nep-cba New Economics Papers
on Central Banking
Issue of 2020‒02‒17
nineteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Policy Maker's Credibility with Predetermined Instruments for Forward-Looking Targets By Jean-Bernard Chatelain; Kirsten Ralf
  2. Monetary Policy and Wealth Effects By Nicolas Caramp; Dejanir H. Silva
  3. Central Bank Communication in Ghana: Insights from a Text Mining Analysis By Omotosho, Babatunde S.
  4. Bank Capital and Risk in Europe and Central Asia Ten Years After the Crisis By Anginer,Deniz; Demirguc-Kunt,Asli; Mare,Davide Salvatore
  5. Financial Market Incompleteness and International Cooperation on Capital Controls By Shigeto Kitano; Kenya Takaku
  6. Bank funding costs and solvency By Arnould, Guillaume; Pancaro, Cosimo; Żochowski, Dawid
  7. The Transmission of Monetary Policy under the Microscope By Martin Holm; Pascal Paul; Andreas Tischbirek
  8. Macro and Micro Implications of the Introduction of Central Bank Digital Currencies: An Overview By Gérard Mondello; Elena Sinelnikova; Pavel Trunin
  9. Monetary Policy Uncertainty Spillovers in Time- and Frequency-Domains By Rangan Gupta; Chi Keung Marco Lau; Jacobus A Nel; Xin Sheng
  10. Central bank policy sets the lower bound on bond yield By Joseph E. Gagnon; Olivier Jeanne
  11. Monetary Stimulus Policy in China: the Bank Credit Channel By Min Zhang; Yahong Zhang
  12. Inflation and Public Debt Reversals in Advanced Economies By Fukunaga,Ichiro; Komatsuzaki,Takuji; Matsuoka,Hideaki
  13. A Data-Rich Measure of Underlying Inflation for Brazil By Vicente da Gama Machado; Raquel Nadal; Fernando Ryu Ramos Kawaoka
  14. Long-run mild deflation under fiscal unsustainability in Japan By Saito, Makoto
  15. Countercyclical Capital Buffers: A Cautionary Tale By Christoffer Koch; Gary Richardson; Patrick Van Horn
  16. Crossing the credit channel: credit spreads and firm heterogeneity By Anderson, Gareth; Cesa-Bianchi, Ambrogio
  17. Central Bank Digital Currency: Central Banking For All? By Jesœs Fern‡ndez-Villaverde; Daniel R. Sanches; Linda Schilling; Harald Uhlig
  18. Regimes of Fiscal and Monetary Policy in England during the French Wars (1793-1821) By Pamfili Antipa; Christophe Chamley
  19. Shilnikov Chaos, Low Interest Rates, and New Keynesian Macroeconomics By Barnett, William; Bella, Giobanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice

  1. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school, INSEEC - INSEEC Business School - Institut des hautes études économiques et commerciales Business School (INSEEC))
    Abstract: The aim of the present paper is to provide criteria for a central bank of how to choose among di¤erent monetary-policy rules when caring about a number of policy targets such as the output gap and expected in ‡ation. Special attention is given to the question if policy instruments are predetermined or only forward looking. Using the new-Keynesian Phillips curve with a cost-push-shock policy-transmission mechanism, the forward-looking case implies an extreme lack of robustness and of credibility of stabilization policy. The backward-looking case is such that the simple-rule parameters can be the solution of Ramsey optimal policy under limited commitment. As a consequence, we suggest to model explicitly the rational behavior of the policy maker with Ramsey optimal policy, rather than to use simple rules with an ambiguous assumption leading to policy advice that is neither robust nor credible.
    Keywords: Determinacy,Proportional Feedback Rules,Dynamic Stochastic General Equilibrium,Ramsey Optimal Policy under Quasi-Commitment Keywords: Determinacy,Ramsey Optimal Policy under Quasi-Commitment
    Date: 2019–11
  2. By: Nicolas Caramp; Dejanir H. Silva (Department of Economics, University of California Davis)
    Abstract: This paper studies the role of wealth effects in the monetary transmission mechanism in New Keynesian models. We propose a decomposition of consumption that extends the Slutsky equation to a general equilibrium setting. Wealth effects, and their amplification in general equilibrium, explain a large fraction of the consumption and inflation response to changes in nominal interest rates in the standard equilibrium. In RANK, wealth effects are determined, generically, by the revaluation of public debt and the fiscal response to monetary policy. In a medium-scale DSGE model, we find a fiscal response that is several times larger than the response we estimate in the data. Therefore, the model is unable to generate sufficiently strong effects. In an analytical HANK model with positive private debt, private wealth effects amplify the response to monetary policy and improve the quantitative performance of the DSGE model.
    Keywords: New Keynesian, Monetary Policy, Fiscal Policy, Wealth Effects
    JEL: E21 E52 E63
    Date: 2020–01–31
  3. By: Omotosho, Babatunde S.
    Abstract: Effective central bank communication is useful for anchoring market expectations and enhancing macroeconomic stability. In this paper, the communication strategy of the Bank of Ghana (BOG) is analysed using BOG’s monetary policy committee press releases for the period 2018-2019. Specifically, we apply text mining techniques to investigate the readability, sentiments and hidden topics of the policy documents. Our results provide evidence of increased central bank communication during the sample period, implying improved monetary policy transparency. Also, the computed Coleman and Liau (1975) readability index shows that the word and sentence structures of the press releases have become less complex, indicating increased readability. Furthermore, we find an average monetary policy net sentiment score of 3.9 per cent. This means that the monetary policy committee expressed positive sentiments regarding policy and macroeconomic outlooks during the period. Finally, the estimated topic model reveals that the topic proportion for “monetary policy and inflation” was prominent in the year 2018 while concerns regarding exchange rate were strong in 2019. The paper recommends that in order to enhance monetary policy communication, the Bank of Ghana should continue to improve on the readability of the monetary policy press releases.
    Keywords: Central bank communication, text mining, monetary policy
    JEL: E52 E58 E65
    Date: 2019–11–15
  4. By: Anginer,Deniz; Demirguc-Kunt,Asli; Mare,Davide Salvatore
    Abstract: This paper examines changes in bank capital and capital regulations since the global financial crisis, in the Europe and Central Asia region. It shows that banks in Europe and Central Asia are better capitalized, as measured by regulatory capital ratios, than they were prior to the crisis. However, the increase in simple equity ratios for the same banks has been smaller over the past 10 years. The increases in regulatory capital ratios have coincided with a reduction in the stringency of the definition of Tier 1 capital and reduction in risk-weights. Further analyses showthat bank risk in Europe and Central Asia is more sensitive to changes in simple leverage ratios than in regulatory capital ratios, consistent with the notion that equity ratios only include high-quality capital and do not rely on internal risk models to compute risk-weights. Although there has been some effort to increase capital and liquidity requirements for institutions deemed systemically important, the region has been lagging in addressing the resolution of these institutions.
    Date: 2020–01–30
  5. By: Shigeto Kitano (Research Institute for Economics and Business Administration, Kobe University, Japan); Kenya Takaku (Faculty of International Studies, Hiroshima City University, Japan)
    Abstract: We examine how the degree of financial market incompleteness affects welfare gains from international cooperation on capital controls. When financial markets are incomplete, international risk sharing is disturbed. However, the optimal global policy significantly reverses the welfare deterioration due to inefficient risk-sharing. We show that when financial markets are more incomplete, the welfare gap between the optimal global policy and the Nash equilibrium increases, and the welfare gains from international cooperation on capital controls then become larger.
    Keywords: Financial markets; Incomplete markets; Policy cooperation; Capital controls; Optimal policy; Welfare; Ramsey policy; Open-loop Nash game
    JEL: D52 E61 F32 F38 F42 G15
    Date: 2020–01
  6. By: Arnould, Guillaume (Bank of England); Pancaro, Cosimo (European Central Bank); Żochowski, Dawid (European Central Bank)
    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.
    Keywords: Banks; solvency; funding costs
    JEL: G15 G21
    Date: 2020–02–07
  7. By: Martin Holm (University of Oslo); Pascal Paul; Andreas Tischbirek (HEC Lausanne, University of Lausanne)
    Abstract: We investigate the transmission of monetary policy to household consumption using detailed administrative data on the universe of households in Norway. Based on a novel series of identified monetary policy shocks, we estimate the dynamic responses of consumption, income, and saving along the liquid asset distribution of households. We find that low-liquidity but also high-liquidity households show strong responses, interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy outweigh direct effects, albeit with a delay. Overall, the results support the importance of financial frictions, cash-flow channels, and heterogeneous effects of monetary policy.
    Keywords: Monetary policy; Household balance sheets; Liquidity constraints; Heterogeneous agent New Keynesian models
    JEL: D31 E12 E21 E24 E32 E43 E52
    Date: 2020–01–31
  8. By: Gérard Mondello (Université Côte d'Azur, France; GREDEG CNRS); Elena Sinelnikova (Center for the Study of Central Banks, Institute for Applied Economic Studies, RANEPA); Pavel Trunin (Macroeconomics and Finance Division, Division Head Gaidar Institute for Economic Policy, Moscow)
    Abstract: After the emergence and widespread of cryptocurrencies central banks are studying how their own digital currencies may help and favor the monetary policy implementation. There are many challenges to this process both in legal and economic (financial, monetary) areas. The paper studies the potential movement from a two-tier banking system (central bank and banks) to a one-tier banking system in case of CBDCs emission, including the issues of competition and commercial banking profitability. More specific question is the change of the transmission of monetary policy with CBDC emission.
    Keywords: CBDC, digital currency, cryptocurrency, monetary policy
    JEL: B53 E42
    Date: 2020–02
  9. By: Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Chi Keung Marco Lau (Huddersfield Business School, University of Huddersfield, Huddersfield, HD1 3DH, United Kingdom); Jacobus A Nel (University of Pretoria, 0002, South Africa); Xin Sheng (Lord Ashcroft International Business School, Anglia Ruskin University, Chelmsford, CM1 1SQ, United Kingdom)
    Abstract: We use the recently created monthly Interest Rate Uncertainty measure, to investigate monetary policy uncertainty across the US, Germany, France, Italy, Spain, UK, Japan, Canada, and Sweden in both the time and frequency domains. We find that the largest spillover indices are from innovations in the country itself, however, there are some instances where spillover indices between countries are large. These relationships change over time and we observe large variances in pairwise spillovers during the global financial crisis. We find that most of the volatility is confined to the crisis period.
    Keywords: Connectedness, Frequency domain spillover, Monetary policy uncertainty, Pairwise spillovers, Uncertainty spillover
    JEL: C32 D80 E52 F42
    Date: 2020–01
  10. By: Joseph E. Gagnon (Peterson Institute for International Economics); Olivier Jeanne (Peterson Institute for International Economics)
    Abstract: This paper shows that the scope for bond yields to fall below zero is strictly limited by market expectations about how far below zero central banks are willing to set their short-term policy rates. If a central bank communicates a credible commitment to keeping its policy rate above a given level under all circumstances, then bond yields must be higher than that level. This result holds true even in a model in which central banks are able to depress the term premium in bond yields below zero via large-scale purchases of long-term bonds, also known as quantitative easing (QE). QE becomes less effective as bond yields approach their lower bound.
    Keywords: Negative interest rate, quantitative easing
    JEL: E43 E58 G12
    Date: 2020–01
  11. By: Min Zhang (East China Normal University, Faculty of Economics and Management, School of Economics); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: This paper develops a novel while plausible way to model the Chinese monetary transmission via open market operations (OMOs). In the model, monetary injections through OMOs, together with differentiated collateral regulation in the banking sector, directly affect banks' loan capacities, which then influences sectoral investments and aggregate GDP. The quantitative analysis shows that the 2009--2010 monetary expansion explains nearly 90 percent of the rise in GDP growth. Moreover, balancing credit allocation across sectors and applying unified banking regulations jointly enhance the GDP growth rate by 2.15 percentage points, with the contribution of the unified banking regulations proving more important.
    Keywords: Monetary stimulus, Bank credit channel, Open market operation rule, Chinese economy
    JEL: E32 E44 E52
    Date: 2020–02
  12. By: Fukunaga,Ichiro; Komatsuzaki,Takuji; Matsuoka,Hideaki
    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 the 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 the public debt burden only marginally in many advanced economies.
    Date: 2020–01–29
  13. By: Vicente da Gama Machado; Raquel Nadal; Fernando Ryu Ramos Kawaoka
    Abstract: This paper proposes a new measure of underlying inflation for Brazil based on a generalized dynamic factor model (GDFM). The approach summarizes a wide set of indicators, which the Banco Central do Brasil (BCB) regularly monitors in its assessment of the inflation scenario, such as data on prices, activity, financial and monetary variables. Differently from most core inflation approaches, the model takes account of the time series dimension – by extracting the lower frequency component – as well as the cross-section dimension and is able to handle end-of-sample unbalances. To our knowledge, it is the first application of this procedure for Brazil. The resulting series exhibits lower variability, unbiasedness and a relatively good forecasting performance compared to various other measures of trend inflation. Overall, the findings suggest the novel underlying inflation measure may be an important complement to the information set used by the BCB.
  14. By: Saito, Makoto
    Abstract: A macroeconomic policy debate has been ongoing in Japan for over the past two decades, with one side proposing drastic fiscal reforms to avoid hyperinflation and the other recommending expansionary policies to escape from a liquidity trap. However, neither side has been able to explain why mild deflation has continued for such a long time, despite primary budget deficits and unprecedented monetary expansion. This paper presents an alternative theory, arguing that fiscal sustainability will be restored in the future not as a result of drastic fiscal reforms, hyperinflation, or continuous mild inflation, but largely through a one-off surge in the price level, such that the price level becomes several times higher than before. Such a price surge is considered a rare event accompanied by catastrophic endowment shocks in the following years. Within this framework, mild deflation coexists with fiscal unsustainability until this sharp surge in the price level occurs.
    Keywords: the fiscal theory of the price level, fiscal sustainability, mild deflation, price surges, yield curves
    JEL: E31 E41 E58 E63
    Date: 2020–01
  15. By: Christoffer Koch; Gary Richardson; Patrick Van Horn
    Abstract: Countercyclical capital buffers (CCyBs) are an old idea recently resurrected. CCyBs compel banks at the core of financial systems to accumulate capital during expansions so that they are better able to sustain operations during downturns. To gauge the potential impact of modern CCyBs, we compare the behavior of large and highly-connected commercial banks during booms before the Great Depression and Great Recession. Before the former, core banks did not expect bailouts and were subject to regulations that incentivized capital accumulation during booms. Before the later, core banks expected bailouts and kept capital levels close to regulatory minima. Our analysis indicates that the pre-Depression regulatory regime induced money-center banks to build capital buffers between 3% and 5% of total assets during economic expansions, which is up to double the maximum modern CCyB. These buffers enabled those banks to continue operations without government assistance during severe crises. This historical analogy indicates that modern countercyclical buffers may achieve their immediate goals of protecting core banks during crises but raises questions about whether they will contribute to overall financial stability.
    JEL: E02 E42 G01 G2 G21 G3 N1
    Date: 2020–01
  16. By: Anderson, Gareth (Bank of England); Cesa-Bianchi, Ambrogio (Bank of England, CFM and CEPR)
    Abstract: We show that credit spreads rise after a monetary policy tightening, yet spread reactions are heterogeneous across firms. Exploiting information from a unique panel of corporate bonds matched with balance sheet data for US non-financial firms, we document that firms with high leverage experience a more pronounced increase in credit spreads than firms with low leverage. A large fraction of this increase is due to a component of credit spreads that is in excess of firms’ expected default — the excess bond premium. Consistent with the spreads response, we also document that high-leverage firms experience a sharper contraction in debt and investment than low-leverage firms. Our results provide evidence that balance sheet effects are crucial for understanding the transmission mechanism of monetary policy.
    Keywords: Monetary policy; heterogeneity; credit spreads; excess bond premium; credit channel; financial accelerator; event-study; identification
    JEL: E44 F44 G15
    Date: 2020–02–07
  17. By: Jesœs Fern‡ndez-Villaverde (University of Pennsylvania - Department of Economics); Daniel R. Sanches (Federal Reserve Banks - Federal Reserve Bank of Philadelphia); Linda Schilling (Ecole Polytechnique- CREST); Harald Uhlig (University of Chicago - Department of Economics)
    Abstract: The introduction of a central bank digital currency (CBDC) allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits. Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bankÕs contract with the investment banks has the capacity to deter runs. Thus, the central bank is more stable than the commercial banking sector. Depositors internalize this feature ex-ante, and the central bank arises as a deposit monopolist, attracting all deposits away from the commercial banking sector. This monopoly might endangered maturity transformation.
    Keywords: central bank digital currency, central banking, intermediation, maturity transformation, bank runs, lender of last resort
    JEL: E58 G21
    Date: 2020
  18. By: Pamfili Antipa (Sciences Po and Banque de France); Christophe Chamley (Boston University and Paris School of Economics)
    Abstract: The French Wars (1793-1815) forced unprecedented coordination between fiscal and monetary authorities and a revolution in the role of the Bank of England. Using hand-collected data, this analysis of the fiscal and monetary policies at that time, and of their impacts on the price of the pound in the internal and the external markets, highlights how the steady overarching commitment to fiscal balance led to the extraordinary success of a flexible implementation of this principle in four sharply defined regimes between 1793 and 1821, “tax-smoothing as usual†(1793-1797), “Real Bills and war tax†(1797-1810), “whatever it takes†(1810-1810), “exit†(1815-1821).
    Keywords: : Interactions between monetary and fiscal policies, central bank balance sheet, policy commitment, Fiscal Theory of the Price Level.
    JEL: N13 H63 E58 E62
    Date: 2019–12
  19. By: Barnett, William; Bella, Giobanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice
    Abstract: The paper shows that in a New Keynesian (NK) model, an active interest rate feedback monetary policy, when combined with a Ricardian passive fiscal policy, à la Leeper-Woodford, may induce the onset of a Shilnikov chaotic attractor in the region of the parameter space where uniqueness of the equilibrium prevails locally. Implications, ranging from long-term unpredictability to global indeterminacy, are discussed in the paper. We find that throughout the attractor, the economy lingers in particular regions, within which the emerging aperiodic dynamics tend to evolve for a long time around lower-than-targeted inflation and nominal interest rates. This can be interpreted as a liquidity trap phenomenon, produced by the existence of a chaotic attractor, and not by the influence of an unintended steady state or the Central Bank's intentional choice of a steady state nominal interest rate at its lower bound. In addition, our finding of Shilnikov chaos can provide an alternative explanation for the controversial “loanable funds” over-saving theory, which seeks to explain why interest rates and, to a lesser extent inflation rates, have declined to current low levels, such that the real rate of interest is below the marginal product of capital. Paradoxically, an active interest rate feedback policy can cause nominal interest rates, inflation rates, and real interest rates unintentionally to drift downwards within a Shilnikov attractor set. Policy options to eliminate or control the chaotic dynamics are developed.
    Keywords: Shilnikov chaos criterion, global indeterminacy, long-term un-predictability, liquidity trap
    JEL: C6 C61 C62 E12 E5 E52 E6 E63
    Date: 2020–01–30

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