assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank.
    Keywords: bad banks, resolutions, lending, non-performing loans, rescue packages, recapitalisations
    JEL: E44 G01 G21
    Date: 2020–01
  20. By: Delis, Manthos; Hong, Sizhe; Paltalidis, Nikos; Philip, Dennis
    Abstract: We suggest that forward guidance, via “binding” the central bank’s actions and creating associated expectations, fundamentally affects bank-lending decisions independently of other forms of monetary policy. To test this hypothesis, we build a forward guidance measure based on the language used in the Federal Open Market Committee meetings and match this measure with syndicated loans. Our results show that expansionary forward guidance decreases corporate loan spreads and that this effect is stronger for well-capitalized banks lending to riskier firms. Moreover, banks more easily initiate new lending relationships with lower spreads, and the loan syndicates are less concentrated.
    Keywords: Forward guidance; Monetary policy transmission; Bank lending; Corporate loans; Loan spreads; Syndicate structure; Bank-firm relationships
    JEL: E43 E52 E58 G21
    Date: 2020–01–15
  21. By: Papafilis, Michalis-Panayiotis; Psillaki, Maria; Margaritis, Dimitris
    Abstract: This study examines the nexus between sovereigns and banks during a crisis with a focus on the effects of PSI, the voluntary exchange program of Greek sovereign bonds with private sector involvement. The effectiveness of the program is evaluated through its impact on credit default swaps of 8 Eurozone countries and 21 banks, using daily data from 2009 to 2014. Using linear and nonlinear causality analyses, it is found that the link between sovereign and bank risk weakened after PSI, while the persistence and magnitude of lead-lag interactions also declined in the same period. A difference-in-difference model confirms this result. The findings are also robust to second moment filtering, with GARCH-BEKK residuals indicating the presence of significant albeit declining nonlinear causal effects. The empirical evidence suggests that sovereign debt restructuring initiatives, such as PSI, could be an effective policy measure to ease off pressure on the nexus between banks and their sovereigns.
    Keywords: CDS spreads; PSI; sovereign/bank credit risk; contagion; nonlinear causality
    JEL: F34 F42 G28 H12 H63
    Date: 2020–01
  22. By: Angeloni, Ignazio
    Abstract: Discussions about the banking union have restarted. Its success so far is limited: national banking sectors are still overwhelmingly exposed to their own countries' economies, cross border banking has not increased and capital and liquidity remain locked within national boundaries. The policy letter highlights that the current debate, centered on sovereign exposures and deposit insurance, misses critical underlying problems in the supervision and resolution frameworks. The ECB supervisors' efforts to facilitate cross-border banking have been hampered by national ringfencing. The resolution framework is not up to its task: limited powers of the SRB, prohibitive access conditions and limited size of the Single Resolution Fund limit its effectiveness. A lack of a coherent European framework for insolvency unlevels the regulatory field and creates incentives to bypass European rules. The new Commission and European Parliament, with the new ECB leadership, provide a unique opportunity to address these shortcomings and make the banking union work.
    Keywords: ECB,Banking Union,Cross-border Banking,Banking Supervision,Banking Resolution
    Date: 2020
  23. By: Bussière, Matthieu (Banque de France); Hills, Robert (Bank of England); Lloyd, Simon (Bank of England); Meunier, Baptiste (Banque de France); Pedrono, Justine (Autorité de Contrôle Prudentiel et de Régulation (ACPR), Banque de France); Reinhardt, Dennis (Bank of England); Sowerbutts, Rhiannon (Bank of England)
    Abstract: By combining analysis of two unique confidential datasets, we examine how euro-area (EA) monetary policy and recipient-country prudential policy interact to influence the cross-border lending of French banks from France and the UK. We find that monetary spillovers via cross-border lending can be partially offset by prudential measures in receiving countries. We then explore heterogeneities in that interaction, specifically the difference made by bank size and location of the affiliate (French headquarters vs. affiliates based in the UK, an international financial centre). Focusing on lending from France, we find that the response of GSIBs’ lending to EA monetary policy is less sensitive to recipient-country prudential policy than non-GSIBs’. In contrast, the response of lending to EA monetary policy from French-owned GSIB affiliates in the UK is sensitive to recipient-country prudential policy. We also find evidence that French GSIBs channel funds towards the UK in response to EA monetary policy, in a manner that is dampened by the global prudential policy setting. Together, these findings suggest the existence of a ‘London Bridge’: conditional on EA monetary policy, French GSIBs adjust their funds in the UK in response to global prudential policies and, from there, lend to third countries, responding to local prudential policies. French GSIBs’ cross-border lending from their headquarters to EA monetary policy responds differently to foreign prudential policies than their lending from international financial centres. Finally, we find evidence of a similar pattern for all EA-owned bank affiliates in the UK, suggesting a broader relevance of the London Bridge.
    Keywords: Cross-border bank lending; monetary policy; prudential policy; policy interactions; spillovers; financial centre.
    JEL: E52 F34 F36 F42 G18 G21
    Date: 2020–01–10
  24. By: Saeidinezhad, Elham; Hovhannisyan, Tatev
    Abstract: As the U.S. experience revealed after the Global Financial Crisis (GFC), zero lower bound (ZLB) limits the Fed's capacity to stimulate the economy through conventional methods of monetary policy. The GFC provided a chance to advance unconventional tools to strengthen economic growth and reclaim financial stability. One of the aims of the existing unconventional tools has been to provide liquidity to the banks. To account for the dynamic reality of the financial ecosystem, we propose two new instruments through which the Fed targets nonbank securities dealers and debt issuers explicitly. By design, these tools should be used as last resort options. The first tool called the "Dealer Option" and functions by opening the Fed's balance sheet to securities dealers to increases liquidity in the market. The second tool, "Elastic Legal Policy," suggests relaxing legal constraints in debt securities contracts during the financial crisis to reduce debt issuers' default risks. Given the interconnectedness of balance sheets and cash flows as well as the role of securities dealers as market makers, the elastic legal policy and dealer option help reduce debtors' defaults and liquidity risk during a financial crisis.
    Keywords: Financial Crisis, Financial Stability, Central Banking, Debt Securities
    JEL: E52 E58 G01 G21 G23 G24 K0 K22
    Date: 2019–12–19
  25. By: Korhonen, Iikka; Newby, Elisa
    Abstract: This study examines the Twitter policies and use of European central banks. Almost every European central bank maintains an institutional Twitter account, but tweeting activity, tweet content and usage restrictions on Twitter use by individual staff members vary considerably. We further consider the evolution of Twitter use by European central banks in light of the growing importance of financial stability in central bank policy messaging. To study these issues, we create a database of tweets from European central banks and financial supervisors, as well as attempt to gauge how closely professional economists follow central banks on Twitter. Central banks’ Twitter activity has no relation to citizens’ online participation. We also find that central banks’ communication on financial stability with Twitter has increased over time, especially in comparison with monetary policy.
    Keywords: central bank communication,monetary policy,financial stability,Twitter
    JEL: E0 E5 E52 E58 G28
    Date: 2019
  26. By: Ball, Laurence; Mazumder, Sandeep
    Abstract: This paper asks whether a textbook Phillips curve can explain the behavior of core inflation in the euro area. A critical feature of the analysis is that we measure core inflation with the weighted median of industry inflation rates, which is less volatile than the common measure of inflation excluding food and energy prices. We find that fluctuations in core inflation since the creation of the euro are well explained by three factors: expected inflation (as measured by surveys of forecasters); the output gap (as measured by the OECD); and the pass-through of movements in headline inflation. Our specification resolves the puzzle of a “missing disinflation” after the Great Recession, and it diminishes the puzzle of a “missing inflation” during the recent economic recovery. JEL Classification: E31, E32
    Keywords: core inflation, euro area, median inflation, missing disinflation, missing inflation, Phillips curve
    Date: 2020–01
  27. By: Bindseil, Ulrich
    Abstract: IT progress and its application to the financial industry have inspired central banks and academics to analyse the merits of central bank digital currencies (CBDC) accessible to the broad public. This paper first reviews the advantages and risks of such CBDC. It then discusses two prominent arguments against CBDC, namely (i) risk of structural disintermediation of banks and centralization of the credit allocation process within the central bank and (ii) risk of facilitation systemic runs on banks in crisis situations. Two-tier remuneration of CBDC is proposed as solution to both issues, and a comparison is provided with a simple cap solution and the solution of Kumhof and Noone (2018). Finally, the paper compares the financial account implications of CBDC with the ones of crypto assets, Stablecoins, and narrow bank digital money, in a domestic and international context. JEL Classification: E3, E5, G1
    Keywords: central bank digital currencies, central banks, financial accounts, financial instability
    Date: 2020–01

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