nep-cba New Economics Papers
on Central Banking
Issue of 2020‒05‒25
thirteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength By Francesco Bianchi; Renato Faccini; Leonardo Melosi
  2. Does monetary policy impact international market co-movements? By Caporin, Massimiliano; Pelizzon, Loriana; Plazzi, Alberto
  3. Stressed banks? Evidence from the largest-ever supervisory review By Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Paul E. Soto
  4. US dollar funding markets during the Covid-19 crisis - the money market fund turmoil By Egemen Eren; Andreas Schrimpf; Vladyslav Sushko
  5. How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers By Katya Kartashova; Xiaoqing Zhou
  6. The asymmetric effects of monetary policy on stock price bubbles By Christophe Blot; Paul Hubert; Fabien Labondance
  7. Public Liquidity Demand and Central Bank Independence By Jean Barthélemy; Eric Mengus; Guillaume Plantin
  8. Optimal Bailouts and the Doom Loop with a Financial Network By Agostino Capponi; Felix C. Corell; Joseph E. Stiglitz
  9. COVID-19 uncertainty and monetary policy By PINSHI, Christian P.
  10. Financial Conditions Index as a predictor in low-inflation environment By Oreste Napolitano; Salvatore Capasso; Ana Laura Viveros
  11. How should Central Banks accumulate reserves? By Federico Sturzenegger
  12. Quantitative Easing, Investment, and Safe Assets: The Corporate-Bond Lending Channel By Erasmo Giambona; Rafael Matta; José-Luis Peydró; Ye Wang
  13. Trade Credit and the Transmission of Unconventional Monetary Policy By Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires

  1. By: Francesco Bianchi; Renato Faccini; Leonardo Melosi
    Abstract: The COVID pandemic hit the US economy at a time in which the ability of policymakers to react to adverse shocks is greatly reduced. The current low interest rate environment limits the tools the central bank can use to stabilize the economy, while the large public debt curtails the efficacy of fiscal interventions by inducing expectations of costly fiscal adjustments. Against this background, we study the implications of a coordinated fiscal and monetary strategy aiming at creating a controlled rise of inflation to wear away a targeted fraction of debt. Under the coordinated strategy, the fiscal authority introduces an emergency budget with no provisions on how it will be balanced, while the monetary authority tolerates a temporary increase in inflation to accommodate the emergency budget. The coordinated strategy enhances the efficacy of the fiscal stimulus planned in response to the COVID pandemic and allows the Federal Reserve to correct a prolonged period of below-target inflation. The strategy results in only moderate levels of inflation by separating long-run fiscal sustainability from a short-run policy intervention.
    JEL: E30 E52 E62
    Date: 2020–05
  2. By: Caporin, Massimiliano; Pelizzon, Loriana; Plazzi, Alberto
    Abstract: We show that FED policy announcements lead to a significant increase in international comovements in the cross-section of equity and in particular sovereign CDS markets. The relaxation of unconventionary monetary policies is felt strongly by emerging markets, and by countries that are open to the trading of goods and flows, even in the presence of floating exchange rates. It also impacts closed economies whose currencies are pegged to the dollar. This evidence is consistent with recent theories of a global financial cycle and the pricing of a FED's put. In contrast, ECB announcements hardly affect comovements, even in the Eurozone.
    Keywords: Unconventional Monetary policy,Quantitative easing,Mundellian trilemma,Comovements,Sovereign credit risk
    JEL: E58 G12 G15
    Date: 2020
  3. By: Puriya Abbassi; Rajkamal Iyer; José-Luis Peydró; Paul E. Soto
    Abstract: Regulation needs effective supervision; but regulated entities may deviate with unobserved actions. For identification, we analyze banks, exploiting ECB's asset-quality-review (AQR) and supervisory security and credit registers. After AQR announcement, reviewed banks reduce riskier securities and credit (also overall securities and credit supply), with largest impact on riskiest securities (not on riskiest credit), and immediate negative spillovers on asset prices and firm-level credit supply. Exposed (unregulated) nonbanks buy the shed risk. AQR drives the results, not the end-of-year. After AQR compliance, reviewed banks reload riskier securities, but not riskier credit, with medium-term negative firm-level real effects (costs of supervision/safe-assets increase).
    Keywords: Asset quality review; stress tests; supervision; risk-masking; costs of safe assets
    JEL: E58 G21 G28 H63 L51
    Date: 2020–02
  4. By: Egemen Eren; Andreas Schrimpf; Vladyslav Sushko
    Abstract: Short-term dollar funding markets experienced severe dislocations in mid-March 2020, with funding diverted from unsecured funding markets as investors withdrew and switched to secured funding markets and government MMFs. Outflows from US prime MMFs led to a loss of funding for banks and a significant shortening of funding maturities; this precipitated spikes in indicators of bank funding costs, such as the LIBOR-OIS spread, despite banks not being at the epicentre of the liquidity squeeze. The turmoil highlights broader lessons for MMF regulation, the role of non-banks for monetary policy implementation, and the role of the central bank during stress.
    Date: 2020–05–12
  5. By: Katya Kartashova; Xiaoqing Zhou
    Abstract: We study the causal effect of mortgage rate changes on consumer spending, debt repayment, and defaults during an expansionary and a contractionary monetary policy episode in Canada. Our identification takes advantage of the fact that the interest rates of short-term fixed-rate mortgages (the dominant product in Canada’s mortgage market) have to be reset according to the prevailing market interest rates at predetermined time intervals. Our empirical strategy exploits this exogenous variation in the timing of mortgage rate resets. We find asymmetric responses of consumer durable spending, deleveraging, and defaults. These results can be rationalized by the cash-flow effect in conjunction with changes in consumers’ expectations about future interest rates. Our findings help us to understand the responses of the household sector to changes in the interest rate, especially in countries where variable-rate, adjustable-rate, and short-term fixed-rate mortgages are prevalent.
    Keywords: Credit and credit aggregates; Interest rates; Monetary policy; Transmission of monetary policy
    JEL: D14 E52 G21 R31
    Date: 2020–05
  6. By: Christophe Blot (Sciences Po-OFCE, Université Paris Nanterre - EconomiX); Paul Hubert (Sciences Po-OFCE); Fabien Labondance (Université de Bourgogne Franche-Comté – CRESE, Sciences Po-OFCE)
    Abstract: Is the effect of US monetary policy on stock price bubbles asymmetric? We use a range of measures of excessive stock price variations that are unrelated to business cycle fluctuations. We find that the effects of monetary policy are asymmetric so responses to restrictive and expansionary shocks must be differentiated. The effects of restrictive monetary policy are more powerful than the effects of expansionary policies. We also find evidence that the asymmetric effect of monetary policy is state-contingent and depends on monetary, credit and business cycles as well as stock price boom -bust dynamics.
    Keywords: Non-linearity, Equity, Booms and busts, Federal Reserve.
    JEL: E44 G12 E52
    Date: 2020–05
  7. By: Jean Barthélemy; Eric Mengus; Guillaume Plantin
    Abstract: This paper studies how private demand for public liquidity affects the independence of a central bank vis-à-vis the fiscal authority. Whereas supplying liquidity to the private sector creates degrees of freedom for fiscal and monetary authorities vis-à-vis each other, we show that the authority that is most able to attract private liquidity demand can ultimately impose its views to the other.
    Keywords: : Central Bank Independence, Low Rates, Game of Chicken, Demand for Liquidity.
    JEL: E50 E42 E63 C72
    Date: 2020
  8. By: Agostino Capponi; Felix C. Corell; Joseph E. Stiglitz
    Abstract: Banks usually hold large amounts of domestic public debt which makes them vulnerable to their own sovereign’s default risk. At the same time, governments often resort to costly public bailouts when their domestic banking sector is in trouble. We investigate how the interbank network structure and the distribution of sovereign debt holdings jointly affect the optimal bailout policy in the presence of this "doom loop". Rescuing banks with high domestic sovereign exposure is optimal if these banks are sufficiently central in the network, even though that requires larger bailout expenditures than rescuing low-exposure banks. Our findings imply that highly central banks can use exposure to their own government as a strategic tool to increase the likelihood of being bailed out. Our model thus illustrates how the "doom loop" exacerbates the "too interconnected to fail" problem in banking.
    JEL: G01 G21 G28 H63 H81
    Date: 2020–05
  9. By: PINSHI, Christian P.
    Abstract: The uncertainty of COVID-19 seriously disrupts the Congolese economy through various macroeconomic channels. This pandemic is influencing the management of monetary policy in its role as regulator of aggregate demand and guarantor of macroeconomic stability. We use a Bayesian VAR framework (BVAR) to provide an analysis of the COVID uncertainty shock on the economy and the monetary policy response. The analysis shows important conclusions. The uncertainty effect of COVID-19 hits unprecedented aggregate demand and the economy. In addition, it undermines the action of monetary policy to soften this fall in aggregate demand and curb inflation impacted by the exchange rate effect. We suggest a development of unconventional devices for a gradual recovery of the economy.
    Keywords: Uncertainty, COVID-19, Monetary policy, Bayesian VAR
    JEL: C32 E32 E51 E52 E58
    Date: 2020–05
  10. By: Oreste Napolitano (University of Naples Parthenope); Salvatore Capasso (University of Naples Parthenope); Ana Laura Viveros (Universidad Nacional Autónoma de México)
    Abstract: The nature of the ?nancial crisis in 2008 imposed new challenges for macroe-conomic theory and policy-makers. In this context, a ?nancial conditions index(FCI) could be a useful tool to identify the state of ?nancial conditions in acountry. We construct a FCI for Mexico to analyse the role of prices of ?nancialassets in the formulation of monetary policy under the in?ation-targeting regime.We estimate FCIs by two di?erent methodologies using monthly data from 1990to 2017. The variables are considered according to the mechanismof transmission of monetary policy and incorporating other important ?nancialvariables, those characterise developing countries. Our results show that FCI isa good predictor in a low/non-in?ation environment.
    Keywords: Financial Conditions, Monetary policy, Vector autoregressive models
    JEL: E52 E58 C01
    Date: 2020–02
  11. By: Federico Sturzenegger (Universidad de San Andres)
    Abstract: There has been substantial research on the benefits of accumulating foreign reserves, but less on the relative merits of how to finance those reserves. Does it matter if reserves are accumulated through unsterilized purchases, by issuing domestic currency liabilities or by issuing foreign currency liabilities? This paper explores this question by looking at the impact of different ways to finance reserve accumulation on country spreads. The results suggest that the financing source is not irrelevant. Accumulating reserves through unsterilized interventions or by issuing domestic debt, do reduce country risk. On the contrary accumulating reserves by issuing foreign liabilities seems not to have a meaningful effect.
    Keywords: reserves, spreads, central banking
    JEL: F3 F4 E5
    Date: 2020–05
  12. By: Erasmo Giambona; Rafael Matta; José-Luis Peydró; Ye Wang
    Abstract: We show that Quantitative Easing (QE) stimulates investment via a corporate-bond lending channel. Fed's large-scale asset purchases of MBS and treasuries through QE creates a vacuum of safe assets, prompting safer firms to invest more by issuing relatively "safe" bonds. Using micro-data around QE, we find that QE increases firm-level investment by 7.4 percentage points for firms with bond market access. This growth is financed with senior bonds. We find no evidence of higher shareholders' payouts associated to QE. The robust findings are consistent with a model in which reducing the supply of government debt lowers "safe" corporate bond yields, stimulating investment.
    Keywords: quantitative easing (QE), corporate-bond lending channel, investment, safe assets, financing
    JEL: E5 G01 G31 G32 G38
    Date: 2020–05
  13. By: Manuel Adelino; Miguel A. Ferreira; Mariassunta Giannetti; Pedro Pires
    Abstract: We show that trade credit in production networks is important for the transmission of unconventional monetary policy. We find that firms with bonds eligible for purchase under the European Central Bank’s Corporate Sector Purchase Program act as financial intermediaries and extend more trade credit to their customers. The increase in trade credit flows is more pronounced from core countries to periphery countries and towards financially constrained customers. Customers increase investment and employment in response to the additional financing, while suppliers with eligible bonds increase their customer base, potentially favoring upstream industry concentration. Our findings suggest that the trade credit channel of monetary policy produces heterogeneous effects on regions, industries, and firms.
    JEL: E50 G30
    Date: 2020–05

This nep-cba issue is ©2020 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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