nep-cba New Economics Papers
on Central Banking
Issue of 2020‒03‒23
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The Collateral Channel of Monetary Policy: Evidence from China By Hanming Fang; Yongqin Wang; Xian Wu
  2. A fistful of dollars:Transmission of global funding shocks to EMs By Shekhar Hari Kumar; Aakriti Mathur
  3. The FR-BDF Model and an Assessment of Monetary Policy Transmission in France, Working Paper Series no. 736, Banque de France By Matthieu Lemoine; Harri Turunen; Mohammed Chahad; Antoine Lepetit; Anastasia Zhutova; Pierre Aldama; Pierrick Clerc; Jean-Pierre Laffargue
  4. Dynamic Impact of Unconventional Monetary Policy on International REITs By Hardik A. Marfatia; Rangan Gupta; Keagile Lesame
  5. Central Bank Tone and the Dispersion of Views within Monetary Policy Committees By Paul Hubert; Fabien Labondance
  6. Monetary Policy Transmission in Emerging Markets and Developing Economies By Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
  7. Monetary Policy and Bubbles in a New Keynesian Model with Overlapping Generations By Jordi Galí
  8. Uncovered Interest Parity, Forward Guidance, and the Exchange Rate By Jordi Galí
  9. Evaluating the Determinants of Irish Inflation By Byrne, Stephen; Zakipour-Saber, Shayan
  10. Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence By Lukas Hoesch; Barbara Rossi; Tatevik Sekhposyan
  11. 21st Century Macro By Narayana R. Kocherlakota
  12. International Capital Flows at the Security Level – Evidence from the ECB’s Asset Purchase Programme By Katharina Bergant; Michael Fidora; Martin Schmitz
  13. Mortgage-related bank penalties and systemic risk among U.S. banks By Vaclav Broza; Evzen Kocenda
  14. Is the Phillips curve dead? International evidence By Alexius, Annika; Lundholm, Michael; Nielsen, Linnea
  15. Standing Repo Facilities, Then and Now By Stephen F. Quinn; William Roberds; Charles M. Kahn
  16. The Impact of Expectations on IFRS 9 Loan Loss Provisions By Petr Polak; Jiri Panos

  1. By: Hanming Fang; Yongqin Wang; Xian Wu
    Abstract: Collateral-based monetary policy tools have been used extensively by major central banks. Lack of proper policy counterfactuals, however, makes it difficult to empirically identify their causal effects on the financial market and the real economy. We exploit a quasi-natural experiment 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 financial institutions to borrow money from its Medium-Term Lending Facility (MLF). This policy shift allows us to implement a triple-difference strategy to estimate the causal impact of the collateral-based unconventional monetary policy. We find 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 find that there is a pass-through effect 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.
    JEL: E44 E52 E58 G12
    Date: 2020–02
  2. By: Shekhar Hari Kumar (IHEID, Graduate Institute of International and Development Studies, Geneva); Aakriti Mathur (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: In this paper, we study transmission of global funding shocks to emerging economies (EMs) from the perspective of interbank markets. Money markets enable banks to engage in risk-sharing against liquidity shocks and are sensitive to global funding conditions. Accordingly, we first show that interbank rates better reflect the magnitude of transmission of foreign liquidity shocks to EMs as compared to benchmark short-term bond yields. Next, we disentangle the transmission into its various channels, focusing in particular on two pull factors associated with the domestic banking microstructure: dependence on wholesale funding and share of foreign banks. Our results indicate that money market rates in EMs react to global shocks, and that in particular dependence on wholesale funding has a significant role to play. Finally, we provide evidence that tools of macro-prudential policy like reserve requirements can help alleviate liquidity shocks to the EM banking system, weakening this global transmission.
    Keywords: International transmission of liquidity shocks; quantitative easing; wholesale funding; interbank rates; macro-prudential policy; reserve requirements.
    JEL: E43 E44 E52 E58 F42 G15 G21
    Date: 2020–03–02
  3. By: Matthieu Lemoine (Centre de recherche de la Banque de France - Banque de France); Harri Turunen (Centre de recherche de la Banque de France - Banque de France); Mohammed Chahad (Centre de recherche de la Banque de France - Banque de France); Antoine Lepetit (Centre de recherche de la Banque de France - Banque de France); Anastasia Zhutova (Centre de recherche de la Banque de France - Banque de France); Pierre Aldama (Centre de recherche de la Banque de France - Banque de France); Pierrick Clerc (Centre de recherche de la Banque de France - Banque de France); Jean-Pierre Laffargue (CES - Centre d'économie de la Sorbonne - UP1 - Université Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper presents the new model for France of the Banque de France (FR-BDF), as well as its key implications for the analysis of monetary policy transmission in France. Relative to our former model, this new semi-structural model has been improved along three dimensions: financial channels are richer, expectations now have an explicit role and simulations now converge toward a balanced growth path. We follow the approach of the FRB/US model, where agents can form their expectations in two different ways, VARbased or model-consistent, and where non-financial behavior react with polynomial adjustment costs. For standard monetary policy shocks, FR-BDF shows a stronger sensitivity than our former model, due to the widespread influence of expectations. Then, we show that, under model-consistent expectations, FR-BDF does not suffer from the forward guidance puzzle. Finally, Eurosystem asset purchase programmes have notable effects in FR-BDF, with a stronger transmission through exchange rates than term premia.
    Keywords: forward guidance,monetary policy,expectations,semi-structural modeling
    Date: 2019–10
  4. By: Hardik A. Marfatia (Department of Economics, Northeastern Illinois University, BBH 344G, 5500 N. St. Louis Ave., Chicago, IL 60625, USA); Rangan Gupta (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa); Keagile Lesame (Department of Economics, University of Pretoria, Pretoria, 0002, South Africa)
    Abstract: In this paper, we estimate the dynamic impact of unconventional monetary policy in the US on international REITs. Unlike existing studies which are limited to conventional policy tools and/or undertake a static approach, we estimate the dynamic time-varying impact of forward guidance and large-scale asset purchases (LSAP) shocks on the international REIT returns. We compare the effects of these unconventional tools with the effects of conventional federal funds rate shocks. Results show that the response of international REITs to the unconventional policy shocks significantly depends on the time under consideration. Forward guidance shocks have greater time variation in the impact on REIT returns compared to LSAP shocks, particularly in the case of Australia, Belgium, and the US REIT markets. We also find that in most countries, REITs time-varying response is related to the gold price changes.
    Keywords: Unconventional monetary policy, Forward guidance, LSAP, REITs, Time varying parameter model
    JEL: E44 E52 C32 F42 G14
    Date: 2020–02
  5. By: Paul Hubert (Sciences Po-OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté - CRESE - Sciences Po-OFCE)
    Abstract: Does policymakers’ choice of words matter? We explore empirically whether central bank tone conveyed in FOMC statements contains useful information for financial market participants. We quantify central bank tone using computational linguistics and identify exogenous shocks to central bank tone orthogonal to the state of the economy. Using an ARCH model and a high-frequency approach, we find that positive central bank tone increases interest rates at the 1- year maturity. We therefore investigate which potential pieces of information could be revealed by central bank tone. Our tests suggest that it relates to the dispersion of views among FOMC members. This information may be useful to financial markets to understand current and future policy decisions. Finally, we show that central bank tone helps predicting future policy decisions.
    Keywords: Optimism, FOMC, Dissent, Interest rate expectations, ECB
    JEL: E43 E52 E58
    Date: 2020–01
  6. By: Luis Brandao-Marques; R. G Gelos; Thomas Harjes; Ratna Sahay; Yi Xue
    Abstract: Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
    Date: 2020–02–21
  7. By: Jordi Galí
    Abstract: I analyze an extension of the New Keynesian model that features overlapping generations of finitely-lived agents and (stochastic) transitions to inactivity. In contrast with the standard model, the proposed framework allows for the existence of rational expectations equilibria with asset price bubbles. I study the conditions under which bubble-driven fluctuations may emerge and the type of monetary policy rules that may prevent them. I conclude by discussing some of the model's welfare implications.
    JEL: E44 E52
    Date: 2020–02
  8. By: Jordi Galí
    Abstract: Under uncovered interest parity (UIP), the size of the effect on the real exchange rate of an anticipated change in real interest rate differentials is invariant to the horizon at which the change is expected. Empirical evidence using US, euro area and UK data points to a substantial deviation from that invariance prediction: expectations of interest rate differentials in the near (distant) future are shown to have much larger (smaller) effects on the real exchange rate than is implied by UIP. Some possible explanations are discussed.
    JEL: E43 E58 F41
    Date: 2020–02
  9. By: Byrne, Stephen (Central Bank of Ireland); Zakipour-Saber, Shayan (Central Bank of Ireland)
    Abstract: During the period from 1970 to the early 2000s, there was a consensus that Irish inflation was primarily determined by external factors. In this letter, we evaluate the relative importance of domestic factors, external factors, and inflation expectations and specify how these have changed over time. We find that since the crisis, external factors remain the most important determinants of inflation. However, domestic factors such as labour slack have been increasingly important in recent years. Evaluating published forecasts against a benchmark statistical model, the Central Bank performs best at shorter horizons, i.e. less than one year. This validates an approach that combines model-evidence with expert judgement.
    Date: 2020–02
  10. By: Lukas Hoesch; 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: 2020–03
  11. By: Narayana R. Kocherlakota
    Abstract: In the 21st century, many key macroeconomic variables in the developed world have been persistently low, including inflation, output, growth, interest rates (both real and nominal), and labor share. I consider a class of standard representative agent rational expectations models in which fundamentals are deterministic and constant over time. I show that for any level of nominal frictions (no matter how small) and for any monetary policy rule (regardless of how active), there is a large set of stochastic equilibria that exhibit permanently low inflation, low output, low labor share, and low nominal interest rates. If the Phillips curve is sufficiently flat, then these equilibria also exhibit low growth and real interest rates.
    JEL: E12 E31 E52
    Date: 2020–02
  12. By: Katharina Bergant; Michael Fidora; Martin Schmitz
    Abstract: We analyse euro area investors' portfolio rebalancing during the ECB's Asset Purchase Programme at the security level. Our empirical analysis shows that euro area investors (in particular investment funds and households) actively rebalanced away from securities targeted under the Public Sector Purchase Programme and other euro-denominated debt securities, towards foreign debt instruments, including `closest substitutes', i.e. certain sovereign debt securities issued by non-euro area advanced countries. This rebalancing was particularly strong during the first six quarters of the programme. Our analysis also reveals marked differences across sectors as well as country groups within the euro area, suggesting that quantitative easing has induced heterogeneous portfolio shifts.
    Date: 2020–02–28
  13. By: Vaclav Broza (Institute of Economic Studies, Charles University); Evzen Kocenda
    Abstract: We analyze link between mortgage-related regulatory penalties levied on banks and the level of systemic risk in the U.S. banking industry. We employ a frequency decomposition of volatility spillovers to draw conclusions about system-wide risk transmission with short-, medium-, and long-term dynamics. We find that after the possibility of a penalty is first announced to the public, long-term systemic risk among banks tends to increase. Short- and medium-term risk marginally declines. In contrast, a settlement with regulatory authorities leads to a decrease in the long-term systemic risk. Our analysis is robust with respect to several criteria.
    Keywords: bank, financial stability, global financial crisis, mortgage, penalty, systemic risk
    JEL: C14 C58 G14 G21 G28 K41
    Date: 2020–03
  14. By: Alexius, Annika (Dept. of Economics, Stockholm University); Lundholm, Michael (Dept. of Economics, Stockholm University); Nielsen, Linnea (Wahlstedt Sageryd)
    Abstract: As the struggle against low inflation intensifies, renewed attention is focusing on the potential instability of the relationship between labor market demand pressure and inflation. A weaker Phillips curve has mainly been documented for the United States. Since it is unlikely that this phenomenon is limited to a single country, more international evidence is required. We analyse changes in the slope of the Phillips curve in eleven OECD countries (including the United States for comparison). Bayesian VAR models with time varying parameters indicate that relationship between inflation and unemployment has strengthened rather than weakened. Shocks to unemployment typically have significant effects on inflation in 2018, indicating that the Phillips curve is still alive and well. The statistical method may matter for the results as rolling window estimation shows a weakened relationship in six out of ten non-US countries.
    Keywords: Inflation; Phillips Curve; Bayesian time-varying parameter VARs;
    JEL: E31 F41
    Date: 2020–03–10
  15. By: Stephen F. Quinn (Texas Christian University; Federal Reserve Bank of Dallas); William Roberds; Charles M. Kahn (University of Illinois at Urbana-Champaign; Federal Reserve Bank of New York; University of Chicago; Harvard University; University of Illinois; Department of Finance)
    Abstract: Recently there have been discussions, both within the FOMC and more broadly, about whether the FOMC should set up a standing repo facility. Such a facility would allow banks to sell safe assets (U.S. Treasury securities) to the Fed, with the assurance of subsequent repurchase, in unlimited quantities at an administered rate. This is not a new idea. In fact, a similar facility was implemented in 1683by the Bank of Amsterdam, the leading central bank of the time, and operated for more than a century afterward. In this article, we describe the motivations, operations, and limitations of the Bank of Amsterdam’s facility and what lessons this historical experience offers for modern-day central banks.
    Date: 2020–01–01
  16. By: Petr Polak; Jiri Panos
    Abstract: This paper describes the implementation of the IFRS 9 accounting standard into a macroprudential (top-down) stress-testing framework. It sets out to present a possible way of overcoming data issues and discusses key assumptions which have an effect on the end results and which stress testers should be aware of. According to the results, macroeconomic expectations play a crucial role in the pass-through of impairment. The paper also presents evidence about the pro-cyclicality of the IFRS 9 approach.
    Keywords: IFRS 9, impairments, loan loss provisions, macroprudential policy, stress testing
    JEL: E44 E62 G01 G21
    Date: 2019–12

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