nep-cba New Economics Papers
on Central Banking
Issue of 2020‒03‒09
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Countercyclical liquidity policy and credit cycles: Evidence from macroprudential and monetary policy in Brazil By João Barata R. Blanco Barroso; Rodrigo Barbone Gonzales; José-Luis Peydró; Bernardus F. Nazar Van Doornik
  2. Variability in risk-weighted assets: what does the market think? By Edson Bastos e Santos; Neil Esho; Marc Farag; Christopher Zuin
  3. Monetary Policy in Fossil Fuel Exporters : The Curse of Horizons By Arezki,Rabah
  4. Robustly Optimal Monetary Policy in a New Keynesian Model with Housing By Klaus Adam; Michael Woodford
  5. Exchange Rate Misalignment and External Imbalances: What is the Optimal Monetary Policy Response? By Giancarlo Corsetti; Luca Dedola; Sylvain Leduc
  6. Monetary Policy Implementation and Pass-Through By Fabio Canetg
  7. Hopf Bifurcation from new-Keynesian Taylor rule to Ramsey Optimal Policy By Jean-Bernard Chatelain; Kirsten Ralf
  8. Trust in the central bank and inflation expectation By Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; van Rooij, Maarten
  9. Monetary policy asset bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  10. Global Footprints of Monetary Policy By Silvia Miranda-Agrippino; Tsvetelina Nenova; Helene Rey
  11. Central Clearing and Systemic Liquidity Risk By G. Thomas Kingsley; Anna L. Paulson; Todd Prono; Travis D. Nesmith
  12. The magnitude of euro area misalignements in 2017 By Bruno Ducoudré; Xavier Timbeau; Sébastien Villemot
  13. The benefits are at the tail: uncovering the impact of macroprudential policy on growth-at-risk By Jorge E. Galán
  14. Has the information channel of monetary policy disappeared? Revisiting the empirical evidence By Barbara Rossi
  15. The Elusive Gains from Nationally-Oriented Monetary Policy By Martin Bodenstein; Giancarlo Corsetti; Luca Guerrieri
  16. Foreign banks, liquidity shocks, and credit stability By Daniel Belton; Leonardo Gambacorta; Sotirios Kokas; Raoul Minetti
  17. How Does Supervision Affect Banks? By Matthew Plosser; Anna Kovner; Beverly Hirtle
  18. Monetary Policy Implementation With an Ample Supply of Reserves By Antoine Martin; Simon M. Potter; Kyungmin (Teddy) Kim; Sam Schulhofer-Wohl; Gara Afonso; Ed Nosal
  19. A Fiscal Theory of Monetary Policy with Partially-Repaid Long-Term Debt By John H. Cochrane
  20. Forward Guidance and Household Expectations By Olivier Coibion; Dimitris Georgarakos; Yuriy Gorodnichenko; Michael Weber
  21. The Limits of onetary Economics : On Money as a Latent Medium of Exchange By Ricardo Lagos; Shengxing Zhang

  1. By: João Barata R. Blanco Barroso; Rodrigo Barbone Gonzales; José-Luis Peydró; Bernardus F. Nazar Van Doornik
    Abstract: We show that countercyclical liquidity policy smooths credit supply cycles, with stronger crisis effects. For identification, we exploit the Brazilian supervisory credit register and liquidity policy changes on reserve requirements, that affected banks differentially and have a monetary and prudential purpose. Liquidity policy strongly attenuates both the credit crunch in bad times and high credit supply in booms. Strong economic effects are twice as large during the crisis easing than during the boom tightening. Finally, in crises, liquidity easing: increase less credit supply by more financially constrained banks; and collateral requirements increase substantially, especially by banks providing higher credit supply.
    Keywords: liquidity, reserve requirements, credit cycles, macroprudential and monetary policy
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2020–02
  2. By: Edson Bastos e Santos; Neil Esho; Marc Farag; Christopher Zuin
    Abstract: The global financial crisis highlighted a number of weaknesses in the regulatory framework, including concerns about excessive variability in banks' risk-weighted assets (RWAs) stemming from their use of internal models. The Basel III reforms that were finalised in 2017 by the Basel Committee on Banking Supervision seek to reduce this excessive RWA variability. This paper develops a novel approach to measuring RWA variability - the variability ratio - by comparing a market-implied measure of RWAs with banks' reported regulatory RWAs. Using a panel data set comprising a large sample of internationally-active banks over the period 2001 to 16, we find that there was a wide degree of RWA variability among banks, and that market-implied RWA estimates were persistently higher than regulatory RWAs. We then assess the determinants of this variability, and find a strong and statistically-significant association between our measure of RWA variability and (i) the share of opaque assets held by banks (eg derivatives); (ii) the degree to which a bank is capital constrained; and (iii) jurisdiction-specific factors. These results suggest that market participants may be applying an 'opaqueness' premium for banks that hold highly-complex instruments, and that the incentive for banks to game their internal models is particularly acute for capital-constrained banks. The results also point to the importance of jurisdiction-specific factors in explaining RWA variability. In addition, we find that RWA variability directly affects banks' own profitability through higher funding costs. Finally, we find that the 2017 Basel III reforms - most notably the output floor - help to reduce excessive RWA variability.
    Keywords: bank regulation, capital, Basel III, risk-weighted assets, financial stability
    JEL: G20 G21 G28
    Date: 2020–02
  3. By: Arezki,Rabah
    Abstract: This paper examines the role of monetary policy in fossil fuel exporters at different horizons. The main argument is that central banks in these economies need to look beyond the horizon of the business cycle. In the short run, (independent) monetary policy should flexibly target inflation. In the medium run, central banks need to coordinate with fiscal authorities to ensure that monetary policy operates around a credible and sustainable fiscal anchor. In the long run, central banks should beware of the existential threats posed by new risks related to stranded assets.
    Keywords: Macroeconomic Management,Inflation,Banks&Banking Reform,Energy Demand,Energy and Mining,Energy and Environment,Financial Structures
    Date: 2019–06–11
  4. By: Klaus Adam; Michael Woodford
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keyne- sian model with a housing sector. With rational private sector expectations about housing prices and inflation, optimal monetary policy can be characterized by a standard 'target criterion' that refers to inflation and the output gap, without making reference to housing prices. When the policymaker is concerned with potential departures of private sector expectations from rational ones and seeks a policy that is robust against such possible departures, then the optimal target criterion must also depend on housing prices. For empirically realistic cases, the central bank should then 'lean against' housing prices, i.e., following unexpected housing price increases (decreases), policy should adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap. Robustly optimal policy does not require that the central bank distinguishes between 'fundamental' and 'non-fundamental' movements in housing prices.
    JEL: D81 D84 E52
    Date: 2020–02
  5. By: Giancarlo Corsetti (European Commission; Dipartimento di Economia; Universität di Bologna; National Bureau of Economic Research; University of Cambridge; Centre for Economic Policy Research (CEPR); Yale University; Università degli Studi di Roma 3; Universität degli studi di Roma La Sapienza; European University Institute); Luca Dedola; Sylvain Leduc
    Abstract: How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete–implying that misalignment and exchange rate volatility are higher in economies where incomplete pass through contains the effects of exchange rates on price competitiveness.
    Keywords: Currency misalignments; trade imbalances; asset markets and risk sharing; optimal targeting rules; international policy cooperation; exchange rate pass-through
    JEL: E44 E52 E61 F41 F42
    Date: 2020–02–26
  6. By: Fabio Canetg
    Abstract: I provide a simple general equilibrium model of monetary policy implementation and pass-through for undergraduate and graduate teaching. Besides a household and a firm, the model features a continuum of commercial banks, a government, and a central bank. The household uses deposits and cash to transfer resources over time. Monetary policy is implemented with open market operations and interest on reserves policies. I show that open market operations affect the money market rate, the government bond yield, and the deposit rate through changes in the insurance yield on reserves. At the interest rate floor, the insurance yield is zero. Therefore, open market operations become ineffective when reserves are ample. By contrast, interest on reserves policies change interest rates even at the interest rate floor. In addition, I find that expansionary monetary policies decrease expected commercial bank profits. Also, they increase household cash holdings in a monotonic, but non-linear fashion.
    Keywords: Monetary policy implementation, monetary policy pass-through, open market operations, interest on reserves, negative interest rate policies
    JEL: E41 E43 E52 E58
    Date: 2020–02
  7. By: Jean-Bernard Chatelain (PSE); Kirsten Ralf
    Abstract: This paper compares different implementations of monetary policy in a new-Keynesian setting. We can show that a shift from Ramsey optimal policy under short-term commitment (based on a negative feedback mechanism) to a Taylor rule (based on a positive feedback mechanism) corresponds to a Hopf bifurcation with opposite policy advice and a change of the dynamic properties. This bifurcation occurs because of the ad hoc assumption that interest rate is a forward-looking variable when policy targets (inflation and output gap) are forward-looking variables in the new-Keynesian theory.
    Date: 2020–02
  8. By: Christelis, Dimitris; Georgarakos, Dimitris; Jappelli, Tullio; van Rooij, Maarten
    Abstract: Using micro data from the 2015 Dutch CentERpanel, we examine whether trust in the European Central Bank (ECB) influences individuals’ expectations and uncertainty about future inflation, and whether it anchors inflation expectations. We find that higher trust in the ECB lowers inflation expectations on average, and significantly reduces uncertainty about future inflation. Moreover, results from quantile regressions suggest that trusting the ECB increases (lowers) inflation expectations when the latter are below (above) the ECB’s inflation target. These findings hold after controlling for people’s knowledge about the objectives of the ECB. JEL Classification: D12, D81, E03, E40, E58
    Keywords: anchoring, consumer expectations, inflation uncertainty, trust in the ECB
    Date: 2020–02
  9. By: Christophe Blot (Sciences Po, OFCE ; Université de Paris Nanterre - EconomiX); Paul Hubert (Sciences Po, OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté - CRESE; Sciences Po, OFCE)
    Abstract: This paper assesses the linear and non-linear dynamic effects of monetary policy on asset price bubbles. We use a Principal Component Analysis to estimate new bubble indicators for the stock and housing markets in the United States based on structural, econometric and statistical approaches. We find that the effects of monetary policy are asymmetric so the responses to restrictive and expansionary shocks must be differentiated. Restrictive monetary policy is not able to deflate asset price bubbles contrary to the “leaning against the wind” policy recommendations. Expansionary interest rate policies would inflate stock price bubbles whereas expansionary balance-sheet measures would not.
    Keywords: Booms and busts, Mispricing, Price deviations, Interest rate policy, Unconventional monetary policy,Quantitative Easing, Federal Reserve.
    JEL: E44 G12 E52
    Date: 2018–11
  10. By: Silvia Miranda-Agrippino (Bank of England; CEPR; Centre for Macroeconomics (CFM)); Tsvetelina Nenova (London Business School); Helene Rey (London Business School; CEPR; NBER)
    Abstract: We study the international transmission of the monetary policy of the two world's giants: China and the US. From East to West, the channels of global transmission differ markedly. US monetary policy shocks affect the global economy primarily through their effects on integrated financial markets, global asset prices, and capital ows. EMEs in particular see both a reduction in in ows and a surge in out ows when the market tide turns as a result of a US monetary contraction. Conversely, international trade, commodity prices and global value chains are the main channels through which Chinese monetary policy transmits worldwide. AEs with a strong manufacturing sector are particularly sensitive to these disturbances.
    Keywords: Monetary policy, Global financial cycle, International pillovers, US, China
    JEL: E44 E52 F33 F42
    Date: 2020–01
  11. By: G. Thomas Kingsley; Anna L. Paulson (Federal Reserve Bank of Chicago); Todd Prono; Travis D. Nesmith
    Abstract: By stepping between bilateral counterparties, a central counterparty (CCP) transforms credit exposure. CCPs generally improve financial stability. Nevertheless, large CCPs are by nature concentrated and interconnected with major global banks. Moreover, although they mitigate credit risk, CCPs create liquidity risks, because they rely on participants to provide cash. Such requirements increase with both market volatility and default; consequently, CCP liquidity needs are inherently procyclical. This procyclicality makes it more challenging to assess CCP resilience in the rare event that one or more large financial institutions default. Liquidity-focused macroprudential stress tests could help to assess and manage this systemic liquidity risk.
    Keywords: margin; financial systems; Central Counterparties (CCPs); procyclicality; liquidity risk; financial stability
    JEL: G28 E58 N22 G21 G23
    Date: 2019–12–01
  12. By: Bruno Ducoudré (OFCE, Sciences Po, Paris, France); Xavier Timbeau (OFCE, Sciences Po, Paris, France); Sébastien Villemot (OFCE, Sciences Po, Paris, France)
    Abstract: This paper is aimed at revisiting monetary analysis in order to better understand erroneous choices in the conduct of monetary policy. According to the prevailing consensus, the market economy is intrinsically stable and is upset only by poor behaviour by government or the banking system. We maintain on the contrary that the economy is unstable and that achieving stability requires a discretionary economic policy. This position relies upon an analytical approach in which monetary and financial organisations are devices that help markets to function. In this perspective, which focuses on the heterogeneity of markets and agents, and, consequently, on the role of institutions in determining overall performance, it turns out that nominal rigidities and financial commitment offer the means to achieve economic stability. This is because they prevent successive, unavoidable disequilibria from becoming explosive. Classification-JEL: Equilibrium exchange rate, trade balance, price-competitiveness
    Keywords: E31, F41
    Date: 2018–12
  13. By: Jorge E. Galán (Banco de España. Financial Stability and Macroprudential Policy Department)
    Abstract: This paper brings together recent developments on the growth-at-risk methodology and the literature on the impact of macroprudential policy. For this purpose, I extend the recent proposals on the use of quantile regressions of GDP growth by including macrofinancial variables with early warning properties of systemic risk, and macroprudential measures. I identify heterogeneous effects of macroprudential policy on GDP growth, uncovering important benefits on the left tail of its distribution. The positive effect of macroprudential policy on reducing the downside risk of GDP is found to be larger than the negative impact on the median, suggesting a net positive effect in the mid-term. Nonetheless, I identify heterogeneous effects depending on the position in the financial cycle, the direction of the policy, the type of instrument, and the time elapsed since its implementation. In particular, tightening capital measures during expansions may take up to two years in evidencing benefits on growth-at-risk, while the positive impact of borrower-based measures is rapidly observed. This suggests the need of implementing capital measures, such as the countercyclical capital buffer, early enough in the cycle; while borrower-based measures can be tightened in more advanced stages. Conversely, in downturns the benefits of loosening capital measures are immediate, while those of borrower-based measures are limited. Overall, this study provides a useful framework to assess costs and benefits of macroprudential policy in terms of GDP growth, and to identify the term-structure of specific types of instruments.
    Keywords: financial stability, growth-at-risk, systemic risk, macroprudential policy, quantile regressions
    JEL: C32 E32 E58 G01 G28
    Date: 2020–03
  14. By: Barbara Rossi
    Abstract: Does the Federal Reserve have an “information advantage†in forecasting macroeconomic variables beyond what is known to private sector forecasters? And are market participants reacting only to monetary policy shocks or also to future information on the state of the economy that the Federal Reserve communicates in its announcements via an “information channel†? This paper investigates the evolution of the information channel over time. Although the information channel appears to be important historically, we find no empirical evidence of its presence in the recent years once instabilities are accounted for.
    Keywords: Forecasting, monetary policy, instabilities, time variation, survey forecasts, information channel of monetary policy.
    JEL: C11 C14 C22 C52 C53
    Date: 2020–02
  15. By: Martin Bodenstein (Federal Reserve Board); Giancarlo Corsetti (Centre for Economic Policy Research; Centre for Macroeconomics (CFM); University of Cambridge); Luca Guerrieri (Federal Reserve Board)
    Abstract: The consensus in the recent literature is that the gains from international monetary cooperation are negligible, and so are the costs of a breakdown in cooperation. However, when assessed conditionally on empirically-relevant dynamic developments of the economy, the welfare cost of moving away from regimes of explicit or implicit cooperation may rise to multiple times the cost of economic fluctuations. In economies with incomplete markets, the incentives to act non-cooperatively are driven by the emergence of global imbalances, i.e., large net-foreign-asset positions; and, in economies with complete markets, by divergent real wages.
    Keywords: Monetary ppolicy cooperation, Global imbalances, Open-loop Nash games
    JEL: E44 E61 F42
    Date: 2020–01
  16. By: Daniel Belton; Leonardo Gambacorta; Sotirios Kokas; Raoul Minetti
    Abstract: We empirically assess the responses of banks in the United States to a regulatory change that influenced the distribution of funding in the banking system. Following the 2011 FDIC change in the assessment base, insured banks found wholesale funding more costly, while uninsured branches of foreign banks enjoyed cheaper access to wholesale liquidity. We use quarterly bank balance sheet data and a rich data set of syndicated loans with borrower and lender characteristics to show that uninsured foreign banks, which faced a relatively positive shock, engaged in liquidity hoarding. Hence, they accumulated more reserves but extended fewer total syndicated loans and became more passive in the syndicated loan deals in which they participated. These results contribute to the discussion on the role of foreign banks in credit creation, especially in a country like the United States where foreign banks also have a crucial role in managing USD money market operations at the group level.
    Keywords: foreign banks, liquidity shocks, wholesale funding, syndicated loans
    JEL: G21 G28 E44
    Date: 2020–03
  17. By: Matthew Plosser; Anna Kovner (Harvard University; Federal Reserve Bank); Beverly Hirtle
    Abstract: Supervisors monitor banks to assess the banks? compliance with rules and regulations but also to ensure that they engage in safe and sound practices (see our earlier post What Do Banking Supervisors Do?). Much of the work that bank supervisors do is behind the scenes and therefore difficult for outsiders to measure. In particular, it is difficult to know what impact, if any, supervisors have on the behavior of banks. In this post, we describe a new Staff Report in which we attempt to measure the impact that supervision has on bank performance. Does more attention by supervisors lead to lower risk at banks and, if so, at what cost to profitability or growth?
    Keywords: bank performance; bank supervision; bank regulation
    JEL: G2
  18. By: Antoine Martin; Simon M. Potter; Kyungmin (Teddy) Kim; Sam Schulhofer-Wohl; Gara Afonso; Ed Nosal
    Abstract: Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-2009 financial crisis. We find that the optimal level of reserve supply likely lies somewhere between scarce and abundant reserves, thus highlighting the benefits of implementation with what could be called “ample” reserves. The Federal Reserve’s announcement in October 2019 that it would maintain a level of reserve supply greater than the one that prevailed in early September is consistent with the implications of our framework.
    Keywords: Federal funds market; interest rates; ample reserve supply; bank reserves; monetary supply
    JEL: E58 E42
    Date: 2020–01–02
  19. By: John H. Cochrane
    Abstract: I construct a simple model with sticky prices and interest rate targets, closed by fiscal theory of the price level with long-term debt and fiscal and monetary policy rules. Fiscal surpluses rise following periods of deficit, to repay accumulated debt, but surpluses do not respond to arbitrary unexpected inflation and deflation, so fiscal policy remains active. This specification avoids many puzzles and counterfactual predictions of standard active-fiscal specifications. The model produces reasonable responses to fiscal and monetary policy shocks, including smooth and protracted disinflation following monetary or fiscal tightening.
    JEL: E3 E31 E32 E4 E5 E6 E62 E63
    Date: 2020–02
  20. By: Olivier Coibion; Dimitris Georgarakos; Yuriy Gorodnichenko; Michael Weber
    Abstract: We compare the causal effects of forward guidance communication about future interest rates on households’ 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 individuals’ 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 year’s 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.
    Keywords: expectations management, inflation expectations, surveys, communication, randomized controlled trial
    JEL: E31 C83 D84
    Date: 2020
  21. By: Ricardo Lagos; Shengxing Zhang
    Abstract: We formulate a generalization of the traditional medium-of-exchange function of money in contexts where there is imperfect competition in the intermediation of credit, settlement, or payment services used to conduct transactions. We find that the option to settle transactions directly with money strengthens the stance of sellers of goods and services vis-á-vis intermediaries. We show this mechanism is operative even for sellers who never exercise the option to sell for cash, and that these "latent money demand" considerations imply monetary policy remains effective through medium-of-exchange channels even if the share of monetary transactions is arbitrarily small.
    JEL: D83 E5 G12
    Date: 2020–02

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