nep-cba New Economics Papers
on Central Banking
Issue of 2020‒06‒08
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. ECB Monetary Policy and Commodity Prices By Shahriyar Aliyev; Evzen Kocenda
  2. Releasing the CCyB to support the economy in a time of stress By De Nora, Giorgia; O'Brien, Eoin; O'Brien, Martin
  3. U.S. Monetary and Fiscal Policies - Conflict or Cooperation? By Xiaoshan Chen; Eric M. Leeper; Campbell Leith
  4. Shadow banking and the design of macroprudential policy in a monetary union By Philipp Kirchner; Benjamin Schwanebeck
  5. Negative Monetary Policy Rates and Systemic Banks’ Risk-Taking: Evidence from the Euro Area Securities Register By Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
  6. Expansionary Yet Different: Credit Supply and Real Effects of Negative Interest Rate Policy By Bottero, Margherita; Minoiu, Camelia; Peydró, José-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
  7. Quality is our asset: the international transmission of liquidity regulation By Reinhardt, Dennis; Reynolds, Stephen; Sowerbutts, Rhiannon; van Hombeeck, Carlos
  8. Monetary Policy at Work: Security and Credit Application Registers Evidence By Peydró, José-Luis; Polo, Andrea; Sette, Enrico
  9. The Rise of Shadow Banking: Evidence from Capital Regulation By Irani, Rustom; Iyer, Rajkamal; Peydró, José-Luis; Meisenzahl, Ralf
  10. Macroeconomic reversal rate: evidence from a nonlinear IS-curve By Jan Willem van den End; Paul Konietschke; Anna Samarina; Irina Stanga
  11. COVID-19 and Financial Markets: A Panel Analysis for European Countries By Jens Klose; Peter Tillmann
  12. Twin default crises By Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik; Ramirez, Juan-Rubio
  13. Foundations of system-wide financial stress testing with heterogeneous institutions By Farmer, J Doyne; Kleinnijenhuis, Alissa M; Nahai-Williamson, Paul; Wetzer, Thom
  14. Who’s afraid of euro area monetary tightening? CESEE shouldn’t By Geis, André; Moder, Isabella; Schuler, Tobias
  15. Macroprudential capital requirements with non-bank finance By Dempsey, Kyle P.
  16. A Joint Foreign Currency Risk Management Approach for Sovereign Assets and Liabilities By Cangoz, Mehmet Coskun; Sulla, Olga; Wang, ChunLan; Dychala, Christopher Benjamin
  17. The Effect of the Central Bank Liquidity Support during Pandemics: Evidence from the 1918 Influenza Pandemic By Haelim Anderson; Jin-Wook Chang; Adam Copeland
  18. Monetary Policy Uncertainty and Firm Dynamics By Stefano Fasani; Haroon Mumtaz; Lorenza Rossi

  1. By: Shahriyar Aliyev (Institute of Economic Studies, Charles University, Opletalova 26, 110 00 Prague, Czech Republic.); Evzen Kocenda (Institute of Economic Studies, Charles University, Opletalova 26, 110 00 Prague, Czech Republic; Institute of Information Theory and Automation of the CAS, Prague; CESifo, Munich; IOS Regensburg; and the Euro Area Business Cycle Network.)
    Abstract: We analyze the impact of the ECB monetary policies on global aggregate and sectoral commodity prices using monthly data from January 2001 till August 2019. We employ a SVAR model and assess separately period of conventional monetary policy before global financial crisis (GFC) and unconventional monetary policy during post-crisis period. Our key results indicate that contractionary monetary policy shocks have positive effects on the aggregate and sectoral commodity prices during both conventional and unconvetional monetary policy periods. The effect is statistically significant for aggregate commodity prices during post-crisis period. In terms of sectoral impact, the effect is statistically significant for food prices in both periods and for fuel prices during post-crisis period; other commodities display positive but statistically insignificant responses. Further, we demonstrate that the impact of the ECB monetary policy on commodity prices increased remarkably after the GFC. Our results also suggest that the effect of the ECB monetary policy on commodity prices does not transmit directly through market demand and supply expectations channel, but rather through the exchange rate channel that influences the European market demand directly.
    Keywords: European Central Bank, commodity prices, short-term interest rates, unconventional monetary policy, Structural Vector Autoregressive model, exchange rates.
    JEL: C54 E43 E58 F31 G15 Q02
    Date: 2020–04
  2. By: De Nora, Giorgia (Central Bank of Ireland); O'Brien, Eoin (Central Bank of Ireland); O'Brien, Martin (Central Bank of Ireland)
    Abstract: This note outlines the rationale underlying the release of the Countercyclical Capital Buffer (CCyB) in Ireland in the light of the recent COVID-19 developments. The COVID-19 outbreak presents an exceptional shock, triggering the materialisation of potential challenges for financial stability. An active use of macroprudential policy, and in particular the release of the CCyB, allows the banking system to absorb the impact of this shock. In doing so, it limits the scope for the banking system to amplify the shock to the detriment of the real economy, by facilitating banks maintaining a sustainable supply of credit to the economy in the challenging times ahead. We discuss how this particular policy response fits in the Central Bank’s CCyB framework, how it interacts with other prudential policy measures, and the size of capital relief and potential additional credit supply capacity it affords.
    Date: 2020–04
  3. By: Xiaoshan Chen; Eric M. Leeper; Campbell Leith
    Abstract: We estimate a model in which both fiscal and monetary policy behavior arise from the optimizing behavior of distinct monetary and fiscal authorities. Optimal time-consistent policy behavior fits U.S. time series at least as well as rules-based behavior. American policy makers have often been in conflict. After the Volcker disinflation, policies did not achieve the conventional mix of a conservative monetary policy paired with a debt-stabilizing fiscal policy. If credible, a conservative central bank that follows a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. Enhancing cooperation between policy makers without an ability to commit would be detrimental to welfare.
    Keywords: Bayesian Estimation, Monetary and Fiscal Policy Interactions, Optimal Policy, Markov Switching
    JEL: C11 E31 E63
    Date: 2019–05
  4. By: Philipp Kirchner (University of Kassel); Benjamin Schwanebeck (University of Hagen)
    Abstract: This paper studies the interaction of international shadow banking with monetary and macroprudential policy in a two-country currency union DSGE model. We fiÂ…nd evidence that cross-country fiÂ…nancial integration through the shadow banking system is a source of fiÂ…nancial contagion in response to idiosyncratic real and fiÂ…nancial shocks due to harmonization of fiÂ…nancial spheres. The resulting high degree of business cycle synchronization across countries, especially for Â…financial variables, makes union-wide policy tools more ffective. Nevertheless, optimal monetary policy at the union-level is too blunt an instrument to adequately stabilize business cycle downturns and needs to be accompanied by macroprudential regulation. Our welfare analysis reveals that the gains from the availability of country-speciÂ…c prudential tools vanish with the degree of fiÂ…nancial integration as union-wide macroprudential regulation is able to effectively reduce losses among the union members.
    Keywords: fiÂ…nancial frictions; shadow banking; currency union; Â…financial integration; macroprudential policy
    JEL: E32 E44 E58 F45
    Date: 2020
  5. By: Bubeck, Johannes; Maddaloni, Angela; Peydró, José-Luis
    Abstract: We show that negative monetary policy rates induce systemic banks to reach-for-yield. For identification, we exploit the introduction of negative deposit rates by the European Central Bank in June 2014 and a novel securities register for the 26 largest euro area banking groups. Banks with more customer deposits are negatively affected by negative rates, as they do not pass negative rates to retail customers, in turn investing more in securities, especially in those yielding higher returns. Effects are stronger for less capitalized banks, private sector (financial and non-financial) securities and dollar-denominated securities. Affected banks also take higher risk in loans.
    Keywords: negative rates,non-standard monetary policy,reach-for-yield,securities,banks
    JEL: E43 E52 E58 G01 G21
    Date: 2020
  6. By: Bottero, Margherita; Minoiu, Camelia; Peydró, José-Luis; Polo, Andrea; Presbitero, Andrea; Sette, Enrico
    Abstract: We show that negative interest rate policy (NIRP) has expansionary effects on bank credit supply—and the real economy—through a portfolio rebalancing channel, and that, by shifting down and flattening the yield curve, NIRP differs from rate cuts just above the zero-lower-bound. For identification, we exploit ECB’s NIRP and matched administrative datasets from Italy. NIRP affects banks with higher net short-term interbank positions or, more broadly, more liquid balance-sheets. NIRPaffected banks reduce liquid assets, expand credit supply (to ex-ante riskier firms), and cut rates, inducing sizable firm-level real effects. By contrast, there is no evidence of a contractionary retail deposit channel.
    Keywords: negative interest rates,portfolio rebalancing,bank lending channel and of monetary policy,liquidity management,Eurozone crisis
    JEL: E52 E58 G01 G21 G28
    Date: 2020
  7. By: Reinhardt, Dennis (Bank of England); Reynolds, Stephen (Bank of England); Sowerbutts, Rhiannon (Bank of England); van Hombeeck, Carlos (Bank of England)
    Abstract: We examine how banks’ cross-border lending reacts to changes in liquidity regulation using a new dataset on Individual Liquidity Guidance (ILG), which was enacted in the UK from 2000 to 2015 and is similar to the Basel III Liquidity Coverage Ratio. A one percentage point increase in liquidity requirements to total assets reduces UK resident banks’ cross-border lending growth by around 0.6 percentage points and both bank and non-bank lending are affected. But quality matters: an increase in the holdings of High Quality Liquid Asset (HQLA) qualifying sovereign debt offsets some of the reduction in total cross-border lending growth. Furthermore, the strongest reduction is driven by foreign subsidiaries from countries where sovereigns do not issue HQLA; in contrast subsidiaries from countries issuing HQLA are able to protect their lending to unrelated entities and cut their intragroup lending instead. Banks with a higher deposit share as a consequence of established retail operations, such as those headquartered in the UK, are also able to offset the effects of increases of liquidity requirement on cross-border lending.
    Keywords: Liquidity regulation; liquidity requirements; external lending; intensity of prudential regulations
    JEL: F36 G21 G28
    Date: 2020–05–21
  8. By: Peydró, José-Luis; Polo, Andrea; Sette, Enrico
    Abstract: Monetary policy transmission may be impaired if banks rebalance their portfolios towards securities to e.g. risk-shift or hoard liquidity. We identify the bank lending and risk-taking channels by exploiting – Italian’s unique – credit and security registers. In crisis times, with higher ECB liquidity, less capitalized banks react by increasing securities over credit supply, inducing worse firm-level real effects. However, they buy securities with lower yields and haircuts, thus reaching-for-safety and liquidity. Differently, in pre-crisis time, securities do not crowd-out credit supply. The substitution from lending to securities in crisis times helps less capitalized banks to repair their balance-sheets and then restart credit supply with a one year-lag.
    Keywords: securities,credit supply,bank capital,monetary policy,reach-for-yield,haircuts,held to maturity,available for sale,trading book,Euro Area Sovereign Debt Crisis
    JEL: G01 G21 G28 E52 E58
    Date: 2020
  9. By: Irani, Rustom; Iyer, Rajkamal; Peydró, José-Luis; Meisenzahl, Ralf
    Abstract: We investigate the connections between bank capital regulation and the prevalence of lightly regulated nonbanks (shadow banks) in the U.S. corporate loan market. For identification, we exploit a supervisory credit register of syndicated loans, loan-time fixed-effects, and shocks to capital requirements arising from surprise features of the U.S. implementation of Basel III. We find that less-capitalized banks reduce loan retention, particularly among loans with higher capital requirements and at times when capital is scarce, and nonbanks step in. This reallocation has important spillovers: during the 2008 crisis, loans funded by nonbanks with fragile liabilities are less likely to be rolled over and experience greater price volatility.
    Keywords: shadow banks,risk-based capital regulation,Basel III,intercations between banks and nonbanks,trading by banks,non-performing loans
    JEL: G01 G21 G23 G28
    Date: 2020
  10. By: Jan Willem van den End; Paul Konietschke; Anna Samarina; Irina Stanga
    Abstract: This paper examines the link between interest rates and expenditures, known as the IS-curve. Specifically, we analyse whether the reaction of spending behaviour to monetary policy changes is different in a low compared to a normal interest rate environment. We estimate the nonlinear IS-curve for the euro area and the five largest euro area countries over the period 1999q2-2019q1 and study whether the IS-curve relationship is regime-dependent. We employ smooth-transition local projections to estimate the impulse responses of the output gap, the growth of consumption, investment, and savings to a contractionary monetary policy shock under normal and low interest rate regimes. Our results point to a possible flattening of the IS-curve, related to substitution effects becoming weaker relative to income effects in a low interest rate regime.
    Keywords: IS-curve; monetary policy; low interest rate environment
    JEL: E21 E22 E43 E52
    Date: 2020–05
  11. By: Jens Klose (THM Business School Giessen); Peter Tillmann (Justus Liebig University Giessen)
    Abstract: In order to fight the economic consequences of the COVID-19 pandemic, monetary and fiscal policy announced a large variety of support packages which are often unprecedented in size. In this paper, we provide an empirical analysis of the responses of European financial markets to these policy announcements. The key contribution is a very granular set of policy announcements, both at the national and the European level. We also differentiate between the first announcement in a series of policies and the subsequent announcements because the initial steps were often seen as bad news about the state of the economy. In a panel model we find that monetary policy, in particular through asset purchases, is effective in supporting the real economy and easing the pressure on governmental finances. Across all subsets of polices, it seems that monetary policy is more effective in supporting the stock market than national fiscal policy, though markets clearly distinguish between different types of policies.
    Keywords: event study, announcements, fiscal policy, monetary policy, European Monetary Union
    JEL: E44 E52 E62
    Date: 2020
  12. By: Mendicino, Caterina; Nikolov, Kalin; Suarez, Javier; Supera, Dominik; Ramirez, Juan-Rubio
    Abstract: We study the interaction between borrowers' and banks' solvency in a quantitative macroeconomic model with financial frictions in which bank assets are a portfolio of defaultable loans. We show that ex-ante imperfect diversification of bank lending generates bank asset returns with limited upside but significant downside risk. The asymmetric distribution of these returns and their implications for the evolution of bank net worth are important for capturing the frequency and severity of twin default crises – simultaneous rises in firm and bank defaults associated with sizeable negative effects on economic activity. As a result, our model implies higher optimal capital requirements than common specifications of bank asset returns, which neglect or underestimate the impact of borrower default on bank solvency. JEL Classification: G01, G28, E44
    Keywords: bank capital requirements, bank default, financial crises, firm default
    Date: 2020–05
  13. By: Farmer, J Doyne (Institute for New Economic Thinking, University of Oxford,); Kleinnijenhuis, Alissa M (Institute for New Economic Thinking, University of Oxford, UK and MIT Sloan School of Management, Massachusetts Institute of Technology,); Nahai-Williamson, Paul (Bank of England); Wetzer, Thom (Faculty of Law, University of Oxford)
    Abstract: We propose a structural framework for the development of system-wide financial stress tests with multiple interacting contagion, amplification channels and heterogeneous financial institutions. This framework conceptualises financial systems through the lens of five building blocks: financial institutions, contracts, markets, constraints, and behaviour. Using this framework, we implement a system-wide stress test for the European financial system. We obtain three key findings. First, the financial system may be stable or unstable for a given microprudential stress test outcome, depending on the system’s shock-amplifying tendency. Second, the ‘usability’ of banks’ capital buffers (the willingness of banks to use buffers to absorb losses) is of great consequence to systemic resilience. Third, there is a risk that the size of capital buffers needed to limit systemic risk could be severely underestimated if calibrated in the absence of system-wide approaches.
    Keywords: Systemic risk; stress testing; financial contagion; financial institutions; capital requirements; macroprudential policy
    JEL: C63 G17 G21 G23 G28
    Date: 2020–05–14
  14. By: Geis, André; Moder, Isabella; Schuler, Tobias
    Abstract: After a first phasing out of the ECB’s net asset purchases at end-2018, the question of how a future tightening of the ECB’s monetary policy may affect countries located in the vicinity of the euro area has gained prominence, but has been left largely unanswered so far. Our paper aims to close this gap for the CESEE region by employing shock-specific conditional forecasts, a methodology that has been little exploited in this context. Besides demonstrating the usefulness of our framework, we obtain three key findings characterising the spillovers of ECB monetary policy to CESEE economies: first, a euro area monetary tightening does trigger sizeable spillovers to the CESEE region. Second, we show that in the context of a demand shock-induced monetary tightening, which is more realistic than the usual approach taken in the literature, CESEE countries’ output and prices actually respond positively. Third, spillovers on output and prices in CESEE countries are heterogeneous, and depend on the trajectory of euro area tightening. JEL Classification: C11, C32, E52, F42
    Keywords: BVAR, EU integration, international shock transmission, monetary policy
    Date: 2020–05
  15. By: Dempsey, Kyle P.
    Abstract: I analyze the impact of raising capital requirements on the quantity, composition, and riskiness of aggregate investment in a model in which firms borrow from both bank and non-bank lenders. The bank funds loans with insured deposits and costly equity, monitors borrowers, and must maintain a minimum capital to asset ratio. Non-banks have deep pockets and competitively price loans. A tight capital requirement on the bank reduces risk-shifting and decreases bank leverage, reducing the risk of costly bank failure. In response, though, the bank can change both price and non-price contract terms. This may induce firms to substitute out of bank finance, leading to a theoretically ambiguous effect on the profile of aggregate investment. Quantitatively, I find that the bank's incentive to insure itself against issuing costly equity and competition from the non-bank sector mutes the long run impact of raising capital requirements. Increasing the capital requirement from 8% to 26% eliminates bank failures with effectively no change in the quantity or riskiness of aggregate investment. JEL Classification: G2, E5, E6, E32, E44
    Keywords: banking, business cycles, capital requirements
    Date: 2020–05
  16. By: Cangoz, Mehmet Coskun; Sulla, Olga; Wang, ChunLan; Dychala, Christopher Benjamin
    Abstract: An asset and liability management framework for managing risks arising from sovereign foreign exchange obligations requires a joint analysis of (i) the external financial liabilities resulting from a country’s sovereign debt and (ii) the foreign exchange assets of its central bank. Governments often issue sizable amounts of debt denominated in foreign currencies, subjecting their fiscal positions to foreign exchange volatilities. Prudent management of a sovereign’s foreign exchange position under an asset and liability management framework enables governments to mitigate risks at the lowest possible cost, hence increasing resilience to external shocks. Based on the challenges associated with the implementation of an asset and liability management framework, this study recommends a practical approach that includes analysis of the foreign exchange positions of central bank reserves and central government debt portfolios and optimization of the net position. The proposed model is tested, using the foreign exchange reserve and external debt data of seven countries (Albania, Ghana, FYR Macedonia, South Africa, the Republic of Korea, Tunisia, and Uruguay). The paper employs quantitative methods to explore the impact of an overarching asset and liability management strategy and integrated approach on the efficient management of foreign exchange risk. It provides policy recommendations on ways to minimize the risk of foreign exchange mismatches and increase the return on foreign exchange reserves.
    Keywords: Exchange Rate Risk, Asset and Liability Management, Public Debt, Sovereign Balance Sheet, Macro Hedging, Portfolio Optimization, International Reserves, Strategic Asset Allocation
    JEL: E61 E63 F31 F34 F37 G11 G15 G17 G18 H63 H68
    Date: 2019–02–05
  17. By: Haelim Anderson; Jin-Wook Chang; Adam Copeland
    Abstract: The coronavirus outbreak raises the question of how central bank liquidity support affects financial stability and promotes economic recovery. Using newly assembled data on cross-county flu mortality rates and state-charter bank balance sheets in New York State, we investigate the effects of the 1918 influenza pandemic on the banking system and the role of the Federal Reserve during the pandemic. We find that banks located in more severely affected areas experienced deposit withdrawals. Banks that were members of the Federal Reserve System were able to access central bank liquidity, enabling them to continue or even expand lending. Banks that were not System members, however, did not borrow on the interbank market, but rather curtailed lending, suggesting that there was little-to-no pass-through of central bank liquidity. Further, in the counties most affected by the 1918 pandemic, even banks with direct access to the discount window did not borrow enough to offset large deposit withdrawals and so liquidated assets, suggesting limits to the effectiveness of liquidity provision by the Federal Reserve. Finally, we show that the pandemic caused only a short-term disruption in the financial sector.
    Keywords: 1918 influenza; pandemics; financial stability; bank lending; economic recovery; COVID-19
    JEL: E32 G21 N22
    Date: 2020–05–01
  18. By: Stefano Fasani (Queen Mary University); Haroon Mumtaz (Queen Mary University); Lorenza Rossi (University of Pavia)
    Abstract: This paper uses a FAVAR model with external instruments to show that policy uncertainty shocks are recessionary and are associated with an increase in the exit of firms and a decrease in entry and in the stock price with total factor productivity rising in the medium run. To explain this result, we build a medium scale DSGE model featuring firm heterogeneity and endogenous firm entry and exit. These features are crucial in matching the empirical responses. Versions of the model with constant firms or constant firms' exit are unable to re-produce the FAVAR response of firms' entry and exit and suggest a much smaller effect of this shock on real activity.
    Keywords: Monetary policy uncertainty shocks, FAVAR, DSGE.
    JEL: C5 E1 E5 E6
    Date: 2020–05

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