|
on Central Banking |
| By: | Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach |
| Abstract: | We describe the Federal Reserve’s (the Fed’s) approach to implementing monetary policy in an ample-reserves regime. We use a stylized model to explain the factors the Fed considers and the tools it uses to ensure interest rate control when the quantity of reserves is ample. Then, we take a close look at the Fed’s experience operating in this regime in the post-crisis period, both as it has raised and lowered its policy rate. Looking ahead, we highlight some considerations relevant for maintaining a level of reserves consistent with the efficient and effective implementation of monetary policy, and conclude with an overview of the benefits of an ample-reserves regime. This primer is intended to enhance discussions and understanding of the Fed’s actions and communications regarding monetary policy implementation, as many resources on this topic may be out of date given the recent evolution of the policy environment. |
| Keywords: | Monetary policy implementation; Reserve balances; Ample-reserves regime; Administered rates; Interest on reserves; Open market operations |
| JEL: | E58 E52 E43 |
| Date: | 2020–02–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-22&r=all |
| By: | Ricardo J. Caballero; Alp Simsek |
| Abstract: | We provide a model of endogenous asset price spirals and severe aggregate demand contractions following a large supply shock. The key mechanism stems from the drop in the wealth share of the economy’s risk-tolerant agents: as a recessionary supply shock hits the economy, their wealth declines and their leverage rises endogenously, causing them to offload some risky assets. When monetary policy is unconstrained, it can offset the decline in risk tolerance with an interest rate cut that boosts the market’s Sharpe ratio. However, if the interest rate policy is constrained, new contractionary feedbacks arise: recessionary supply shocks not only feed into reduced risk tolerance but also into further asset price and output drops, which feed the risk-o¤ episode and trigger a downward loop. When pre-shock leverage ratios are high, multiple equilibria are possible, including one where risk-tolerant agents go bankrupt. A large-scale asset purchases (LSAPs) policy can be highly effective in this environment, as it reverses the downward asset price spiral. The Covid-19 shock and the large response by all the major central banks provide a vivid illustration of the environment we seek to capture. |
| JEL: | E00 E12 E21 E22 E30 E40 G00 G01 G11 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27044&r=all |
| By: | Fokin, Nikita (Фокин, Никита) (The Russian Presidential Academy of National Economy and Public Administration) |
| Abstract: | In this paper, a Bayesian error correction model is proposed based on which the change in the trajectory of adaptation of the real ruble exchange rate to equilibrium in response to oil shock after changing the monetary policy regime is estimated. At the end of 2014, the Bank of Russia switched to the inflation targeting regime released the ruble into free float. Against the backdrop of rapidly falling oil prices, the nominal exchange rate devalued by about 2 times. In 2017, the Ministry of Finance introduced a budget rule, according to which, with oil prices above $ 40 dollars in 2017 prices, the currency is purchased for the excess profits, thereby affecting the nominal ruble exchange rate. Given that since 2017, oil prices have not fallen below the threshold level, the budget rule permanently affected the ruble exchange rate. Thus, the current monetary policy regime is not a free exchange rate regime, but a quasi-free or quasi-fixed rate regime. In this paper, the task is to assess how the current regime of the monetary policy affected the reaction of the real ruble exchange rate to the shock of oil prices over the past 5 years. |
| Keywords: | real ruble exchange rate, monetary policy, Bayesian methods |
| Date: | 2020–03 |
| URL: | http://d.repec.org/n?u=RePEc:rnp:wpaper:032012&r=all |
| By: | Stefanie Behncke |
| Abstract: | I analyse the effects of two macroprudential policy measures implemented in Switzerland: the activation of the countercyclical capital buffer (CCyB) and a cap on the loan-to-value (LTV) ratios. I use a difference-in-differences method to estimate the effects of these measures on risk indicators, such as their LTV and loan-to-income (LTI) ratios and mortgage growth rates. I find that both the CCyB and the LTV cap led to a reduction in high LTV mortgages. The banks affected by the CCyB also reduced their mortgage growth rates. I do not find any evidence that these measures had unintended consequences on LTI risks or on non-mortgage credit growth. |
| Keywords: | Banks, countercyclical capital buffer, financial stability, loan-to-value ratio, macroprudential policy, mortgages |
| JEL: | E5 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2020-06&r=all |
| By: | Tan Schelling; Pascal Towbin |
| Abstract: | In a negative interest rate environment, banks have generally proved reluctant to pass on negative interest rates to their retail depositors. Thus, banks that are more dependent on deposit funding face higher funding costs relative to other banks. This raises questions about the effect of negative interest rates on bank lending and monetary policy transmission. To study the transmission of negative interest rates, we use an unexpected policy decision by the Swiss National Bank in combination with a comprehensive and granular micro data set on individual Swiss corporate loans. We find that banks relying more heavily on deposit funding take more risks and offer looser lending terms than other banks. This result is consistent with the risk-taking channel, where a lower policy rate spurs bank risk-taking to maintain profits. |
| Keywords: | Negative interest rates, bank lending, deposit funding, monetary transmission |
| JEL: | G21 G28 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2020-05&r=all |
| By: | Cem Cakmakli (Koç University); Selva Demiralp (Koç University); Sebnem Kalemli Ozcan (University of Maryland, NBER and CEPR); Sevcan Yesiltas (Koç University); Muhammed Ali Yildirim (Koç University & Center for International Development at Harvard University) |
| Abstract: | The COVID-19 crisis can turn into the biggest emerging market (EM) crisis ever. EMs are observing record capital outflows and depreciating currencies, while trying to come up with fiscal resources necessary to fight the pandemic. This paper focuses on a large EM, Turkey. Turkey provides us with a good laboratory given its low foreign currency reserves, high foreign currency debt and a questionable record on monetary policy credibility, all of which are the characteristics of several EMs. We develop a simple framework incorporating a SIR model in a reduced form economic model. We proxy supply shocks with a measure that synthesizes infection rates with teleworkers, physical job proximity and lockdown policies. Demand shocks are captured with credit card purchases. We also incorporate the fact that Turkey is a small open economy with trade linkages. Our estimates show that the lowest economic cost, which saves the maximum number of lives, can be achieved under an immediate full lockdown. Partial lockdowns, which is the current policy, amplify the economic toll because the normalization takes longer. We highlight that it is necessary for the economic units to be compensated during the lockdown and yet Turkey’s policy options are limited given its low fiscal space, and reliance on capital flows that require both external and domestic funding. The external funds can be secured through international financial institutions. On the domestic front, the Turkish Central Bank can provide funding with a well-targeted and transparent asset purchase program (QE). As an example of such a policy, we provide the details of a successful historical episode: Turkish Central Bank monetized the government debt with a clearly communicated disinflation program under an IMF Stand-By Agreement, in the aftermath of 2001 triple crisis (banking, sovereign, balance of payments). |
| Keywords: | COVID-19; Financial Crisis; SIR; Input-Output Tables; Emerging Markets. |
| JEL: | E61 F00 C51 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:2011&r=all |
| By: | Michiel De Pooter; Giovanni Favara; Michele Modugno; Jason J. Wu |
| Abstract: | Monetary policy uncertainty affects the transmission of monetary policy shocks to longer-term nominal and real yields. For a given monetary policy shock, the reaction of yields is more pronounced when the level of monetary policy uncertainty is low. Primary dealers and other investors adjust their interest rate positions more when monetary policy uncertainty is low than when uncertainty is high. These portfolio adjustments likely explain the larger pass-through of a monetary policy shock to bond yields when uncertainty is low. These findings shed new light on the role that monetary policy uncertainty plays in the transmission of monetary policy to financial markets. |
| Keywords: | Monetary policy surprises; Monetary policy uncertainty; Interest rates; Primary dealers |
| JEL: | E40 E50 G10 |
| Date: | 2020–04–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-32&r=all |
| By: | Saroj Dhital (Economics and Business Department, Southwestern University); Pedro Gomis-Porqueras (Department of Economics, Deakin University, Geelong, Australia); Joseph H. Haslag (Department of Economics, University of Missouri-Columbia) |
| Abstract: | In this paper we examine the interactions between fiscal and monetary policy in an economy with financial frictions, where fiat money, bank deposits and short and long-term nominal bonds coex-ist. Because agents face information frictions and bankers have limited commitment, fiat money is always accepted and bank deposits can be used in some trades. Within this frictional environment, we study how consumption inequality varies when the central bank pursues an active monetary pol-icy and when the fiscal authority is active. Specifically, we find that consumption wedges across the different states of the world are more severe when an active central bank pursues expansionary monetary policy. Moreover, we find a unique stationary equilibrium when the monetary authority follows an active policy, while multiple stationary equilibria exist when the fiscal authority pursues an active regime. Consequently, such indeterminacy can result in greater volatility in economies in which the fiscal authority is active and the central bank is passive. |
| Keywords: | taxes; inflation; liquidity premium |
| JEL: | E40 E61 E62 H21 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:umc:wpaper:2002&r=all |
| By: | E Philip Davis; Dilruba Karim; Dennison Noel |
| Abstract: | Despite the importance of profitability to banks' growth and stability, there have, to our knowledge, been no studies which assess the effect of macroprudential regulation on banks' profitability, a key aspect of the transmission of macroprudential measures. We seek to fill this lacuna with empirical estimates for a sample of 6,010 global banks. These suggest that over 2000-2013, a number of measures of macroprudential policy had a negative and significant effect on banks' profitability as measured by return of average assets and return on average equity. Furthermore, the effect of macroprudential policy on banks' profitability varies between advanced and emerging market economies, with some differences also apparent between retail and universal banks. Assessing our results in combination with existing estimates of the impact of macroprudential policy on credit expansion, some measures such as interbank restrictions, concentration limits and taxes on financial institutions are found to affect lending negatively but not profitability; others, such as loan-to-value ratios, the debt-to-income ratio, domestic currency loan limits and the general countercyclical capital buffer affect both negatively; and some, such as reserve requirements and capital surcharges on SIFIs, affect profitability with no significant effect on lending. Since it is probably desirable for banks to make profits and build up capital from retained earnings, according to our results, the first group are more desirable than the second, and the third is the least desirable. |
| Keywords: | Macroprudential policy, bank profitability, return of average assets, return on average equity |
| JEL: | E44 E58 G17 G28 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:514&r=all |
| By: | Joshua Aizenman; Yothin Jinjarak; Donghyun Park; Huanhuan Zheng |
| Abstract: | We analyze the sovereign bond issuance data of eight major emerging markets (EM) - Brazil, China, India, Indonesia, Mexico, Russia, Turkey and South Africa - in 1970-2018. Our analysis suggests EMs are more likely to issue local-currency sovereign bonds if their currencies appreciated before the global financial crisis of 2008 (GFC). Inflation-targeting monetary policy regime increases the likelihood of issuing local-currency debt before GFC but not after. EMs that offer higher yields are more likely to issue local-currency bond after GFC. EM bonds which are smaller in size, shorter in maturity, or lower in coupon rate are more likely to be issued in local currency. Future data will allow us to test and identify structural changes associated with the COVID-19 pandemic and its aftermath. |
| JEL: | F21 F31 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27030&r=all |
| By: | Bernard Dumas; Marcel R. Savioz |
| Abstract: | We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) household/investors who supply labor with a finite elasticity, consume a large variety of goods that are not perfect substitutes and trade government bonds; (ii) firms that produce those varieties of goods, receive productivity shocks and set prices in a Calvo manner; (iii) a government that collects an exogenous fiscal surplus and acts mechanically, buying and selling bonds in accordance with a Taylor policy rule based on expected inflation. In this setting we show that stock market returns are much less than one-for-one related to inflation over a one-year holding period, which means that stock securities have a strong nominal character. We also show that their nominal character diminishes as the length of the stock-holding period increases, in accordance with empirical evidence. |
| Keywords: | Stock market, monetary policy, inflation-targeting |
| JEL: | E44 E52 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2020-03&r=all |
| By: | Marco Migueis |
| Abstract: | Basel's new standardized approach (SA) for operational risk capital may allow for regulatory arbitrage through the use of insurance. Under the SA, banks will have incentive to insure recurring losses, which can meaningfully reduce capital requirements even as it does not meaningfully decrease tail operational loss exposure. Several alternatives to deal with this regulatory arbitrage strategy are discussed. |
| Date: | 2020–03–30 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfn:2020-03-30&r=all |
| By: | Lieb, Lenard (RS: GSBE Theme Data-Driven Decision-Making, General Economics 2 (Macro)); Schuffels, Johannes (RS: GSBE Theme Data-Driven Decision-Making, General Economics 2 (Macro)) |
| Abstract: | Research interest in the reaction of consumption to expected inflation has increased in recent years due to efforts by central banks to kick-start demand by steering inflation expectations. We contribute to this literature by analysing whether various components of households’ balance sheets determine how consumption reacts to expected inflation. Two channels in particular are conceivable: an increase in inflation expectations can raise consumption through direct increases in expected real wealth, e.g. for households with nominal financial liabilities. By affecting the real interest rate, expected inflation can interact with wealth if only those households can adapt their consumption to current real interest rates that are not budget constrained or sufficiently liquid to shift funds between consumption and savings. We investigate these channels empirically using household-level information on balance sheets, durable consumption, and inflation expectations from the Dutch Central Bank’s Household Survey. We find that household net worth moderates the relation between expected inflation and durable spending decisions. This effect is particularly strong for households with fixed interest rate mortgages. |
| JEL: | D84 E31 E21 |
| Date: | 2020–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:unm:umagsb:2020006&r=all |
| By: | Sergio Correia; Kevin F. Kiernan; Matthew P. Seay; Cindy M. Vojtech |
| Abstract: | This technical note describes the Forward-Looking Analysis of Risk Events (FLARE) model, which is a top-down model that helps assess how well the banking system is positioned to weather exogenous macroeconomic shocks. FLARE estimates banking system capital under varying macroeconomic scenarios, time horizons, and other systemic shocks. |
| Keywords: | Bank capital; Stress testing; Comprehensive capital analysis and review (CCAR); Dodd-Frank Act stress tests (DFAST); Financial stability and risk |
| JEL: | G18 G21 G28 |
| Date: | 2020–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-15&r=all |
| By: | Micossi, Stefano; Peirce, Fabrizia |
| Abstract: | The completion of EMU, and banking union as its critical component, requires that certain taboos in the policy debate are brought out in the open. First, the Commission must stop pretending that Italian public debt is sustainable under current policies and shift from politically motivated forbearance to serious implementation of the SGP and notably its debt rule. Second, it is necessary to acknowledge that crisis management by the ESM is crippled as long as its financial assistance can only be granted after the country in need is close to losing market access and, in addition, this threatens the financial stability of the entire euro area. The already-existing alternative to assist a country that is not respecting the SGP is to utilise the enhanced conditional credit line (ECCL) introduced by the ESM reform, approved by the European Council and awaiting national ratifications, in order to agree on a full-fledged adjustment programme before any euro area member (Italy) comes to the brink again – without any preventive conditions on the sustainability of public debt. And, third, the completion of the banking union requires a reduction of banks’ home sovereign portfolios, that can be incentivised by the introduction of mild concentration charges. However, the system will not work without simultaneously offering the banks and financial investors in general a true European safe asset, fully guaranteed by its member states. Our proposal is that such a safe asset could be offered by the ESM, which would purchase in exchange the sovereigns held by the ESCB as a result of the quantitative easing asset purchase programme. The risk of losses on these sovereigns would continue to lie with the national central banks, thus avoiding the transfer of new risks to the ESM. This Policy Insight is being published simultaneously as a LUISS SEP Policy Brief. |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:eps:cepswp:26688&r=all |
| By: | Matteo Luciani |
| Abstract: | We use a dynamic factor model to disentangle changes in prices due to economy-wide (common) shocks, from changes in prices due to idiosyncratic shocks. Using 146 disaggregated individual price series from the U.S. PCE price index, we find that most of the fluctuations in core PCE prices observed since 2010 have been idiosyncratic in nature. Moreover, we find that common core inflation responds to economic slack, while the idiosyncratic component does not. That said, even after filtering out idiosyncratic factors, the estimated Phillips curve is extremely flat post-1995. Therefore, our results suggest that the flattening of the Phillips curve is the result of macroeconomic forces. |
| Keywords: | Core inflation; Dynamic factor model; Disaggregated consumer prices; Monetary policy |
| JEL: | C32 C43 C55 E31 E37 |
| Date: | 2020–03–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-24&r=all |
| By: | Joao Rafael Cunha (University of St Andrews) |
| Abstract: | In this chapter, I argue that the deregulatory process that started in the 1980s in the banking industry in the United States has changed the profile of this sector. Between the Great Depression and the 1980s, the banking sector in the United States was a stable, yet not competitive sector. The financial deregulation of the 1980s changed this sector to a competitive, yet unstable one. This deregulatory process occurred mostly as a response to the economic conditions of the 1970s. |
| Keywords: | Financial Regulation, Deregulation, United States Banks |
| JEL: | G21 G28 G38 K20 N22 N42 |
| Date: | 2020–04–29 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:2003&r=all |
| By: | Raphael A. Auer; Stijn Claessens |
| Abstract: | Cryptocurrencies are often thought to operate out of the reach of national regulation, but in fact their valuations, transaction volumes and user bases react substantially to news about regulatory actions. The impact depends on the specific regulatory category to which the news relates: events related to general bans on cryptocurrencies or to their treatment under securities law have the greatest adverse effect, followed by news on combating money laundering and the financing of terrorism, and on restricting the interoperability of cryptocurrencies with regulated markets. News pointing to the establishment of specific legal frameworks tailored to cryptocurrencies and initial coin offerings coincides with strong market gains. These results suggest that cryptocurrency markets rely on regulated financial institutions to operate and that these markets are segmented across jurisdictions. |
| Keywords: | digital currencies, cryptocurrencies, bitcoin, ethereum, distributed ledger technology, regulation, financial markets, event studies |
| JEL: | E42 E51 F31 G12 G28 G32 G38 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8228&r=all |
| By: | Pierpaolo Benigno (University of Bern and EIEF); Salvatore Nisticò |
| Abstract: | An economy plagued by a slump and in a liquidity trap has some options to exit the crisis. We discuss “helicopter money†and other equivalent policies that can reflate the economy and boost consumption. In the framework analysed – where lump-sum transfers may be the only e↵ective fiscal response, like in the current pandemic crisis – the central bank, and only the central bank, is the rescuer of last resort of the economy. Fiscal policy is bounded by solvency constraints unless the central bank backs treasury’s debt. |
| Keywords: | Helicopter money, ZLB, Pandemic Crisis |
| JEL: | E50 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:2001&r=all |
| By: | Samuel Demeulemeester (TRIANGLE - Triangle : action, discours, pensée politique et économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet [Saint-Étienne] - IEP Lyon - Sciences Po Lyon - Institut d'études politiques de Lyon - Université de Lyon - CNRS - Centre National de la Recherche Scientifique) |
| Abstract: | This chapter discusses the "seigniorage argument" in favor of public money issuance, according to which public finances could be improved if the state more fully exercised the privilege of money creation, which is, today, largely shared with private banks. (...) |
| Keywords: | 100% Money,Money Creation,Public Debt,Seigniorage,Chicago Plan,Irving Fisher |
| Date: | 2020–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:hal:journl:hal-02495683&r=all |
| By: | Abuselidze, George |
| Abstract: | In the work it is focused on the determining factor of interbank competition, the level of competitiveness between banks and legislative regulations. They are also studied in the banking system of Baltic states. The purpose of the work is to identify existence of interbank competition, its causing reasons determining and reviewing regulatory ways, as well as identifying the impacts of National Bank regulations and developing recommendations. During the survey, in-depth analysis of the issue, to identify the existing problems and determine the ways of its solution, to comprehend the comparative analysis, conclusions and recommendations, was studied Georgian and EU (including the Baltic countries) public information about commercial banks, regulation documents, internet sources, which are characterized by a high degree of reliability. At the final stage, it was evaluated the existence of competition in the Georgian banking system and determined its stimulating factors. |
| Keywords: | Central Banks and their policies; Commercial banks; Interbank competition; EU; Georgia |
| JEL: | E52 E58 G21 G28 |
| Date: | 2019 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:99899&r=all |
| By: | Hertrich, Markus |
| Abstract: | From September 2011 to January 2015, the Swiss National Bank (SNB) implemented a minimum exchange rate regime (i.e. a one-sided target zone) vis-a-vis the euro to fight deflationary pressures in the aftermath of the Great Financial Crisis. During this period of unconventional monetary policy, the SNB faced mounting criticism from the media and the public on the sizable balance sheet risks that it was incurring. Motivated by this episode, I present a structural model embedded within the target zone framework developed by Krugman (1991) that allows monetary authorities to determine ex-ante the maximum size of foreign exchange market interventions that are expected to be necessary to implement and maintain a one-sided target zone. An empirical application of the proposed model to the aforementioned episode reveals that it is well suited to explain the actual size of these interventions and that, in January 2015, the SNB's euro purchases might indeed have been large without the abandonment of the minimum exchange rate regime, which is consistent with the official statements of the SNB in the aftermath of that episode. |
| Keywords: | Foreign exchange interventions,minimum exchange rate,reaction function,reflected Brownian motion,Swiss franc,Swiss National Bank,target zone,unconventional monetary policy |
| JEL: | C43 C51 E32 E37 E43 G12 R21 R28 R31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:212020&r=all |
| By: | Jager, Maximilian; Siemsen, Thomas; Vilsmeier, Johannes |
| Abstract: | We introduce a novel simulation-based network approach, which provides full-edged distributions of potential interbank losses. Based on those distributions we propose measures for (i) systemic importance of single banks, (ii) vulnerability of single banks, and (iii) vulnerability of the whole sector. The framework can be used for the calibration of macro-prudential capital charges, the assessment of systemic risks in the banking sector, and for the calculation of banks' interbank loss distributions in general. Our application to German regulatory data from End-2016 shows that the German interbank network was at that time in general resilient to the default of large banks, i.e. did not exhibit substantial contagion risk. Even though up to four contagion defaults could occur due to an exogenous shock, the system-wide 99.9% VaR barely exceeds 1.5% of banks' CET 1 capital. For single institutions, however, we found indications for elevated vulnerabilities and hence the need for a close supervision. |
| Keywords: | Interbank contagion,credit risk,systemic risk,loss simulation |
| JEL: | G17 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:232020&r=all |
| By: | Peter Wierts; Harro Boven |
| Abstract: | In principle, DNB has a favourable attitude to central bank digital currency (CBDC) which is money issued by a central bank and generally accessible to households and businesses. We believe the continued use of a public form of money is important. After all, the fungibility between private money and public money bolsters confidence in money when it is needed most - in periods of uncertainty including war, financial crisis or disruption of private payments. It is at those times that the demand for public money increases. Cash has fulfilled this role, but given the decrease in the use of cash this may be set to change in the future. The trend of declining use of cash has long been ongoing and appears to be of a structural nature. CBDC could provide the desired policy options to protect the balance between public and private forms of money and safeguard the fungibility between private and public money.The aim of this report is to contribute to the public debate on CBDC. The introduction of CBDC would involve a structural reform affecting users and the financial system as well as DNB's tasks and objectives. The social impact of such a reform requires broad public debate both in the Netherlands and the euro area as a whole. This study therefore serves as DNB's input for the debate on CBDC within the euro area. The euro was introduced in the Netherlands in 1999, involving a transfer of monetary policy autonomy to the European System of Central Banks (ESCB). That holds for CBDC as well. As a consequence, this study also looks at the European institutional and legal framework for CBDC. |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbocs:20-01&r=all |
| By: | Michael D. Bordo; Christopher M. Meissner |
| Abstract: | Was foreign currency denominated debt a determinant of exchange rate and monetary policy during the Great Depression? Policy makers of the day thought so. High-frequency bond price data show depreciation was associated with elevated risk premia on public debt. We also show that foreign currency debt was a determinant of exchange rate policy during the Great Depression. The gold standard heightened exposure to global shocks and prolonged the Great Depression. Why then did countries hesitate to jettison the monetary technology? Multiple factors have been identified in the literature ranging from economic and political considerations to social preferences for monetary stability. We find that foreign currency debt and trade patterns, both shaped by history and geography, had a significant impact on these choices and hence on economic stability. The effect is likely to be about half as large as the output gap in determining exchange rate policy. |
| JEL: | F31 F34 N10 N2 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27067&r=all |
| By: | Michael C. Nwogugu |
| Abstract: | Securitization has become prevalent in many countries, and has substantial impact on government monetary policy and fiscal policy which have not yet been adequately analyzed in the existing literature. This article develops optimal conditions for efficient securitization, identifies constraints on securitization, and analyzes the interactions of capital-reserve requirements and securitization. This article introduces new decision models and theories of asset-securitization. |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2005.01706&r=all |
| By: | Victoria Ivashina; Luc Laeven; Enrique Moral-Benito |
| Abstract: | Using credit-registry data for Spain and Peru, we document that four main types of commercial credit—asset-based loans, cash-flow loans, trade finance and leasing—are easily identifiable and represent the bulk of corporate credit. We show that credit dynamics and bank lending channels vary across these loan types. Moreover, aggregate credit supply shocks previously identified in the literature appear to be driven by individual loan types. The effects of monetary policy and the effects of the financial crisis propagating through banks’ balance sheets are primarily driven by cash-flow loans, whereas asset-based credit is mostly insensitive to these types of effects. |
| JEL: | E0 G21 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27056&r=all |
| By: | Ahnert, Lukas; Vogt, Pascal; Vonhoff, Volker; Weigert, Florian |
| Abstract: | This paper investigates the impact of stress testing results on bank's equity and CDS performance using a large sample of twelve tests from the US CCAR and the European EBA regimes in the time period from 2010 to 2018. We find that passing banks experience positive abnormal equity returns and tighter CDS spreads, while failing banks show strong drops in equity prices and widening CDS spreads. We also document strong market reactions at the announcement date of the stress tests. Although the institutional designs between US and European stress tests differ, we generally observe similar capital market consequences for both regimes. We complement existing studies by investigating the predictability of stress test outcomes and evaluating strategic options for affected banks and investors. |
| Keywords: | Banks,Stress Testing,Equity Performance,CDS Performance |
| JEL: | G00 G21 G28 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cfrwps:2003&r=all |
| By: | Pelizzon, Loriana; Riedel, Max; Simon, Zorka; Subrahmanyam, Marti G. |
| Abstract: | We study how the Eurosystem Collateral Framework for corporate bonds helps the European Central Bank (ECB) fulfill its policy mandate. Using the ECBs eligibility list, we identify the first inclusion date of both bonds and issuers. We find that due to the increased supply and demand for pledgeable collateral following eligibility, (i) securities lending market trading activity increases, (ii) eligible bonds have lower yields, and (iii) the liquidity of newly-issued bonds declines, whereas the liquidity of older bonds is una↵ected/improves. Corporate bond lending relaxes the constraint of limited collateral supply, thereby making the market more cohesive and complete. Following eligibility, bond-issuing firms reduce bank debt and expand corporate bond issuance, thus increasing overall debt size and extending maturity. |
| Keywords: | Collateral Policy,ECB,Corporate Bonds,Corporate Debt Structure,Eligibility premium |
| JEL: | G12 G14 G32 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:safewp:275&r=all |
| By: | Olivier Coibion (University of Texas at Austin); Yuriy Gorodnichenko (University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics); Lorenz Kueng (University of Lugano - Faculty of Economics; Swiss Finance Institute; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Northwestern University - Kellogg School of Management); John Silvia (Wells Fargo) |
| Abstract: | We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy. |
| Keywords: | Monetary policy, income inequality, consumption inequality |
| JEL: | E3 E4 E5 |
| Date: | 2020–04 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2036&r=all |