nep-cba New Economics Papers
on Central Banking
Issue of 2020‒02‒24
seventeen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. What’s on the ECB’s mind? – Monetary policy before and after the global financial crisis By Jonas Gross; Johannes Zahner
  2. Monetary Policy and Sovereign Risk in Emerging Economies (NK-Default) By Cristina Arellano; Yan Bai; Gabriel Mihalache
  3. The Power of Helicopter Money Revisited: A New Keynesian Perspective By Thomas J. Carter; Rhys R. Mendes
  4. Macroeconomic Surprises and the Demand for Information about Monetary Policy By Peter Tillmann
  5. How Should Credit Gaps Be Measured? An Application to European Countries By Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
  6. The transmission of bank capital requirements and monetary policy to bank lending By Imbierowicz, Björn; Löffler, Axel; Vogel, Ursula
  7. Should central banks communicate uncertainty in their projections? By Ryan Rholes; Luba Petersen
  8. One Shock, Many Policy Responses By Rui Mano; Silvia Sgherri
  9. Managing GDP Tail Risk By Thibaut Duprey; Alexander Ueberfeldt
  10. Revisiting the monetary presentation of the euro area balance of payments By Picón Aguilar, Carmen; Soares, Rodrigo Oliveira; Adalid, Ramón
  11. Intervention Under Inflation Targeting--When Could It Make Sense? By David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
  12. Monetary Policy Surprises and Employment: evidence from matched bank-firm loan data on the bank lending-channel By Rodrigo Barbone Gonzalez
  13. Output Gap, Monetary Policy Trade-offs, and Financial Frictions By Francesco Furlanetto; Paolo Gelain; Marzie Sanjani
  14. Regional Monetary Policies and the Great Depression By Pooyan Amir-Ahmadi; Gustavo S. Cortes; Marc D. Weidenmier
  15. The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets By Calvin He; Gianni La Cava
  16. Optimal monetary policy cooperation with a global shock and dollar standard By Xiaoyong Cui; Liutang Gong; Chan Wang; Heng-fu Zou
  17. Monetary Policy and Government Debt Dynamics Without Commitment By Dmitry Matveev

  1. By: Jonas Gross (University of Bayreuth); Johannes Zahner (Philipps-University Marburg)
    Abstract: This paper analyzes the interest rate setting of the European Central Bank (ECB) both before and after the outbreak of the global financial crisis. In the current monetary policy literature, researchers typically select one Taylor rule-based model in order to analyze the interest rate setting of central banks, but neglect uncertainty about the choice of this respective model. We apply a Bayesian model averaging (BMA) approach to extend the standard Taylor rule to account for model uncertainty driven by heterogeneity in the ECB decision-making body, the governing council. Our results suggest the following: First, the ECB acts according to its official mandate to maintain price stability and therefore to focus its decisions on the inflation rate. Second, economic activity measures have been in the focus of the ECB before the financial crisis broke out. Third, over the last decade, the role of economic activity for ECB monetary policy has decreased so that inflation seems to be the main driver of monetary policy decisions. Fourth, central bankers appear to consider more than one model when they decide about monetary policy measures.
    Keywords: European Central Bank, Taylor Rule, Bayesian Model Averaging, Model Uncertainty
    JEL: C11 E43 D81 E52 E58
    Date: 2020
  2. By: Cristina Arellano; Yan Bai; Gabriel Mihalache
    Abstract: This paper develops a New Keynesian model with sovereign default risk (NK-Default). We focus on the interaction between monetary policy, conducted according to an interest rate rule that targets inflation, and external defaultable debt issued by the government. Monetary policy and default risk interact since both affect domestic consumption, production, and inflation. We find that default risk amplifies monetary frictions and generates a tension for monetary policy, which increases the volatility of inflation and nominal rates. These monetary frictions in turn discipline sovereign borrowing, slowing down debt accumulation and lowering sovereign spreads. Our framework replicates the positive comovements of spreads with nominal domestic rates and inflation, a salient feature of emerging markets data, and can rationalize the experience of Brazil during the 2015 downturn, with high inflation, nominal rates, and spreads.
    Date: 2020
  3. By: Thomas J. Carter; Rhys R. Mendes
    Abstract: We analyze money financing of fiscal transfers (helicopter money) in two simple New Keynesian models: a “textbook” model in which all money is non-interest-bearing (e.g., all money is currency), and a more realistic model with interest-bearing reserves. In the textbook model with only non-interest-bearing money, we find the following: * A money-financed fiscal expansion can be more stimulative than a debt-financed fiscal expansion of equal magnitude. However, the extra stimulus requires that the central bank abandon its usual feedback rule for an extended period, allowing interest rates to instead be determined by the rate of money creation. * Moreover, the extra stimulus associated with money financing stems solely from its implications for the path of short-term interest rates and cannot be attributed to an oft-cited Ricardian-equivalence argument that money financing avoids the adverse wealth effects associated with higher taxes under debt financing. * Because the stimulative effects of money financing are driven by its implications for interest rates, a combination of debt financing and sufficiently accommodative forward guidance can replicate all welfare-relevant outcomes while bypassing the potential political-economic complications associated with helicopter money. * Apart from these complications, money financing also has the drawback that it would allow money-demand shocks to generate volatility in output and inflation, much as was the case under the money-targeting regimes of the 1970s and 1980s. In the model with interest-bearing reserves, we find the following: * The rate of money creation determines the interest rate on reserves, but broader interest rates are invariant across debt- and money-financing regimes. * As a result, money financing delivers no extra stimulus relative to debt financing. Overall, results suggest that helicopter money cannot be justified on the grounds that it would allow policy-makers to get more stimulus out of a given fiscal expansion: either money financing has no extra stimulative benefits to offer, or all potential benefits could be pursued more effectively and robustly using alternative policies.
    Keywords: Credibility; Economic models; Fiscal Policy; Inflation targets; Interest rates; Monetary Policy; Monetary policy framework; Transmission of monetary policy; Uncertainty and monetary policy
    JEL: E12 E41 E43 E51 E52 E58 E61 E63
    Date: 2020–02
  4. By: Peter Tillmann (University of Giessen)
    Abstract: This paper studies the demand for information about monetary policy, while the literature on central bank transparency and communication typically studies the supply of information by the central bank or the reception of the information provided. We use a new data set on the number of views of the Federal Reserve's website to measure the demand for information. We show that exogenous news about the state of the economy as re flected in U.S. macroeconomic news surprises raise the demand for information about monetary policy. Surprises trigger an increase in the number of views of the policy-relevant sections of the website, but not the other sections. Hence, market participants do not only revise their policy expectations after a surprise, but actively acquire new information. We also show that attention to the Fed matters: a high number of views on the day before the news release weakens the high-frequency response of interest rates to macroeconomic surprises.
    Keywords: macroeconomic announcements, nonfarm payroll, attention, event study, central bank communication
    Date: 2020
  5. By: Chikako Baba; Salvatore Dell'Erba; Enrica Detragiache; Olamide Harrison; Aiko Mineshima; Anvar Musayev; Asghar Shahmoradi
    Abstract: Assessing when credit is excessive is important to understand macro-financial vulnerabilities and guide macroprudential policy. The Basel Credit Gap (BCG) – the deviation of the credit-to-GDP ratio from its long-term trend estimated with a one-sided Hodrick-Prescott (HP) filter—is the indicator preferred by the Basel Committee because of its good performance as an early warning of banking crises. However, for a number of European countries this indicator implausibly suggests that credit should go back to its level at the peak of the boom after the credit cycle turns, resulting in large negative gaps that might delay the activation of macroprudential policies. We explore two different approaches—a multivariate filter based on economic theory and a fundamentals-based panel regression. Each approach has pros and cons, but they both provide a useful complement to the BCG in assessing macro-financial vulnerabilities in Europe.
    Keywords: Real interest rates;Interest rate policy;Credit booms;Credit expansion;Credit aggregates;Credit Cycle,Credit Gap,Countercyclical Capital Buffer,Macroprudential Policies,WP,BCG,real interest rate,output gap,fundamental variable
    Date: 2020–01–17
  6. By: Imbierowicz, Björn; Löffler, Axel; Vogel, Ursula
    Abstract: We investigate the transmission of changes in bank capital requirements and supranational monetary policy, and their interaction effect, on euro area bank lending and lending rates. Our results show that - for weakly capitalized banks - increases in capital requirements are in the short-run associated with a decrease in the total of domestic and cross-border bank lending. In addition, we find that there is no similar effect of capital requirements for strongly capitalized banks. Furthermore, changes in the monetary policy stance are positively related to lending rates. Regarding the interacting effect of national capital requirements and supranational monetary policy, we observe that increases in capital requirements attenuate the general effects of monetary policy on interest rates. Overall, the transmission of an accommodating monetary policy to lending rates is attenuated by contemporaneous increases in bank capital requirements which additionally imply a transitory decrease of the loan growth of weakly capitalized banks.
    Keywords: Bank Lending,Lending Rates,Capital Requirements,Monetary Policy,International Policy Interaction
    JEL: E52 F30 G28
    Date: 2019
  7. By: Ryan Rholes (Texas A&M University); Luba Petersen (Simon Fraser University)
    Abstract: This paper provides original empirical evidence on the emerging practice by central banks of communicating uncertainty in their inflation projections. We compare the effects of point and density projections in a learning-to-forecast laboratory experiment where participants' aggregated expectations about one- and two-period-ahead inflation influence macroeconomic dynamics. Precise point projections are more effective at managing inflation expectations. Point projections reduce disagreement and uncertainty while nudging participants to forecast rationally. Supplementing the point projection with a density forecast mutes many of these benefits. Relative to a point projection, density forecasts lead to larger forecast errors, greater uncertainty about own forecasts, and less credibility in the central bank's projections. We also explore expectation formation in individual-choice environments to understand the motives for responding to projections. Credibility in the projections is significantly lower when strategic considerations are absent, suggesting that projections are primarily effective as a coordination device. Overall, our results suggest that communicating uncertainty through density projections reduces the ecacy of inflation point projections.
    Keywords: expectations, monetary policy, inflation communication, credibility, laboratory experiment, experimental macroeconomics, uncertainty, strategic, coordination, group versus individual choice
    Date: 2020–01
  8. By: Rui Mano; Silvia Sgherri
    Abstract: Policymakers have relied on a wide range of policy tools to cope with capital flow shocks. And yet, the effects and interaction of these policies remain under debate, as does the motivation for using them. In this paper, quantile local projections are used to estimate the entire distribution of future policy responses to portfolio flow shocks for 20 emerging markets and understand the variety of policy choices across the sample. To assuage endogeneity concerns, estimates rely on the fact that global capital flows are exogenous from the viewpoint of any one of these countries. The paper finds that: (i) policy responses to capital flow shocks are heterogeneous across countries, fat-tailed—“extreme” responses tend to be more elastic than “typical” responses—and asymmetric—“extreme” responses tend to be more elastic with respect to outflows than to inflows; (ii) country characteristics are linked to policy choices—with cross-country differences in forex intervention relating to the size of balance sheet vulnerabilities and the depth of the forex market; (iii) the use of targeted macroprudential policy and capital flows management measures can help “free the hands” of monetary policy by allowing it to focus more squarely on domestic cyclical developments.
    Keywords: Exchange rate policy;International investment position;Foreign exchange reserves;Foreign exchange intervention;Central banks;Capital flows,emerging markets,macroprudential policies,capital flows management.,WP,policy response,policy tool,flow pressure,forex,policy action
    Date: 2020–01–17
  9. By: Thibaut Duprey; Alexander Ueberfeldt
    Abstract: We propose a novel framework to analyze how policy-makers can manage risks to the median projection and risks specific to the tail of gross domestic product (GDP) growth. By combining a quantile regression of GDP growth with a vector autoregression, we show that monetary and macroprudential policy shocks can reduce credit growth and thus GDP tail risk. So policymakers concerned about GDP tail risk would choose a tighter policy stance at the expense of macroeconomic stability. Using Canadian data, we show how our framework can add tail event information to projection models that ignore them and give policy-makers a tool to communicate the trade-offs they face.
    Keywords: Central bank research; Economic models; Financial stability; Financial system regulation and policies; Interest rates; Monetary Policy; Monetary policy framework
    JEL: E44 E52 E58 D8 G01
    Date: 2020–01
  10. By: Picón Aguilar, Carmen; Soares, Rodrigo Oliveira; Adalid, Ramón
    Abstract: We explain how the external counterpart of the euro area M3 can be analysed by using the euro area balance of payments (b.o.p.). This is possible because the net external assets of the monetary financial institutions (MFIs) are present in two statistical frameworks that follow similar conventions: the balance sheet items (BSI) of MFIs and the balance of payments statistics. The first step to including external flows in the monetary analysis is to understand the nature of the flows between resident money holders and the rest of the world. This is possible thanks to the monetary presentation of the b.o.p, which provides information on the nature of external transactions and therefore guidance on the persistence of the monetary signal stemming from external flows.Over the past five years, the increase in the euro area’s external competitiveness has given rise to a sustained current account surplus that has consistently supported monetary inflows into the euro area. At the same time, portfolio transactions, which closely reflect financial and monetary policy conditions, have fluctuated significantly, increasing monetary inflows in the period from mid-2012 to mid-2014 and turning them into net outflows during the asset purchase programme (APP) period. JEL Classification: E51, E52, F45, F41, F43, F32, F34
    Keywords: balance of payments, balance sheet items, cross-border flows, monetary aggregates, monetary financial institutions, net external assets
    Date: 2020–02
  11. By: David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
    Abstract: We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed—at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
    Keywords: Central banks;Exchange rate policy;Central bank policy;Exchange markets;Central banking and monetary issues;emerging markets,monetary and exchange rate policies,inflation targeting,foreign exchange intervention,capital flows,WP,EME,inflation target,policy instrument,exchange rate,targeter
    Date: 2020–01–17
  12. By: Rodrigo Barbone Gonzalez
    Abstract: This paper investigates the effects of the bank lending-channel of monetary policy (MP) surprises on credit supply and employment. To identify the effects of MP surprises, I bring the high-frequency identification strategy of Kuttner (2001) to comprehensive and matched bank-firm data from Brazil. The results are robust and stronger than the ones obtained with Taylor residuals or the reference rate. Consistent with theory, financial intermediaries’ constraints are relevant in the transmission of MP (beyond credit) to the real economy. Firms connected to weaker banks not only observe 0.26 pp higher credit intake, but also employ 0.10 pp more following MP stimulus.
  13. By: Francesco Furlanetto (BI Norwegian Business School; Norges Bank); Paolo Gelain; Marzie Sanjani (International Monetary Fund)
    Abstract: This paper investigates how the presence of pervasive financial frictions and large financial shocks changes the optimal monetary policy prescriptions and the estimated dynamics in a New Keynesian model. We find that financial factors affect the optimal policy only to some extent. A policy of nominal stabilization (with a particular focus on targeting wage inflation) is still the optimal policy, although the central bank is now unable to fully stabilize economic activity around its potential level. In contrast, the presence of financial frictions and financial shocks crucially changes the size and shape of the estimated output gap and the relative importance of different shocks in driving economic fluctuations, with financial shocks absorbing explanatory power from labor supply shocks.
    Keywords: Financial frictions; output gap; monetary policy
    JEL: E32 C51 C52
    Date: 2020–02–15
  14. By: Pooyan Amir-Ahmadi; Gustavo S. Cortes; Marc D. Weidenmier
    Abstract: The Great Depression provides a unique setting to test the impact of monetary policies on economic activity in a monetary union within the same country during a severe crisis. Until the mid-1930s, the 12 Federal Reserve banks had the ability to set their own discount rates and conduct independent monetary policy. Using a structural VAR with sign restrictions and new monthly data for each Federal Reserve district between 1923-33, we extract a national monetary policy factor from the 12 discount rates of the Federal Reserve banks. We then identify the region-specific component for each Fed district by subtracting the common factor component of monetary policy from the discount rate of each Federal Reserve bank. Our findings suggest that there was significant variation in regional monetary policy and that the district reserve banks played a key role in the economic contraction.
    JEL: E52 E58 N1 N12
    Date: 2020–01
  15. By: Calvin He (Reserve Bank of Australia); Gianni La Cava (Reserve Bank of Australia)
    Abstract: We document that the effect of monetary policy on housing prices varies substantially by local housing market. We show that this heterogeneity across local housing markets can be partly explained by variation in housing supply conditions – housing prices are typically more sensitive to changes in interest rates in areas where land is more expensive. But other factors are important too. Specifically, we find the sensitivity is greater in areas where incomes are relatively high, households are more indebted and there are more investors. Taken together, this suggests that the state of the economy can affect the sensitivity of housing prices to monetary policy. We also directly explore how monetary policy affects housing wealth inequality. We find that housing prices in more expensive areas are more sensitive to changes in interest rates than in cheaper areas. This suggests that lower interest rates increase housing wealth inequality, while higher rates do the opposite. However, these effects appear to be temporary.
    Keywords: housing; monetary policy; mortgage debt; inequality; heterogeneity
    JEL: D31 E21 E52
    Date: 2020–02
  16. By: Xiaoyong Cui (School of Economics, Peking University); Liutang Gong (Guanghua School of Management, Peking University); Chan Wang (School of Finance, Central University of Finance and Economics); Heng-fu Zou (China Economics and Management Academy, Central University of Finance and Economics)
    Abstract: Contrary to the consensus in the literature, we demonstrate that there exist the welfare gains from monetary policy cooperation when the world is hit by a global shock. We reach our conclusion in a two-country New Keynesian model with a global oil price shock and dollar standard. When exporters in both countries and oil producer which is modeled as a third party such as OPEC price goods in the home currency, the U.S. dollar, the status of home and foreign monetary policy is asymmetric. Speciffically, home monetary policy can influence the welfare levels of the households in the world while foreign monetary policy can only affect the welfare level of the domestic household. By internalizing the negative externality of home monetary policy to foreign country, world planner can achieve the welfare gains from monetary policy cooperation. In addition, unlike what is found in the literature, we show that not all countries are willing to take part in monetary policy cooperation, unless the world planner transfers part of the welfare gains from the country which benefits from the monetary policy cooperation to the one which loses.
    Keywords: A global shock, Dollar standard, Monetary policy cooperation, Welfare gains
    JEL: E5 F3 F4
    Date: 2020
  17. By: Dmitry Matveev
    Abstract: I show that maturity considerations affect the optimal conduct of monetary and fiscal policy during a period of government debt reduction. I consider a New Keynesian model and study a dynamic game of monetary and fiscal policy authorities without commitment, characterizing the incentives that drive the choice of interest rate. The presence of long-term bonds makes government budgets less sensitive to changes in interest rates. As a result, a reduction of government debt induced by a lack of policy commitment is associated with tight monetary policy. Furthermore, the long maturity of bonds slows down the speed of debt reduction up to the rate consistent with existing empirical evidence on the persistence of government debt. Finally, the long maturity of bonds brings down the welfare loss associated with debt reduction.
    Keywords: Fiscal Policy; Monetary Policy
    JEL: E52 E62 E63
    Date: 2019–12

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