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

  1. Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area By Philippe Andrade; Filippo Ferroni
  2. Monetary Policy Is Not Always Systematic and Data-Driven: Evidence from the Yield Curve By Ales Bulir; Jan Vlcek
  3. Monetary policy when preferences are quasi-hyperbolic By Richard Dennis; Oleg Kirsanov
  4. Macroprudential policy measures: macroeconomic impact and interaction with monetary policy By Darracq Pariès, Matthieu; Karadi, Peter; Körner, Jenny; Kok, Christoffer; Mazelis, Falk; Nikolov, Kalin; Rancoita, Elena; Van der Ghote, Alejandro; Cozzi, Guido; Weber, Julien
  5. The Optimal Inflation Target and the Natural Rate of Interest By Philippe Andrade; Jordi Gali; Hervé Le Bihan; Julien Matheron
  6. Why Is the Euro Punching Below Its Weight? By Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
  7. Predicting Downside Risks to House Prices and Macro-Financial Stability By Andrea Deghi; Mitsuru Katagiri; Sohaib Shahid; Nico Valckx
  8. Monetary policy and bank stability: the analytical toolbox reviewed By Albertazzi, Ugo; Barbiero, Francesca; Marqués-Ibáñez, David; Popov, Alexander; d’Acri, Costanza Rodriguez; Vlassopoulos, Thomas
  9. The Chair of the U.S. Federal Reserve and the Macroeconomic Causality Regimes By Yunus Aksoy; Rubens Morita; Zacharias Psaradakis
  10. Monetary Policy, Redistribution, and Risk Premia By Rohan Kekre; Moritz Lenel
  11. Capital inflows to emerging countries and their sensitivity to the global financial cycle By Ines Buono; Flavia Corneli; Enrica Di Stefano
  12. Quest for Robust Optimal Macroprudential Policy By Aguilar, Pablo; Fahr, Stephan; Gerba, Eddie; Hurtado, Samuel
  13. The Euro Area Periphery Sovereigns' Fiscal Positions and Unconventional Monetary Policy By Oliver Hülsewig; Johann Scharler
  14. Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions By Chatelain, Jean-Bernard; Ralf, Kirsten
  15. Output Spillovers from U.S. Monetary Policy: The Role of International Trade and Financial Linkages By Falk Bräuning; Viacheslav Sheremirov
  16. The Hidden Heterogeneity of Inflation Expectations and its Implications By Dräger, Lena; Lamla, Michael J.; Pfajfar, Damjan
  17. Integrating microdata for policy needs: the ESCB experience By Perrella, Antonio; Catz, Julia
  18. Zombie International Currency: The Pound Sterling 1945-1973 By Maylis Avaro
  19. The impact of TLTRO2 on the Italian credit market: some econometric evidence By Lucia Esposito; Davide Fantino; Yeji Sung
  20. Unemployment Fluctuations and Nominal GDP Targeting By Billi, Roberto
  21. Effects of Monetary Policy in a Model with Cash-in-Advance Constraints on R&D and Capital Accumulation By Daiki Maeda; Yuki Saito
  22. Forward Guidance and Household Expectations By Olivier Coibion; Dimitris Georgarakos; Yuriy Gorodnichenko; Michael Weber

  1. By: Philippe Andrade; Filippo Ferroni (University of Surrey; Banque de France; Federal Reserve Bank of Chicago)
    Abstract: What drives the strong reaction of financial markets to central bank communication on the days of policy decisions? We highlight the role of two factors that we identify from high-frequency monetary surprises: news on future macroeconomic conditions (Delphic shocks) and news on future monetary policy shocks (Odyssean shocks). These two shocks move the yield curve in the same direction but have opposite effects on financial conditions and macroeconomic expectations. A drop in future interest rates that is associated with a negative Delphic (Odyssean) shock is perceived as being contractionary (expansionary). These offsetting effects can explain why central bank communication leads to a strong reaction of the yield curve together with a weak reaction by inflation expectations or stock prices. The two shocks also have different impacts on macroeconomic outcomes, such that central bankers cannot infer the degree of stimulus they provide by looking at the mere reaction of the yield curve. However, changes in their communication policy can influence the way markets predominantly understand communication about future interest rates.
    Keywords: central bank communication; yield curve; monetary policy surprises; signaling; forward guidance
    JEL: C10 E32 E52
    Date: 2019–07–01
  2. 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, links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.
    Keywords: Bank rates;Central banks;Monetary policy;Central banking and monetary issues;Central bank policy;Monetary transmission,yield curve,rule-based monetary policy,WP,output gap,inflation expectation,inflation-targeting,policy innovation
    Date: 2020–01–17
  3. By: Richard Dennis; Oleg Kirsanov
    Abstract: We study discretionary monetary policy in an economy where economic agents have quasi-hyperbolic discounting. We demonstrate that a benevolent central bank is able to keep inflation under control for a wide range of discount factors. If the central bank, however, does not adopt the household’s time preferences and tries to discourage early consumption and delayed-saving, then a marginal increase in steady state output is achieved at the cost of a much higher average inflation rate. Indeed, we show that it is desirable from a welfare perspective for the central bank to quasi-hyperbolically discount by more than households do. Welfare is improved because this discount structure emphasizes the current-period cost of price changes and leads to lower average inflation. We contrast our results with those obtained when policy is conducted according to a Taylor-type rule.
    Keywords: Quasi-hyperbolic discounting, Monetary policy, Time-consistency
    JEL: E52 E61 C62 C73
    Date: 2020–02
  4. By: Darracq Pariès, Matthieu; Karadi, Peter; Körner, Jenny; Kok, Christoffer; Mazelis, Falk; Nikolov, Kalin; Rancoita, Elena; Van der Ghote, Alejandro; Cozzi, Guido; Weber, Julien
    Abstract: This paper examines the interactions of macroprudential and monetary policies. We find, using a range of macroeconomic models used at the European Central Bank, that in the long run, a 1% bank capital requirement increase has a small impact on GDP. In the short run, GDP declines by 0.15-0.35%. Under a stronger monetary policy reaction, the impact falls to 0.05-0.25%. The paper also examines how capital requirements and the conduct of macroprudential policy affect the monetary transmission mechanism. Higher bank leverage increases the economy's vulnerability to shocks but also monetary policy's ability to offset them. Macroprudential policy diminishes the frequency and severity of financial crises thus eliminating the need for extremely low interest rates. Counter-cyclical capital measures reduce the neutral real interest rate in normal times. JEL Classification: E4, E43, E5, E52, G20, G21
    Keywords: bank stability, credit, monetary policy
    Date: 2020–02
  5. By: Philippe Andrade; Jordi Gali; Hervé Le Bihan (Banque de France); Julien Matheron (Banque de France)
    Abstract: We study how changes in the steady-state real interest rate affect the optimal inflation target in a New Keynesian DSGE model with trend inflation and a lower bound on the nominal interest rate. In this setup, a lower steady-state real interest rate increases the probability of hitting the lower bound. That effect can be counteracted by an increase in the inflation target, but the resulting higher steady-state inflation has a welfare cost in and of itself. We use an estimated DSGE model to quantify that tradeoff and determine the implied optimal inflation target, conditional on the monetary policy rule in place before the financial crisis. The relation between the steady-state real interest rate and the optimal inflation target is downward sloping. While the increase in the optimal inflation rate is in general smaller than the decline in the steady-state real interest rate, in the currently empirically relevant region the slope of the relation is found to be close to –1. That slope is robust to allowing for parameter uncertainty. Under “make-up” strategies such as price level targeting, the required increase in the optimal inflation target under a lower steady-state real interest rate is, however, much smaller.
    Keywords: inflation target; effective lower bound; natural interest rate; steady-state real interest rate
    JEL: E31 E52 E58
    Date: 2019–10–01
  6. By: Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: On the twentieth anniversary of its inception, the euro has yet to expand its role as an international currency. We document this fact with a wide range of indicators including its role as an anchor or reference in exchange rate arrangements—which we argue is a portmanteau measure—and as a currency for the denomination of trade and assets. On all these dimensions, the euro comprises a far smaller share than that of the US dollar. Furthermore, that share has been roughly constant since 1999. By some measures, the euro plays no larger a role than the Deutschemark and French franc that it replaced. We explore the reasons for this underperformance. While the leading anchor currency may have a natural monopoly, a number of additional factors have limited the euro’s reach, including lack of financial center, limited geopolitical reach, and US and Chinese dominance in technology research. Most important, in our view, is the comparatively scarce supply of (safe) euro-denominated assets, which we document. The European Central Bank’ lack of policy clarity may have also played a role. We show that the euro era can be divided into a “Bundesbank-plus” period and a “Whatever it Takes” period. The first shows a smooth transition from the European Exchange Rate Mechanism and continued to stabilize German inflation. The second period is characterised by an expanding ECB arsenal of credit facilities to European banks and sovereigns
    JEL: E5 F3 F4 N2
    Date: 2020–02
  7. By: Andrea Deghi; Mitsuru Katagiri; Sohaib Shahid; Nico Valckx
    Abstract: This paper predicts downside risks to future real house price growth (house-prices-at-risk or HaR) in 32 advanced and emerging market economies. Through a macro-model and predictive quantile regressions, we show that current house price overvaluation, excessive credit growth, and tighter financial conditions jointly forecast higher house-prices-at-risk up to three years ahead. House-prices-at-risk help predict future growth at-risk and financial crises. We also investigate and propose policy solutions for preventing the identified risks. We find that overall, a tightening of macroprudential policy is the most effective at curbing downside risks to house prices, whereas a loosening of conventional monetary policy reduces downside risks only in advanced economies and only in the short-term.
    Date: 2020–01–17
  8. By: Albertazzi, Ugo; Barbiero, Francesca; Marqués-Ibáñez, David; Popov, Alexander; d’Acri, Costanza Rodriguez; Vlassopoulos, Thomas
    Abstract: The response of major central banks to the global financial crisis has revived the debate around the interactions between monetary policy (MP) and bank stability. This technical paper sheds light, quantitatively, on the different mechanisms underlying the relationship between MP and bank stability. It does so by reviewing microeconometric studies from the academic literature as well as those conducted internally at the ECB. The paper proceeds chronologically, using the recent crisis as a touchstone. First, it provides a brief overview of the main theoretical channels linking bank stability and the transmission of MP. It then analyses the evidence from the pre-crisis period in the light of the structural trends leading up to the crisis. As the crisis erupted, unconventional monetary policy (UMP) measures were deployed, and the paper suggests that these were essential to buttress bank stability and halt a systemic crisis. At the same time, these measures involved trade-offs, and the adverse spillovers on banks’ intermediation capacity and risk-taking require close monitoring. The paper ends by offering a critical review of the methodologies employed and suggestions for the areas where analytical efforts should be focussed in the future. JEL Classification: E4, E43, E5, E52, G20, G21
    Keywords: bank stability, credit, monetary policy
    Date: 2020–02
  9. By: Yunus Aksoy; Rubens Morita; Zacharias Psaradakis
    Abstract: We investigate regime-dependent Granger causality between real output, inflation 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 inflation. 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
  10. By: Rohan Kekre (University of Chicago - Booth School of Business); Moritz Lenel (Princeton University - Bendheim Center for Finance)
    Abstract: We study the transmission of monetary policy through risk premia in a heterogeneous agent New Keynesian environment. Heterogeneity in households' marginal propensity to take risk (MPR) summarizes differences in portfolio choice on the margin. An unexpected reduction in the nominal interest rate redistributes to households with high MPRs, lowering risk premia and amplifying the stimulus to the real economy. Quantitatively, this mechanism rationalizes the role of news about future excess returns in driving the stock market response to monetary policy shocks.
    Keywords: monetary policy, risk premia, heterogeneous agents
    JEL: E44 E63 G12
    Date: 2020
  11. By: Ines Buono (Bank of Italy); Flavia Corneli (Bank of Italy); Enrica Di Stefano (Bank of Italy)
    Abstract: We study how the effect of global and domestic factors on capital flows towards emerging economies has changed in the last 25 years. We find that both the global financial crisis and the so-called ‘taper tantrum’ event, when investors perceived the end of the US Federal Reserve’s unconventional monetary policy, triggered changes in the sensitivity of capital inflows to their main drivers. In particular, we provide evidence that during the period between the global financial crisis and the taper tantrum, international investors devoted less attention to domestic factors. Nevertheless, the taper tantrum marked the beginning of a new phase, characterized by increased sensitivity to both global factors and domestic vulnerabilities.
    Keywords: international capital movements, uncertainty, global financial cycle, VIX, non-linearities
    JEL: F21 F32 F42
    Date: 2020–02
  12. By: Aguilar, Pablo; Fahr, Stephan; Gerba, Eddie; Hurtado, Samuel
    Abstract: This paper contributes by providing a new approach to study optimal macroprudential policies based on economy wide welfare. Following Gerba (2017), we pin down a welfare function based on a first-and second order approximation of the aggregate utility in the economy and use it to determine the merits of different macroprudential rules for the Euro Area. With the aim to test this framework, we apply it to the model of Clerc et al (2015). In this model, we find that the optimal level of capital is 15.6 percent, or 2.4 percentage points higher than the 2001-2015 value. Optimal capital reduces significantly the volatility of the economy while increasing somewhat the total level of welfare in steady state, even with a time-invariant instrument. Expressed differently, bank default rates would have been 3.5 percentage points lower while credit (GDP) 5% (0.8%) higher had optimal capital level been in place during the 2011-13 crisis. Further, we find that the optimal Countercyclical Capital Buffer rule depends on whether observed or optimal capital levels are already in place. Conditional on optimal capital level, optimal CCyB rule should respond to movements in total credit and mortgage lending spreads. Gains in welfare from an optimal combination of instruments is higher than the sum of their individual effects due to synergies and spillovers.
    Keywords: Financial stability; global welfare analysis; financial DSGE model
    JEL: G21 G28 G17 E58 E61
    Date: 2020–02
  13. By: Oliver Hülsewig; Johann Scharler
    Abstract: We explore the reaction of the euro area periphery sovereigns’ fiscal positions to an unconventional monetary policy shock. We estimate panel vector autoregressive (VAR) models over the period 2010-2018, and identify the shock by imposing sign restrictions. Our results suggest that the sovereigns’ fiscal positions improve in response to the economic expansion induced by an expansionary non-standard monetary policy innovation which lowers sovereign CDS spreads. Moreover, we observe that fiscal discipline is maintained rather than undermined.
    Keywords: euro area periphery sovereigns, fiscal position, unconventional monetary policy, panel vector autoregressive model
    JEL: E52 E62 H62 H63
    Date: 2020
  14. By: Chatelain, Jean-Bernard; Ralf, Kirsten
    Abstract: We consider a frictionless constant endowment economy based on Leeper (1991). In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hoc fiscal rule, there are two equilibria. One has active monetary policy and passive fiscal policy, while the other has passive monetary policy and active fiscal policy. We consider an extended set-up in which the policy maker minimizes a loss function under quasi-commitment, as in Schaumburg and Tambalotti (2007). Under this formulation there exists a unique Ramsey equilibrium, with an interest rate peg and a passive fiscal policy.
    Keywords: Frictionless endowment economy, Fiscal theory of the Price Level, Ramsey optimal policy, Interest Rate Rule, Fiscal Rule.
    JEL: E5 E52 E58 E6 E62 E63
    Date: 2020–02–05
  15. By: Falk Bräuning; Viacheslav Sheremirov
    Abstract: We estimate that U.S. monetary policy has sizable spillover effects on global economic activity. In response to a surprise increase in the federal funds rate of 25 basis points, real output in our sample of 44 countries declines on average by 0.9% after three years. We find that international trade is a more important factor than international finance in explaining these spillovers. In particular, countries with a high share of exports and imports in output have 79% larger responses than countries with a low share, whereas we do not find significant heterogeneity depending on a country’s financial openness. Bilateral trade linkages appear to be quantitatively important, as the network amplification effect accounts for 45% of the total spillover effect at the peak horizon. We conclude that trade networks could be an important ingredient of theoretical models focusing on the international effects of U.S. monetary policy shocks.
    Keywords: financial linkages; international spillovers; monetary shocks; trade networks
    JEL: E52 F42 F44 G15
    Date: 2019–10–01
  16. By: Dräger, Lena; Lamla, Michael J.; Pfajfar, Damjan
    Abstract: Using a new consumer survey dataset, we document a new dimension of heterogeneity in inflation expectations that has implications for consumption and saving decisions as well as monetary policy transmission. We show that German households with the same inflation expectations differently assess whether the level of expected inflation and of nominal interest rates is appropriate or too high/too low. The `hidden heterogeneity' in expectations stemming from these opinions is related to demographic characteristics and affects current and planned spending in addition to the Euler equation effect of the perceived real interest rate. Furthermore, these differences in opinions affect German households differently depending on whether they are renters or homeowners.
    Keywords: Macroeconomic expectations, monetary policy perceptions, survey microdata
    JEL: E31 E52 E58 D84
    Date: 2020–02
  17. By: Perrella, Antonio; Catz, Julia
    Abstract: Since the financial crisis, central bank policymakers have expressed a need for more integrated microdata for monetary policy purposes and for macroprudential and microprudential supervision, with a stronger focus on lending. In response to this policy need, the European System of Central Banks (ESCB) has increased the scope and quality of instrument-level data (e.g. loan-by-loan) it collects. At the same time, the ESCB has further developed the Register of Institutions and Affiliates Data (RIAD), which is pivotal in ensuring the successful linking of the databases, because it ensures the unique identification of counterparties. RIAD allows data to be aggregated using various types of company information, such as industrial activity or geographical location, but it also offers the possibility of aggregating data according to multiple group structures based on different concepts of what a “group” is. This paper discusses why there is a policy need for microdata and highlights some of the practical uses of the interlinked data. It also sheds more light on how information contained in different granular databases can be combined and aggregated in a flexible manner according to different business needs. It describes in detail the process of linking through a common stable identifier, points out current limitations and suggests a possible way forward. JEL Classification: C81, E44, G32
    Keywords: granular data, group structures, macroprudential, microeconomic data, microprudential, unique identification
    Date: 2020–02
  18. By: Maylis Avaro (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: This paper provides new evidence on the decline of sterling as an international currency, focusing on its role as foreign exchange reserve asset under the Bretton Woods era. Using a unique new dataset on the composition of foreign exchange reserves of central banks, I show that the shift away from the sterling occurred earlier than conventionally supposed for the countries not belonging to the sterling area. The use of sterling has been described as freely chosen, imposed by the Bank of England or negotiated. I argue that the sterling area was a captive market as the Bank of England used capital controls, commercial threats and economic sanctions against sterling area countries to limit the divestments of their sterling assets. This management of the decline of sterling benefited mostly Britain and the City of London but represented a cost for sterling area countries and the international monetary system.
    Keywords: Monetary and financial history; Foreign exchnage; International monetary system
    JEL: N24 F31 E58
    Date: 2020–02–25
  19. By: Lucia Esposito (Bank of Italy); Davide Fantino (Bank of Italy); Yeji Sung (Columbia University)
    Abstract: This paper evaluates the impact of the second series of Targeted Longer-Term Refinancing Operations (TLTRO2) on the amount of credit granted to non-financial private corporations and on the interest rates applied to loans in Italy, using data on credit transactions, bank and firm characteristics and a difference-in-differences approach. We find that TLTRO2 had a positive impact on the Italian credit market, encouraging medium-term lending to firms and reducing credit interest rates. While firms overall benefited from TLTRO2 irrespective of their risk category and size, we document heterogeneous treatment effects. Regarding firms’ risk category, the effects on credit quantities are larger for low-risk firms while those on credit interest rate are larger for high-risk firms. Regarding firms’ size, smaller firms benefited the most both in terms of amounts borrowed and interest rates. Furthermore, our evidence suggests that monetary policy transmission of TLTRO2 is stronger for banks with a low bad debt ratio in their balance sheets.
    Keywords: Unconventional Monetary Policy, Pass-through, Policy Evaluation
    JEL: E51 E52
    Date: 2020–02
  20. By: Billi, Roberto (Research Department, Central Bank of Sweden)
    Abstract: I evaluate the welfare performance of a target for the level of nominal GDP in a New Keynesian model with unemployment, accounting for a zero lower bound (ZLB) constraint on the nominal interest rate. Nominal GDP targeting is compared to employment targeting, a conventional Taylor rule, and the optimal monetary policy with commitment. I find that employment targeting is optimal when supply shocks are the source of fluctuations; however, facing demand shocks and the ZLB constraint, nominal GDP targeting can outperform substantially employment targeting.
    Keywords: employment targeting; optimal monetary policy; Taylor rule; ZLB
    JEL: E24 E32 E52
    Date: 2020–01–01
  21. By: Daiki Maeda; Yuki Saito
    Abstract: To examine the effect of monetary policy on economic growth, we formulate an endogenous growth model with cash-in-advance constraints on R&D and capital accumulation as endogenous growth engines. Within this framework, we show that the relationship between economic growth and the nominal interest rate can be an inverted-U shape. Moreover, we demonstrate that the welfare-maximizing level of the nominal interest rate is larger than the growth rate-maximizing level of the nominal interest rate.
    Date: 2020–02
  22. By: Olivier Coibion (University of Texas at Austin); Dimitris Georgarakos (European Central Bank (ECB) - Directorate General Research; Center for Financial Studies (CFS)); Yuriy Gorodnichenko (University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics); Michael Weber (University of Chicago - Finance)
    Abstract: We compare the causal effects of forward guidance communication about future interest rates on householdsÕ expectations of inflation, mortgage rates, and unemployment to the effects of communication about future inflation in a randomized controlled trial using more than 25,000 U.S. individuals in the Nielsen Homescan panel. We elicit individualsÕ expectations and then provide 22 different forms of information regarding past, current and/or future inflation and interest rates. Information treatments about current and next yearÕs interest rates have a strong effect on household expectations but treatments beyond one year do not have any additional impact on forecasts. Exogenous variation in inflation expectations transmits into other expectations. The richness of our survey allows us to better understand how individuals form expectations about macroeconomic variables jointly and the non-response to long-run forward guidance is consistent with models in which agents have constrained capacity to collect and process information.
    JEL: E31 C83 D84
    Date: 2020

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