nep-cba New Economics Papers
on Central Banking
Issue of 2020‒03‒16
fourteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. A Forward Guidance Indicator For The South African Reserve Bank: Implementing A Text Analysis Algorithm By Ruan Erasmus; Hylton Hollander
  2. A Text Mining Analysis of Central Bank Monetary Policy Communication in Nigeria By Omotosho, Babatunde S.
  3. Monetary Policy Spillovers under Intermediate Exchange Rate Regimes By Ahmed, Rashad
  4. The Collateral Channel of Monetary Policy: Evidence from China By Hanming Fang; Yongqin; Xian Wu
  5. China’s Debt Revisited By Sun, Lixin
  6. External adjustment with a common currency: The case of the Euro Area By Alberto Fuertes Mendoza
  7. Relationship Finance, Informed Liquidity, and Monetary Policy By Araujo, Luis; Minetti, Raoul; Murro, Pierluigi
  8. The Fed's Response to Economic News Explains the “Fed Information Effect” By Michael D. Bauer; Eric T. Swanson
  9. Nonlinear Business Cycle and Optimal Policy: A VSTAR Perspective By Vito Polito
  10. Banks, Maturity Transformation, and Monetary Policy By Pascal Paul
  11. Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence By Lukas Hoesch; Barbara Rossi; Tatevik Sekhposyan
  12. Monetary Policy Implementation: Operational Issues for Countries with Evolving Monetary Policy Frameworks By Nils Mæhle
  13. Estimating the Effect of Central Bank Independence on Inflation Using Longitudinal Targeted Maximum Likelihood Estimation By Philipp Baumann; Michael Schomaker; Enzo Rossi
  14. Bank Lending and Maturity: the Anatomy of the Transmission of Monetary Policy By Selva Bahar Baziki; Tanju Capacioglu

  1. By: Ruan Erasmus (Department of Economics, Stellenbosch University); Hylton Hollander (Department of Economics, Stellenbosch University)
    Abstract: The expansion of central bank communications and the increased use thereof as a policy tool to manage expectations have led to an area of research, semantic modelling, that analyses the words and phrases used by central banks. We use text-mining and text-analysis techniques on South African Reserve Bank monetary policy committee statements to construct an index measuring the stance of monetary policy: a forward guidance indicator (FGI). We show that, after controlling for market expectations, FGIs provide significant predictive power for future changes in the repurchase interest rate (the primary monetary policy instrument). Furthermore, we show that FGIs are primarily driven by inflation expectations, which highlights the strong link between the SARB's communication strategy and its inflation targeting mandate. In fact, we observe a systematic anti-inflation bias in the communicated stance of monetary policy---both absolutely and asymmetrically. The results are, however, sensitive to the selection of the dictionary used to analyse the text.
    Keywords: Monetary policy, Text analysis, Forward guidance, Inflation targeting
    JEL: C43 C53 E42 E47 E52 E58
    Date: 2020
  2. By: Omotosho, Babatunde S.
    Abstract: This paper employs text-mining techniques to analyse the communication strategy of the Central Bank of Nigeria (CBN) during the period 2004-2019. Since the policy communique released after each meeting of the CBN’s monetary policy committee (MPC) represents an important tool of central bank communication, we construct a corpus based on 87 policy communiques with a total of 123, 353 words. Having processed the textual data into a form suitable for analysis, we examined the readability, sentiments, and topics of the policy documents. While the CBN’s communication has increased substantially over the years, implying increased monetary policy transparency; the computed Coleman and Liau readability index shows that the word and sentence structures of the policy communiques have become more complex, thus reducing its readability. In terms of monetary policy sentiments, we find an average net score of -10.5 per cent, reflecting the level of policy uncertainties faced by the MPC over the sample period. In addition, our results indicate that the topics driving the linguistic contents of the communiques were influenced by the Bank’s policy objectives as well as the nature of shocks hitting the economy per period.
    Keywords: Central bank communication, Text mining, Monetary policy
    JEL: E02 E32 E52 E58 E61
    Date: 2019
  3. By: Ahmed, Rashad
    Abstract: I investigate monetary policy transmission under the Trilemma across Advanced and Emerging Market Economies, paying particular attention on the extent of spillovers under intermediate exchange rate regimes (i.e. managed floats). The extent of monetary pass-through: 1) is broadly significant, but more incomplete in Emerging Markets than Advanced Economies, 2) occurs over both the short-run and longer-run, 3) varies within intermediate exchange rate regimes, 4) appears to be diversifiable under a basket peg, and 5) is non-linear in exchange rate flexibility. The latter three points suggest that near-corner exchange rate policies can carry starkly different implications from corner policies themselves: Countries can face almost the same monetary autonomy as under a float without resorting to a pure float. Countries under a fixed regime appear to gain disproportionate monetary independence by giving up relatively little exchange rate stability. The use of international reserves as an additional policy instrument appears to play a role in explaining these non-linearities, particularly in Emerging Markets. Such gains in monetary autonomy are allocated towards domestic objectives differently across Advanced Economies and Emerging Markets. Advanced Economies tend to put greater emphasis on output stabilization while Emerging Markets focus on inflation. Non-linear policy trade-offs under intermediate exchange rate regimes may help explain the continuous rejection of the Two Corners hypothesis, the scarcity of true pure floats, and the persistent dominance of middle-ground exchange rate policy.
    Keywords: Monetary policy, exchange rate regimes, international spillovers, policy trilemma
    JEL: F3 F31
    Date: 2020–02–27
  4. By: Hanming Fang (University of Pennsylvania); Yongqin (Fudan University); Xian Wu (University of Wisconsin)
    Abstract: Collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it di?cult to empirically identify their causal e?ects on the ?nancial market and the real economy. We exploit a quasi-natural ex-periment in China, where dual-listed bonds are traded in two mostly segmented markets: the interbank market regulated by the Central Bank, and the exchange market regulated by the securities regulator. During a policy shift in our study period, China’s Central Bank included a class of previously ineligible bonds in the interbank market to become eligible collateral for ?nancial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-di?erence strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We ?nd that in the secondary market the policy reduced the spreads of the newly collateralizable bonds in the treatment market (the interbank market) by 42-62 basis points. We also ?nd that there is a pass-through e?ect from the secondary market to the primary market: the spreads of the treated bonds newly issued in the interbank market were reduced by 54 basis points.
    Keywords: Unconventional Monetary Policy, Collateral, Bond Spread, Medium-Term Lend-ing Facility
    JEL: E52 E58 G12
    Date: 2020–02–18
  5. By: Sun, Lixin
    Abstract: This paper updates the dataset on the structure of China’s debt published in Sun (2015, 2019) with the debt effects. The new dataset extends the sample to the end of 2018 including the collected annual and the estimated quarterly data covering the period 1985-2018, and presents the updated changes in deleverage ratios for all debt categories in China. In addition, we examine the effects of the debt on the monetary policy transmission and the macroeconomy in China with the GMM approach and a VAR model. We find that the monetary policy transmissions have been weakened in times of high indebtedness by both the public and the private debt despite at the heterogenous magnitude. Our study sheds new lights to policy design and debt management in China.
    Keywords: China’s Debt Dataset; Non-financial Private and Public Debt; Monetary Policy Transmission; GMM Approach; VAR Model; Chinese Economy
    JEL: E50 H63
    Date: 2019–12
  6. By: Alberto Fuertes Mendoza (Instituto Complutense de Estudios Internacionales (ICEI), Universidad Complutense de Madrid.)
    Abstract: This paper analyzes the behaviour of the external adjustment path for the fourmain economies in the euro area. I find a structural break in the behaviour of thenet external position at the time of the introduction of the euro for France, Italyand Spain, pointing out that the inception of the common currency changed theirexternal adjustment process. Germany does not show this structural break, beingits external position more affected by other events such as the country reunificationin 1989. I also find that France and Italy will adjust the net external position mainlythrough the valuation component, while Germany and Spain will restore their externalbalance mostly through the trade component. The common currency area exacerbatedGermany’s net creditor position as the evolution of the euro has reacted to the externaladjustment needs of debtor countries such as Italy and Spain.
    Keywords: External Adjustment; Exchange Rate Regime; Structural Breaks; Valuation Adjustment.
    Date: 2020
  7. By: Araujo, Luis (Michigan State University, Department of Economics); Minetti, Raoul (Michigan State University, Department of Economics); Murro, Pierluigi (Luiss University)
    Abstract: We study the aggregate effects of credit relationships in an economy where lenders’ effort in acquiring knowledge about firms’ investments endogenously depends on their financial involvement in investments. Firms trade off the benefits of precautionary internal liquidity with the need to incentivize lenders’ effort through their involvement in investment financing. We find that, through these intensive margin effects, tight credit relationships can induce suboptimally high investment levels, calling for a positive interest rate policy that departs from the Friedman rule. Loose credit relationships, however, amplify the aggregate impact of negative real shocks. Credit policies that inject liquidity into the lending sector enhance the welfare effect of credit relationships but have ambiguous effects on stabilization.
    Keywords: Liquidity; Credit relationships; Monetary policy
    JEL: D02 E02 E44 G21
    Date: 2020–03–10
  8. By: Michael D. Bauer; Eric T. Swanson (Federal Reserve Bank of San Francisco; University of California Irvine; Federal Reserve Bank; Board of Governors of the Federal Reserve System (U.S.))
    Abstract: High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent studies have documented puzzling effects of these shocks on private-sector forecasts of GDP, unemployment, or inflation that are opposite in sign to what standard macroeconomic models would predict. This evidence has been viewed as supportive of a “Fed information effect” channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected. We show that these empirical results are also consistent with a “Fed response to news” channel, in which incoming, publicly available economic news causes both the Fed to change monetary policy and the private sector to revise its forecasts. We provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, (i) high-frequency stock market responses to Fed announcements, (ii) a new survey that we conduct of individual Blue Chip forecasters, and (iii) regressions that include the previously omitted public macroeconomic data releases all indicate that the Fed and Blue Chip forecasters are simply responding to the same public news, and that there is little if any role for a “Fed information effect”.
    Keywords: Federal Reserve; Delphic forward guidance; Blue Chip; forecasts; survey
    JEL: E43 E52 E58
    Date: 2020–02–27
  9. By: Vito Polito
    Abstract: This paper studies optimal macroeconomic policy when nonlinearity in the business cycle is described by a vector smooth transition autoregression (VSTAR). A structural identification of the VSTAR that yields a low-dimension and certainty-equivalent nonlinear quadratic regulator (NLQR) problem is derived. Optimal rules are calculated by adapting from the engineering theory the approach of State Dependent Riccati Equation, which allows standard dynamic programming techniques to solve NLQR problems. The methodology is employed to study optimal conventional and quantitative easing (QE) monetary policy using a VSTAR model esti-mated on data for the United States during 1979-2018. The model allows for regime changes during periods of economic slack and when interest rates are near the zero lower bound. The results highlight the quantitative significance of nonlinearity in the analysis of optimal monetary policy and how the size, timing and composition of QE can influence macroeconomic dynamics.
    Keywords: smooth transition models, nonlinear quadratic regulator, zero lower bound, quantitative easing, optimal monetary policy
    JEL: C30 C60 E50
    Date: 2020
  10. By: Pascal Paul
    Abstract: Banks engage in maturity transformation and the term premium compensates them for bearing the associated duration risk. Consistent with this view, I show that banks’ net interest margins and term premia have comoved in the United States over the last decades. On monetary policy announcement days, banks’ stock prices fall in response to an increase in expected future short-term interest rates but rise if term premia increase. These effects are reflected in the response of banks’ net interest margins and amplified for institutions with a larger maturity mismatch. The results reveal that banks are not immune to interest rate risk.
    Keywords: Banks; Maturity Transformation; Monetary Policy; Term Premium; Interest Rate Risk; Bank Profitability
    JEL: E43 E44 E52 E58 G21 G32
    Date: 2020–02–28
  11. By: Lukas Hoesch (Univ. Pompeu Fabra, Barcelona School of Economics); Barbara Rossi; Tatevik Sekhposyan
    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: 2020–02–27
  12. By: Nils Mæhle
    Abstract: This paper discusses operational issues for countries that want to reform their monetary policy frameworks. It argues that stabilizing short-term interest rates on a day-to-day basis has significant advantages, and thus that short-term interest rates, not reserve money, in most cases should be the daily operating target, including for countries relying on a money targeting policy strategy. The paper discusses how a policy formulation framework based on monetary aggregates can be combined with an operational framework that ensures more stable and predictable short-term rates to enhance policy transmission. It also discusses how to best configure an interest-rate-based operational framework when markets are underdeveloped and liqudity management capacity is weak.
    Date: 2020–02–07
  13. By: Philipp Baumann; Michael Schomaker; Enzo Rossi
    Abstract: Whether a country's central bank independence (CBI) status has a lowering effect on inflation is a controversial hypothesis. To date, this question could not be answered satisfactorily because the complex macroeconomics structure that gives rise to the data has not been adequately incorporated into statistical analyses. We have developed a causal model that summarizes the economic process of inflation. Based on this causal model and recent data, we discuss and identify the assumptions under which the effect of CBI on inflation can be identified and estimated. Given these and alternative assumptions we estimate this effect using modern doubly robust effect estimators, i.e. longitudinal targeted maximum likelihood estimators. The estimation procedure incorporated machine learning algorithms and was tailored to address the challenges that come with complex longitudinal macroeconomics data. We could not find strong support for the hypothesis that a central bank that is independent over a long period of time necessarily lowers inflation. Simulation studies evaluate the sensitivity of the proposed methods in complex settings when assumptions are violated, and highlight the importance of working with appropriate learning algorithms for estimation.
    Date: 2020–03
  14. By: Selva Bahar Baziki; Tanju Capacioglu
    Abstract: We study the effects of monetary policy decisions on banks’ loan issuance and maturity decisions using a unique matched firm-bank-loan level granular database. We find that changes in the policy rate impact both credit and maturity channels - an increase of 100 basis points reduces commercial loan volumes by 1.6% and maturities by 1.2%, with tighter monetary policy having a larger effect on both. Small banks, banks with relatively weaker capital and liquidity structures, and with weaker access to foreign funding are more sensitive to policy changes. Bank ownership types and loan currency denomination also create asymmetries in responses. Banks reflect these changes to firms with which they have longer established relationships or which have a healthier past credit performance to a lesser extent. A quasi-experimental analysis adds that the intense use of a collateral guarantee scheme has increased maturities at the time of tight monetary policy stance, reversing their long-run negative relationship. These results highlight the importance of the financial regulatory process on banks’ risk taking behavior, search-for yield appetites, identifying areas of potential systemic risk buildup, and finally policy design and coordination.
    Keywords: Monetary policy, Transmission channel, Credit guarantee fund, Loan maturity, Bank type
    JEL: E51 E58 G20 G21 G28
    Date: 2020

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