nep-cba New Economics Papers
on Central Banking
Issue of 2020‒03‒30
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Robustly Optimal Monetary Policy in a New Keynesian Model with Housing By Klaus Adam; Michael Woodford
  2. Financial policy in an exuberant world By Walther, Ansgar
  3. Financial stability committees and the countercyclical capital buffer By Edge, Rochelle M.; Liang, Jean Nellie
  4. Firm-bank credit network, business cycle and macroprudential policy By Luca Riccetti; Alberto Russo; Mauro Gallegati
  5. The Bank of Japan as a Real Estate Tycoon: Large-Scale REIT Purchases By Takahiro Hattori; Jiro Yoshida
  6. Interest Rate Pass-Through : A Meta-Analysis of the Literature By Gregora,Jiri; Melecky,Ales; Melecky,Martin
  7. A Long-Run Approach to Money, Unemployment and Equity Prices By Kuk Mo Jung; Ju Hyun Pyun
  8. The coronavirus and financial stability By Boot, Arnoud W. A.; Carletti, Elena; Haselmann, Rainer; Kotz, Hans-Helmut; Krahnen, Jan Pieter; Pelizzon, Loriana; Schaefer, Stephen M.; Subrahmanyam, Marti G.
  9. How effective is the Taylor rule? Some insights from the time-frequency domain By Crowley, Patrick M.; Hudgins, David
  10. Why narrative information matters: Evidence from the asset purchase program of the ECB By Frederic Opitz
  11. Unconventional Monetary Policy and Inflation in the U.S.: How Much Inflation was Missing? By Carlos Esteban Posada Posada; Alejandro Torres García; Alfredo Villca Condori
  12. Rules versus Discretion in Central Bank Communication By Raphael Galvao; Felipe Shalders
  13. Demographics and inflation in the euro area: a two-sector new Keynesian perspective By Lis, Eliza; Nickel, Christiane; Papetti, Andrea
  14. Implications of negative interest rates for the net interest margin and lending of euro area banks By Melanie Klein
  15. Structural developments in global financial intermediation: The rise of debt and non-bank credit intermediation By Robert Patalano; Caroline Roulet
  16. Risk-Shifting, Regulation, and Government Assistance By Padma Sharma
  17. Exchange rate shocks and inflation comovement in the euro area By Leiva-Leon, Danilo; Martínez-Martin, Jaime; Ortega, Eva
  18. A Model of Monetary Transmission Mechanism By Maruyama, Yuuki
  19. Brexit and the Euro By Nauro F Campos; Corrado Macchiarelli
  20. The power of forward guidance in a quantitative TANK model By Gerke, Rafael; Giesen, Sebastian; Scheer, F. Alexander

  1. By: Klaus Adam; Michael Woodford
    Abstract: We analytically characterize optimal monetary policy for an augmented New Keynesian 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” in terms of inflation and the output gap, that makes no reference to housing prices. If instead 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 will also depend on housing prices. For empirically realistic cases, robustness requires the central bank to “lean against” housing prices, i.e., to adopt a stance that is projected to undershoot (overshoot) its normal targets for inflation and the output gap following unexpected housing price increases (decreases). Notably, robustly optimal policy does not require that the central bank distinguish between “fundamental” and “non-fundamental” movements in housing prices.
    JEL: C61 E52
    Date: 2020–03
  2. By: Walther, Ansgar
    Abstract: This paper studies optimal financial policy in a world where the financial sector can become excessively optimistic. I decompose the welfare effects of bank capital regulation to demonstrate the effects of exuberance and its interaction with incentive problems in banking. The optimal policy depends not only on the extent, but also on the type of optimism. For example, it is markedly different when the exuberance of banks focuses on neglected downside risk, as opposed to overstated upside opportunities. A central normative conclusion is that “leaning against the wind”, by tightening capital requirements in exuberant times, can be counterproductive. I show that two natural metrics, describing the distortion in perceived upside and downside risk, are sufficient statistics for the policy implications of exuberance. My results shed light on the diverse empirical evidence on the relationship between bank capital and risk-taking. Finally, I investigate the sensitivity of these insights under different assumptions about government rationality and paternalism. JEL Classification: G01, G21, G40
    Keywords: banking, behavioral finance, financial crises, macroprudential policy
    Date: 2020–03
  3. By: Edge, Rochelle M.; Liang, Jean Nellie
    Abstract: Multi-agency financial stability committees (FSCs) have grown dramatically since the global financial crisis. However, most cannot direct actions or recommend to other agencies that they take actions, and most would influence policy actions only through convening and discussing risks. We evaluate whether the significant variation in FSCs and other financial regulatory structures across countries affect decisions to use the countercyclical capital buffer (CCyB). After controlling for credit growth and the severity of the financial crisis, we find that countries with stronger FSCs are more likely to use the CCyB, especially relative to countries where a bank regulator or the central bank has the authority to set the CCyB. While the experience with the CCyB is still limited, these results are consistent with some countries creating FSCs with strong governance to take actions, but most countries instead creating weak FSCs without mechanisms to promote actions, consistent more with a symbolic political delegation motive and raising questions about accountability for financial stability.
    Keywords: Financial stability committees,Bank regulators,Delegation,Macroprudential policy,Countercyclical capital buffer,Credit growth
    JEL: H11 G21 G28 P16
    Date: 2020
  4. By: Luca Riccetti (Department of Economics and Law, Università degli Studi di Macerata, Italy); Alberto Russo (Department of Management, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain); Mauro Gallegati (Department of Management, Università Politecnica delle Marche, Acona, Italy)
    Abstract: We present an agent-based model to study firm-bank credit market interactions in different phases of the business cycle. The business cycle is exogenously set and it can give rise to various scenarios. Compared to other models in this literature strand, we improve the mechanism according to which the dividends are distributed, including the possibility of stock repurchase by firms. In addition, we locate firms and banks over a space and firms may ask credit to many banks, resulting in a complex spatial network. The model reproduces a long list of stylized facts and their dynamic evolution as described by the cross-correlations among model variables. The model allows us to test the effectiveness of rules designed by the current financial regulation, such as the Basel 3 countercyclical capital buffer. We find that its effectiveness of this rule changes in different business cycle environments and this should be considered by policy makers.
    Keywords: Agent-based modeling, credit network, business cycle, financial regulation, macroprudential policy
    JEL: C63 E32 E52 G01
    Date: 2020
  5. By: Takahiro Hattori (Hitotsubashi University); Jiro Yoshida (The Pennsylvania State University and the University of Tokyo)
    Abstract: This is the first study analyzing the Bank of Japan’s purchases of real estate investment trusts (REITs) that started in 2010 as part of enhanced unconventional monetary policy. The Bank purchases REIT shares after observing a significantly negative return over the previous night and during the morning market. The Bank continues purchases daily until the overnight and morning REIT returns become positive. This counter-cyclical behavior is consistent with the objective of decreasing risk premia and stimulating spending. Our study sheds light on the unique program of a central bank’s equity purchases.
    Keywords: large-scale asset purchases (LSAP), quantitative easing (QE), central banking, real estate investment trust, unconventional monetary policy
    JEL: E52 E58 G12 R33
    Date: 2020–03–17
  6. By: Gregora,Jiri; Melecky,Ales; Melecky,Martin
    Abstract: The interest rate pass-through describes how changes in a reference rate (the monetary policy, money market, or T-bill rate) transmit to bank lending rates. This paper reviews the empirical literature on the interest rate pass-through and systematizes it by means of meta-analysis and meta-regressions. The paper finds systematically lower estimated pass-through coefficients in studies that focus on transmission to long-term lending rates, consumer lending rates, and average lending rates. The interest rate pass-through is significantly influenced by country macro-financial and institutional factors. The estimated pass-through tends to be stronger for economies with deeper capital markets (measured by market capitalization). Interestingly, central bank independence rising from lower levels can reduce interest rate pass-through, while central bank independence rising from already high levels can boost the pass-through.
    Keywords: Macroeconomic Management,Inflation,Financial Structures,Financial Crisis Management&Restructuring,International Trade and Trade Rules
    Date: 2019–01–18
  7. By: Kuk Mo Jung (Department of Economics, Sogang University, Seoul); Ju Hyun Pyun (Korea University Business School,)
    Abstract: A long-run relationship between money (inflation or interest rates), unemployment, and equity prices are studied. We first document robust empirical evidence that a statistically significant joint relationship between the long term trends of three variables exists in the post-WWII U.S. data: (i) a positive relationship between inflation (or interest rates) and unemployment; (ii) a negative relationship between unemployment and equity prices; and (iii) a negative relationship between inflation (or interest rates) and equity prices. Then, we provide a unified framework that incorporates money, unemployment, and equity prices with microfoundation and empirical relevance. The model predicts the empirically found joint relationship in the long run. The calibration exercises also show that the model results driven solely by US monetary policy can account for 62.9% and 29.8% of variations of the long-term trends of US unemployment rate and real equity prices, respectively
    Keywords: Inflation, Unemployment, Equity Prices, SearchModels
    JEL: E4 E5
    Date: 2020
  8. By: Boot, Arnoud W. A.; Carletti, Elena; Haselmann, Rainer; Kotz, Hans-Helmut; Krahnen, Jan Pieter; Pelizzon, Loriana; Schaefer, Stephen M.; Subrahmanyam, Marti G.
    Abstract: The spreading of the Covid-19 virus causes a reduction in economic activity worldwide and may lead to new risks to financial stability. The authors draw attention to the urgency of the targeted mitigation strategies on the European level and suggest taking coordinated action on the fiscal side to provide liquidity to affected firms in the corporate sector. Otherwise, virus-related cashflow interruptions could lead to a new full-blown banking crisis. Monetary policy measures are unlikely to mitigate cash liquidity shortages at the level of individual firms. Coordinated action at European level is decisive to prevent markets from losing confidence in the resilience of banks, particularly in countries with limited fiscal capacity. In contrast to the euro crisis of 2011, the cause of the current crisis does not lie in the financial markets; therefore, the risk of moral hazard for banks or states is low.
    Keywords: coronavirus,financial stability,banking,strategies
    Date: 2020
  9. By: Crowley, Patrick M.; Hudgins, David
    Abstract: When the central bank sets monetary policy according to a conventional or modified Taylor rule (which is known as the Taylor Principle), does this deliver the best outcome for the mac-roeconomy as a whole? This question is addressed by extending the wavelet-based control (WBC) model of Crowley and Hudgins (2015) to evaluate macroeconomic performance when the central bank sets interest rates based on a conventional or modified Taylor rule (TR). We compare the simulated performance of jointly optimal fiscal and monetary policy under an unrestricted baseline model with performance under the TR. We simulate the model un-der relatively small and large weighting of the output gap in the TR specification, and for both low and high inflation environments. The results show that the macroeconomic outcome de-pends on whether the conventional or modified Taylor rule is used, and whether the central bank is operating in a low or high inflation environment.
    Keywords: Discrete Wavelet Analysis,Monetary Policy,Optimal Control
    JEL: C61 C63 C88 E52 E61 F47
    Date: 2020
  10. By: Frederic Opitz (-)
    Abstract: In this paper, I evaluate the effects of public sector purchase program announcement shocks in the Euro area estimating a Bayesian VAR with sign-restrictions augmented by narrative information taken from event studies. Using monthly data, I find that the shocks persistently increase inflation and output. The exchange rate, market volatility, borrowing costs, and systemic risk fall while the quantity of household credit and economic and consumer sentiment rises. Most importantly, I find that the additional narrative information substantially reduces the uncertainty around these effects, shedding new light on the effectiveness and the pass-through of unconventional monetary policy
    Keywords: Unconventional monetary policy, APP, Narrative sign-restrictions
    JEL: E50 E51 E52 E58
    Date: 2020–03
  11. By: Carlos Esteban Posada Posada; Alejandro Torres García; Alfredo Villca Condori
    Date: 2020–03–12
  12. By: Raphael Galvao; Felipe Shalders
    Abstract: We study Central Bank communication in a coordination environment. We show that anything goes when the Central Bank cannot commit to a communication policy: both its most and least preferred allocations can be supported in equilibrium, and so can anything in between. We find that the ability to commit to a policy does not eliminate multiplicity and, in particular, does not necessarily implement the Central Bank's most preferred allocation. Under commitment, however, the Central Bank can avoid the least desirable outcomes and assure an intermediate payoff. We show that the Central Bank chooses an information structure with only two messages that leads to perfect coordination among private agents.
    Keywords: Central Bank communication; commitment; coordination
    JEL: D83 D84 E58
    Date: 2020–03–19
  13. By: Lis, Eliza; Nickel, Christiane; Papetti, Andrea
    Abstract: Can the aging process affect inflation? The prolonged decline of fertility and mortality rates induces a persistent downward pressure on the natural interest rate. If this development is not internalized by the monetary policy rule, inflation can be on a downward trend. Using the structure of a two-sector overlapping generations model embedded in a New-Keynesian framework with price frictions, calibrated for the euro area, this paper shows that following a commonly specified monetary policy rule the economy features a ”disinflationary bias” since 1990, in a way that can match the downward trend of core inflation found in the data for the euro area. In this model, continuing to follow the same rule makes inflation to be on a declining pattern at least until 2030. At the same time, changing consumption patterns towards nontradable items such as health-care generate a small ”inflationary bias” a positive deviation of inflation from target of less than 0.1 percentage points between 1990 and 2030. In the model setting of this paper, this inflationary bias is not strong enough to counteract the disinflationary bias generated by the downward impact of aging on the natural interest rate. JEL Classification: E43, E52, E58, J11
    Keywords: consumption composition, euro area, inflation, monetary policy, population aging
    Date: 2020–03
  14. By: Melanie Klein
    Abstract: This paper explores the impact of low (but) positive and negative market interest rates on euro area banks' net interest margin (NIM) and its components, retail lending and retail deposit rates. Using two proprietary bank-level data sets, I find a positive impact of the level of the short-term rate on the NIM, which increases substantially at negative market rates. As low profitability could hamper the ability of banks to expand lending, I also investigate the impact of the NIM on new lending to the non-financial private sector. In general, the NIM is positively related to lending: When lending is less profitable, banks cut lending. However, at negative rates this effect vanishes. This finding suggests that banks adjusted their business practices when servicing new loans, thereby contributing to higher new lending in the euro area since 2014.
    Keywords: net interest margin, monetary policy, negative interest rates, bank pro tability, lending
    JEL: G21 E43 E52
    Date: 2020–03
  15. By: Robert Patalano (OECD); Caroline Roulet (OECD)
    Abstract: This paper examines global credit intermediation through the lens of financial markets and financial intermediaries in the post-crisis period during which highly accommodative monetary policies contributed to investors’ search for yield. It reviews the extent to which non-bank intermediation contributed to the rise of sovereign and corporate debt levels and exuberance in global credit markets. It also assesses forms of market-based finance that are contributing to financial vulnerabilities, including leverage loans and collateralised loan obligations (CLOs), fixed-income investment funds, and bank contingent convertible debt. Post-crisis policy frameworks should adapt to the shift toward market-based finance in many countries to allow better consideration of the interactions between monetary, prudential, and regulatory tools with respect to credit intermediation and risks. Policies should also consider the optimal combination of macroprudential and activities-based tools in non-bank credit intermediation to address vulnerabilities without undermining the benefits of market-based finance.
    Keywords: debt sustainability, International lending, international policy mix, non-bank financial intermediation
    JEL: F34 F42 G21 G23
    Date: 2020–03–30
  16. By: Padma Sharma
    Abstract: This paper examines an episode when policy response to a financial crisis effectively incentivized financial institutions to reallocate their portfolios toward safe assets. Following a shift to a regime of enhanced regulation and scaled-down public assistance during the savings and loan crisis in 1989, I find that thrifts with a high probability of failure increased their composition of safe assets relative to thrifts with a low probability of failure. The findings also show a shift to safe assets among stock thrifts relative to mutual thrifts, thereby providing evidence of risk-shifting from equity-holders to debt-holders of stock thrifts prior to the regulatory reforms. These findings suggest that for recent policies aimed at reducing moral hazard to succeed (such as the Orderly Liquidation Authority under Title II of the Dodd-Frank Act), credible signals around government assistance should be provided to shareholders of financial institutions. To identify the effect of the policy change I develop a new Bayesian estimation method for causal studies.
    Keywords: Bank Failures; Bailouts; Moral Hazard; Risk-shifting; Bayesian Inference; Savings and loans crisis; Maskov Chain Monte Carlo (MCMC); Federal Savings and Loans Insurance Corporation (FSLIC); Resolution Trust Corporation (RTC)
    JEL: C11 C31 C33 G21 G33 G38
    Date: 2019–11–26
  17. By: Leiva-Leon, Danilo; Martínez-Martin, Jaime; Ortega, Eva
    Abstract: This paper decomposes the time-varying effect of exogenous exchange rate shocks on euro area countries inflation into country-specific (idiosyncratic) and region-wide (common) components. To do so, we propose a flexible empirical framework based on dynamic factor models subject to drifting parameters and exogenous information. We show that exogenous shocks to the EUR/USD exchange rate account for over 50% of nominal EUR/USD exchange rate fluctuations in more than a third of the quarters of the past six years, especially in turning point periods. Our main results indicate that headline inflation in euro area countries, and in particular its energy component, has become significantly more affected by these exogenous exchange rate shocks since the early 2010s, in particular for the region's largest economies. While in the case of headline inflation this increasing sensitivity is solely reliant on a sustained surge in the degree of comovement, for energy inflation it is also based on a higher region-wide effect of the shocks. By contrast, purely exogenous exchange rate shocks do not seem to have a significant impact on the core component of headline inflation, which also displays a lower degree of comovement across euro area countries. JEL Classification: C32, E31, F31, F41
    Keywords: exchange rate, factor model, inflation, structural VAR model
    Date: 2020–03
  18. By: Maruyama, Yuuki
    Abstract: The point of this model is that total investment in the economy is not determined by the equilibrium of the interest rate alone, but by the equilibrium of both the interest rate and the market price of risk (risk premium). In this model, the lower the discount rate or risk aversion of people, the higher the total investment. This model shows that when the interest rate is not at the zero lower bound, the total investment is only slightly affected by people's risk aversion, but at the zero lower bound, the total investment is inversely proportional to people's risk aversion. In addition, this model is used to analyze monetary policy. It is shown that the interest rate channel and the credit channel can be analyzed with the same formula and the effect of the interest rate channel is small. This explains why a central bank can greatly increase the total investment with small changes in the interest rate. Additionally, this paper analyzes fiscal policy, helicopter money, and government bonds.
    Date: 2020–03–19
  19. By: Nauro F Campos; Corrado Macchiarelli
    Abstract: The year 2019 marked the 20th anniversary of the establishment of the Euro. It was also the last full year before the UK formally left the European Union. This paper examines the relationship between the UK and the euro area. We look at the economic distance between core and periphery groups of countries which is driven by the level of synchronisation in economic activity. We provide new evidence that since 1990 the UK economy has become significantly more integrated with that of the EMU countries. The UK has moved from being in the periphery before 1990 to being part of the core over the following 30 years, despite not being part of the EMU. We also provide evidence that the level of business cycles synchronisation of the UK economy with the EU has had the greatest, among the EU countries, variability over time. We conclude with some policy implications arising from Brexit for the stability of the euro area. Specifically, while synchronisation might have increased the costs of Brexit, the UK exit from the EU represents much less of a threat to the stability of the euro area than the risk of a failure to further European economic integration via fiscal federalism and the banking union.
    Keywords: European Monetary Union, Eurozone, Core-periphery
    JEL: E32 E63 F02
    Date: 2020–03
  20. By: Gerke, Rafael; Giesen, Sebastian; Scheer, F. Alexander
    Abstract: We quantify the macroeconomic effects of interest rate forward guidance in an estimated medium-scale two-agent New Keynesian (TANK) model. In general, such models can dampen or amplify the power of forward guidance compared to a representative agent model. Our empirical estimates indicate a dampening, as there is sufficient countercyclical redistribution.An interaction with asset purchases gives rise to non-linear effects that depend on the horizon of forward guidance.
    Keywords: Forward Guidance,Hand-to-mouth households,Redistribution,Bayesian Estimation,Asset purchase program
    JEL: E44 E52 E62
    Date: 2020

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