nep-cba New Economics Papers
on Central Banking
Issue of 2020‒06‒15
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Central bank bond purchases in emerging market economies By Yavuz Arslan; Mathias Drehmann; Boris Hofmann
  2. Optimal Monetary Policy and Uncertainty Shocks By Cho, Deaha; Han, Yoonshin; Oh, Joonseok; Rogantini Picco, Anna
  3. Macroprudential regulation and leakage to the shadow banking sector By Gebauer, Stefan; Mazelis, Falk
  4. Unconventional monetary policy and credit market activity By Juan Carlos Medina Guirado; ; ;
  5. Monetary policy and its transmission in a globalised world By Ca' Zorzi, Michele; Dedola, Luca; Georgiadis, Georgios; Jarociński, Marek; Stracca, Livio; Strasser, Georg
  6. A Promised Value Approach to Optimal Monetary Policy By Timothy Hills; Taisuke Nakata; Takeki Sunakawa
  7. Central banks' response to Covid-19 in advanced economies By Paolo Cavallino; Fiorella De Fiore
  8. How well-anchored are long-term inflation expectations? By Richhild Moessner; Előd Takáts
  9. COVID-19, Helicopter Money & the Fiscal-Monetary Nexus By Cukierman, Alex
  10. A shadow rate without a lower bound constraint By B De Rezende, Rafael; Ristiniemi, Annukka
  11. On the external validity of experimental inflation forecasts: A comparison with five categories of field expectations By Camille Cornand; Paul Hubert
  12. Changes in the Inflation Target and the Comovement between Inflation and the Nominal Interest Rate By Yunjong Eo; Denny Lie
  13. Uncertainty and Monetary Policy in the US: A Journey into Non-Linear Territory By Giovanni Pellegrino
  14. Speed Limit Policy and Liquidity Traps By Taisuke Nakata; Sebastian Schmidt; Paul Yoo
  15. Macroprudential Policy, Mortgage Cycles and Distributional Effects: Evidence from the UK By José-Luis Peydró; Francesc R Tous; Jagdish Tripathy; Arzu Uluc
  16. Bank Lending, Monetary Policy Transmission, and Interest on Excess Reserves: A FAVAR Analysis By Dave, Chetan; Dressler, Scott J.; Zhang, Lei
  17. Institutional Diversity in Domestic Banking Sectors and Bank Stability: A Cross-Country Study By Christopher F. Baum; Caterina Forti Grazzini; Dorothea Schäfer
  18. When could macroprudential and monetary policies be in conflict? By Grégory LEVIEUGE; Jose David GARCIA REVELO
  19. Monetary Policy Options at the Effective Lower Bound: Assessing the Federal Reserve’s Current Policy Toolkit By Hess Chung; Etienne Gagnon; Taisuke Nakata; Matthias Paustian; Bernd Schlusche; James Trevino; Diego Vilán; Wei Zheng
  20. Active, or Passive? Revisiting the Role of Fiscal Policy in the Great Inflation By Stephanie Ettmeier; Alexander Kriwoluzky
  21. Monetary Policy with Judgment By Paolo Gelain; Simone Manganelli
  22. From Tether to Libra: Stablecoins, Digital Currency and the Future of Money By Alexander Lipton; Aetienne Sardon; Fabian Sch\"ar; Christian Sch\"upbach
  23. Inflation dynamics: Expectations, structural breaks and global factors By Pierre L. Siklos
  24. International effects of euro area forward guidance By Maximilian Bock; Martin Feldkircher; Pierre L. Siklos
  25. Yield curve control By Kortelainen, Mika
  26. The prospect of the proposed Currency Union on intra-regional trade in East African Community By Stanley, Abban
  27. The People's Bank of China's response to the coronavirus pandemic - A quantitative assessment By Funke, Michael; Tsang, Andrew
  28. Monetary regimes, the term structure and business cycles in Ireland, 1972-2018 By Stuart, Rebecca

  1. By: Yavuz Arslan; Mathias Drehmann; Boris Hofmann
    Abstract: In response to the Covid-19 shock, many central banks in emerging market economies have launched local currency bond purchase programmes to address bond market dislocations, signalling that they were willing to take the role of a buyer of last resort. Local currency bond yields fell significantly following the programme announcements, with little effect on exchange rates. These positive initial market reactions suggest that the programmes were successful in restoring investor confidence and did not lead to higher inflation expectations, eg due to perceived risks of fiscal dominance. Market reactions varied between countries, depending on initial conditions in each jurisdiction as well as on the scope, scale and communication of the bond purchase programmes.
    Date: 2020–06–02
  2. By: Cho, Deaha; Han, Yoonshin; Oh, Joonseok; Rogantini Picco, Anna
    Abstract: We study optimal monetary policy in response to uncertainty shocks in standard New Keynesian models under Calvo and Rotemberg pricing schemes. We find that optimal monetary policy achieves joint stabilization of inflation and the output gap in both pricing schemes. We show that a simple Taylor rule that puts high weight on inflation stability approximates optimal monetary policy well. This rule mutes firms’ precautionary pricing incentive, the key channel that makes responses under Calvo and Rotemberg pricing schemes differ under the empirically calibrated Taylor rule.
    Keywords: Optimal monetary policy; Uncertainty shocks
    JEL: E12 E52
    Date: 2020–06
  3. By: Gebauer, Stefan; Mazelis, Falk
    Abstract: Macroprudential policies are often aimed at the commercial banking sector, while a host of other non-bank financial institutions, or shadow banks, may not fall under their jurisdiction. We study the effects of tightening commercial bank regulation on the shadow banking sector. We develop a DSGE model that differentiates between regulated, monopolistic competitive commercial banks and a shadow banking system that relies on funding in a perfectly competitive market for investments. After estimating the model using euro area data from 1999 – 2014 including information on shadow banks, we find that tighter capital requirements on commercial banks increase shadow bank lending, which may have adverse financial stability effects. Coordinating macroprudential tightening with monetary easing can limit this leakage mechanism, while still bringing about the desired reduction in aggregate lending. In a counterfactual analysis, we compare how macroprudential policy implemented before the crisis would have dampened the business and lending cycles. JEL Classification: E32, E58, G23
    Keywords: financial frictions, macroprudential policy, monetary policy, non-bank financial institutions, policy coordination
    Date: 2020–05
  4. By: Juan Carlos Medina Guirado (UACJ); ; ;
    Abstract: Since the 2007-2009 financial recession and up until the present day, the main central banks have resorted to nontraditional policy tools to stimulate economic activity. A distinctive example was the expansion of the size of their balance sheets through the purchase of long-term government securities. In this paper I analyze the effect on credit markets of this “unconventional” monetary policy tool and compare it with that of conventional instruments such as open market operations. Our findings suggest that central bank purchases of long-term government securities stimulate credit market activity and reduce the cost of public and private borrowing only under a low interest rate and reduced fiscal debt regime. Otherwise, this policy increases the cost of servicing debt resulting in a contraction of lending. In contrast, open market operations aid credit availability but negatively affect the amount of risk-sharing in the economy.
    Keywords: Central Banking, unconventional monetary policy, financial intermediation, credit markets.
    JEL: E31 E44 E52 E58
    Date: 2020–01–04
  5. By: Ca' Zorzi, Michele; Dedola, Luca; Georgiadis, Georgios; Jarociński, Marek; Stracca, Livio; Strasser, Georg
    Abstract: This paper estimates and compares the international transmission of European Central Bank (ECB) and Federal Reserve System monetary policy in a unified and methodologically consistent framework. It identifies pure monetary policy shocks by purging them of the bias stemming from contemporaneous central bank information effects. The results suggest that there is a hierarchy in the global spillovers from ECB and Federal Reserve monetary policy: while the spillovers to consumer prices are relatively small in both directions, Federal Reserve monetary policy shocks have a larger impact on euro area financial markets and real activity. Federal Reserve monetary policy also has a significantly larger impact than ECB monetary policy on real and financial variables in the rest of the world. JEL Classification: E44, E52, F3, E58, F42
    Keywords: international monetary policy coordination, international shock transmission, monetary policy shocks, monetary policy spillovers
    Date: 2020–05
  6. By: Timothy Hills (New York University); Taisuke Nakata (University of Tokyo); Takeki Sunakawa (Hitotsubashi University)
    Abstract: This paper characterizes optimal commitment policy in the New Keynesian model using a recursive formulation of the central bank's in finite horizon optimization problem in which promised inflation and output gap - as opposed to lagged Lagrange multipliers - act as pseudo-state variables. Our recursive formulation is motivated by Kydland and Prescott (1980). Using three well known variants of the model - one featuring inflation bias, one featuring stabilization bias, and one featuring a lower bound constraint on nominal interest rates - we show that the proposed formulation sheds new light on the nature of the intertemporal trade-off facing the central bank.
    Date: 2020–05
  7. By: Paolo Cavallino; Fiorella De Fiore
    Abstract: Central banks in advanced economies reacted swiftly and forcefully to the Covid-19 pandemic, deploying the full range of crisis tools within weeks. The initial response focused primarily on easing financial stress and ensuring a smooth flow of credit to the private non-financial sector.The pandemic triggered complementary responses from monetary and fiscal authorities. Fiscal backstops and loan guarantees supported central bank actions. Asset purchases, designed to achieve central banks' objectives, helped contain the costs of fiscal expansions. The footprint of central banks' measures will be sizeable. Across the five largest advanced economies, balance sheets are projected to grow on average by 15-23% of GDP before end-2020 and to remain large in the near future.
    Date: 2020–06–05
  8. By: Richhild Moessner; Előd Takáts
    Abstract: We study the anchoring properties of long-term inflation expectations in emerging and advanced economies, as a measure of monetary policy credibility. We proxy anchoring by how short-term expectations relate to long-term inflation expectations. We find that long-term inflation expectations are less well anchored in emerging than in advanced economies for the period 1996-2019. These findings do not significantly differ between before and after the global financial crisis or away from and at the effective lower bound. We also find that persistent deviations of inflation from target affect long-term inflation expectations in advanced economies. Yet, persistent deviations do not have a stronger impact at the effective lower bound. Moreover, we find evidence for asymmetry: higher than targeted inflation has a larger impact on long-term inflation expectations.
    Keywords: inflation expectations, anchoring, ZLB, monetary policy credibility
    JEL: E31 E58
    Date: 2020–06
  9. By: Cukierman, Alex
    Abstract: The huge actual and prospective expansionary fiscal policies triggered by the corona crisis are expected to substantially raise debt/GDP ratios. This led a number of economists to reconsider the taboo on using seignorage (or more colorfully helicopter money (HM)). Following a brief documentation of the economic impact of the crisis and the responses of aggregate demand policies the paper surveys the views of economists and policymaker in the past and present on HM. Optimal taxation considerations imply that the decision on allocating deficit financing between debt and HM falls within the realm of fiscal authorities â?? a fact that infringes on central bank (CB) autonomy. The paper explores ideas aimed at improving the tradeoff between implementation of the optimal taxation principle and CB autonomy. Implication of cross-country variations in the need to use seignorage are discussed. Comparison of the indirect contribution of quantitatve easing (QE) to deficit financing with the direct contribution of HM implies that the latter can be implemented under central bank dominance without much change in existing monetary institutions. Empirical evidence from the US during the global financial crisis with the post WWI German inflation supports the view that for countries experiencing deflationary pressure HM is more potent in moving inflation toward its target than QE. Given the current outlook temporary use of HM where badly needed does not appear to involve a substantial risk of inflation.
    Keywords: central bank independence; COVID-19; Deficits; Fiscal institutions; Government Debt; inflation and deflation; optimal taxation; Seignorage
    JEL: E31 E5 E62 E63 H12 H21 H6
    Date: 2020–05
  10. By: B De Rezende, Rafael (Bank of England); Ristiniemi, Annukka (Sveriges Riksbank and European Central Bank)
    Abstract: We propose a shadow rate that measures the overall stance of monetary policy when the lower bound is not necessarily binding. Using daily yield curve data we estimate shadow rates for the US, Sweden, the euro area and the UK, and document that they fall (rise) as monetary policy becomes more expansionary (contractionary). This ability of the shadow rate to track the stance of monetary policy is identified on announcements of policy rate cuts (hikes), balance sheet expansions (contractions) and forward guidance, with shadow rates responding in a timely fashion, and in line with government bond yields. We show two applications for our shadow rate. First, we decompose shadow rate responses to monetary policy announcements into conventional and unconventional monetary policy surprises, and assess the pass-through of each type of policy to exchange rates. We find that exchange rates respond more to conventional than to unconventional monetary policy. Lastly, a counterfactual experiment in a DSGE model suggests that inflation in Sweden would have been around half a percentage point lower had unconventional monetary policy not been used since February 2015.
    Keywords: Monetary policy stance; unconventional monetary policy; term structure of interest rates; short-rate expectations; term premium; exchange rates
    JEL: E43 E44 E52 E58
    Date: 2020–05–22
  11. By: Camille Cornand (Centre National de la Recherche Scientifique (CNRS)); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: Establishing the external validity of experimental inflation forecasts is essential if laboratory experiments are to be used as decision-making tools for monetary policy. Our contribution is to document whether different measures of inflation expectations, based on various categories of agents (participants in experiments, households, industry forecasters, professional forecasters, financial market participants and central bankers), share common patterns. We do so by analyzing the forecasting performance of these different categories of data, their deviations from full information rational expectations, and the variables that enter the determination of these expectations. Overall, the different categories of forecasts exhibit common features: forecast errors are comparably large and autocorrelated, and forecast errors and forecast revisions are predictable from past information, suggesting the presence of some form of bounded rationality or information imperfections. Finally, lagged inflation positively affects the determination of inflation expectations. While experimental forecasts are relatively comparable to survey and financial market data, more heterogeneity is observed compared to central bank forecasts.
    Keywords: Inflation expectations; Experimental forecasts; Survey forecasts; Market-based forecasts; Central bank forecasts
    JEL: E3 E5
    Date: 2020–01
  12. By: Yunjong Eo (Department of Economics, Korea University, Seoul 02841, South Korea); Denny Lie (School of Economics, The University of Sydney, NSW 2006, Australia)
    Abstract: Would raising the inflation target require an increase in the nominal interest rate in the short run? We answer this policy question, first analytically in a small-scale New Keynesian model with backward-looking components where a closed-form solution exists, and then in a medium-scale model of Smets and Wouters (2007) calibrated to the U.S. economy. Our analysis shows that the short-run comovement between inflation and the nominal interest rate conditional on changes in the inflation target is more likely to be positive, all else equal, as the monetary authority reacts less aggressively to the deviation of inflation from its target. Meanwhile, features of the model that enhance backward-looking behavior, such as backward price indexation and habit formation in consumption, are shown to reduce the likelihood of the positive comovement. However, our investigations reveal that in both models, this positive comovement or so-called Neo-Fisherism is prevalent across a wide-range of empirically-plausible parameter values. Using the Smets and Wouters model with a zero lower bound constraint (ZLB) on the nominal interest rate, we show that raising the inflation target could be an effective alternative policy framework to reduce the possibility of a binding ZLB constraint and to mitigate the potentially large output loss.
    Keywords: Neo-Fisherism; zero lower bound; inflation expectations; Taylortype rule; hybrid NKPC; hybrid IS curve;
    JEL: E12 E32 E58 E61
    Date: 2020
  13. By: Giovanni Pellegrino (Department of Economics and Business Economics, Aarhus University)
    Abstract: This paper estimates a non-linear Interacted VAR model to assess whether the real effects of stimulative monetary policy shocks are milder during times of high uncertainty. Crucially, uncertainty is modeled endogenously in the VAR, thus allowing to take account of two unexplored channels of monetary policy transmission working through uncertainty mitigation and uncertainty mean reversion. Generalized Impulse Response Functions à la Koop, Pesaran and Potter (1996) reveal that monetary policy shocks are significantly less powerful during uncertain times, the peak reactions of a battery of real variables being about two-thirds milder than those during tranquil times. Failing to account for endogenous uncertainty would bias responses and imply twice as powerful monetary policy during uncertain times as during tranquil times, mainly because of the non-consideration of uncertainty mean reversion.
    Keywords: Monetary policy shocks, Non-Linear Structural Vector Auto-Regressions, Interacted VAR, Generalized Impulse Response Functions, Endogenous Uncertainty
    JEL: C32 E32 E52
    Date: 2020–06–03
  14. By: Taisuke Nakata (University of Tokyo); Sebastian Schmidt (European Central Bank); Paul Yoo (UNC Kenan-Flagler)
    Abstract: The zero lower bound (ZLB) constraint on interest rates makes speed limit policies(SLPs) - policies aimed at stabilizing the output growth - less effective. Away from the ZLB, the history dependence induced by a concern for output growth stabilization improves the inflation-output tradeoff for a discretionary central bank. However, in the aftermath of a deep recession with a binding ZLB, a central bank with an objective for output growth stabilization aims to engineer a more gradual increase in output than under the standard discretionary policy. The anticipation of a more restrained recovery exacerbates the declines in inflation and output when the lower bound is binding.
    Date: 2020–05
  15. By: José-Luis Peydró; Francesc R Tous; Jagdish Tripathy; Arzu Uluc
    Abstract: Macroprudential regulators worldwide have introduced regulations to limit household leverage in light of existing evidence which suggests that high leverage is associated with household distress during crisis. We analyse the distributional effects of such a macroprudential policy on mortgage and house price cycles. For identification, we exploit the universe of UK mortgages and a 15%-limit imposed in 2014 on lenders—not households—for high loan-to-income ratio (LTI) mortgages. Despite some regulatory arbitrage (e.g. increases in LTV and average loan size), more-constrained lenders issue fewer high-LTI mortgages. Partial substitution by less-constrained lenders leads to overall credit contraction to low-income borrowers in local-areas more exposed to constrained-lenders, lowering house price growth. Following the Brexit referendum (which led to house-price correction), the 2014-policy strongly implies—via lower pre-correction debt—better house prices and mortgage defaults during an episode of house price correction.
    Keywords: macroprudential policy, mortgages, credit cycles, Inequality, house prices
    JEL: E5 G01 G21 G28
    Date: 2020–06
  16. By: Dave, Chetan (University of Alberta, Department of Economics); Dressler, Scott J. (Villanova University); Zhang, Lei (North Dakota State University)
    Abstract: Has paying interest on excess reserves (IOER) impacted monetary policy transmission? We employ a factor augmented VAR (i.e. FAVAR) to analyze a traditional bank lending channel (BLC) as well as a potential reserves channel. Our main results are: (i) the bank-lending response to an exogenous monetary policy innovation in the Federal Funds rate (i.e. the BLC) remains active but smaller than pre-2008 measures; (ii) the bank-lending response to any IOER-based liquidity innovations (i.e. the reserves channel) either mimics the BLC or is largely insignificant. These results provide little evidence that IOER has significantly impacted bank lending or monetary transmission.
    Keywords: Bank Lending Channel; FAVAR; IOER; Monetary Policy
    JEL: C32 E51 E52
    Date: 2020–05–28
  17. By: Christopher F. Baum; Caterina Forti Grazzini; Dorothea Schäfer
    Abstract: This paper analyzes the causal relationship between institutional diversity in domestic banking sectors and bank stability. We use a large bank- and country-level unbalanced panel data set covering the EU member states’ banking sectors between 1998 and 2014. Constructing two distinct indicators for measuring institutional diversity, we find that a high degree of institutional diversity in the domestic banking sector positively affects bank stability. The positive relationship between domestic institutional diversity and bank stability is stronger in times of crisis, providing evidence that diversity can help to absorb both financial and real shocks. In particular, greater institutional diversity smooths bank earnings risk in times of crisis. Our results are economically meaningful and offer important insights to the ongoing economic policy debate on how to reshape the architecture of the banking sector.
    Keywords: Institutional diversity, Shannon Index, Gini-Simpson Index, bank stability, financial crisis, bank competition
    JEL: G01 G20 G21 G28
    Date: 2020
  18. By: Grégory LEVIEUGE; Jose David GARCIA REVELO
    Date: 2020
  19. By: Hess Chung (Board of Governors of the Federal Reserve System); Etienne Gagnon (Board of Governors of the Federal Reserve System); Taisuke Nakata (University of Tokyo); Matthias Paustian (Board of Governors of the Federal Reserve System); Bernd Schlusche (Board of Governors of the Federal Reserve System); James Trevino (Board of Governors of the Federal Reserve System); Diego Vilán (Board of Governors of the Federal Reserve System); Wei Zheng (Visa Inc.)
    Abstract: We simulate the FRB/US model and a number of statistical models to quantify some of the risks stemming from the effective lower bound (ELB) on the federal funds rate and to assess the efficacy of adjustments to the federal funds rate target, balance sheet policies, and forward guidance to provide monetary policy accommodation in the event of a recession. Over the next decade, our simulations imply a roughly 20 to 50 percent probability that the federal funds rate will be constrained by the ELB at some point. We also find that forward guidance and balance sheet polices of the kinds used in response to the Global Financial Crisis are modestly effective in speeding up the labor market recovery and return of inflation to 2 percent following an economic slump. However, these policies have only small effects in limiting the initial rise in the unemployment rate during a recession because of transmission lags. As with any model-based analysis, we also discuss a number of caveats regarding our results.
    Date: 2020–05
  20. By: Stephanie Ettmeier; Alexander Kriwoluzky
    Abstract: We reexamine whether pre-Volcker U.S. fiscal policy was active or passive. To do so, we estimate a DSGE model with monetary and fiscal policy interactions employing a sequential Monte Carlo algorithm (SMC) for posterior evaluation. Unlike existing studies, we do not have to treat each policy regime as distinct, separately estimated, models. Rather, SMC enables us to estimate the DSGE model over its entire parameter space. A differentiated perspective results: pre-Volcker macroeconomic dynamics were similarly driven by a passive monetary/passive fiscal policy regime and fiscal dominance. Fiscal policy actions, especially government spending, were critical in the pre-Volcker inflation build-up.
    Keywords: Bayesian Analysis, DSGE Models, Monetary-Fiscal Policy Interactions, Monte Carlo Methods
    JEL: C11 C15 E63 E65
    Date: 2020
  21. By: Paolo Gelain; Simone Manganelli
    Abstract: We consider two approaches to incorporate judgment into DSGE models. First, Bayesian estimation indirectly imposes judgment via priors on model parameters, which are then mapped into a judgmental interest rate decision. Standard priors are shown to be associated with highly unrealistic judgmental decisions. Second, judgmental interest rate decisions are directly provided by the decision maker and incorporated into a formal statistical decision rule using frequentist procedures. When the observed interest rates are interpreted as judgmental decisions, they are found to be consistent with DSGE models for long stretches of time, but excessively tight in the 1980s and late 1990s and excessively loose in the late 1970s and early 2000s.
    JEL: E50 E58 E47 C12
    Date: 2020–05–21
  22. By: Alexander Lipton; Aetienne Sardon; Fabian Sch\"ar; Christian Sch\"upbach
    Abstract: This paper provides an overview on stablecoins and introduces a novel terminology to help better identify stablecoins with truly disruptive potential. It provides a compact definition for stablecoins, identifying the unique features that make them distinct from previously known payment systems. Furthermore, it surveys the different use cases for stablecoins as well as the underlying economic incentives for creating them. Finally, it outlines critical regulatory considerations that constrain stablecoins and summarizes key factors that are driving their rapid development.
    Date: 2020–05
  23. By: Pierre L. Siklos
    Abstract: There is no consensus over the importance of “global forces” on inflation. This study explores the role of structural breaks in the inflation process, and their timing, whether it is common across countries, and the extent to which ‘global forces’ are relevant. Three conclusions stand out. Global inflation impacts inflation in both AE and EME, but the impact is more heterogeneous than existing narratives have argued. One’s interpretation of global influences on domestic inflation differs, according to whether poorly performing economies in inflation terms are considered as opposed to the standard practice of examining mean inflation performance. A focus on observed inflation alone ignores that inflation expectations, including a global version of this variable, also plays a critical in inflation dynamics. Finally, there are significant spillovers in inflation between AE and EME, but these too are sensitive according to relative inflation performance. Some policy implications are also drawn.
    Keywords: Inflation, Globalization, monetary policy, Vector autoregressions, local projections, quantile regressions
    JEL: E31 E52 E58 C31 C32
    Date: 2020–05
  24. By: Maximilian Bock; Martin Feldkircher; Pierre L. Siklos
    Abstract: This paper explores the domestic and international effects of an increase in observed interest rates (conventional monetary policy) and expected interest rates (forward guidance). We find significant spillovers to a broad range of countries when both are subject to a tightening shock: Output growth and inflation decelerate and equity returns decline. Currencies of euro area neighboring countries tend to depreciate against the euro. A tightening forward guidance shock triggers more persistent effects on euro area and international interest rates. We find that international effects vary over the sample period when either interest rates are shocked.
    Keywords: Spillovers, interest rate expectations, forward guidance, GVAR
    JEL: E5 F3 C11 C30
    Date: 2020–05
  25. By: Kortelainen, Mika
    Abstract: We study the yield curve control in Eurozone. We apply Chen, Cúrdia and Ferrero (2012) model that uses a financial friction to break Wallace's neutrality. We calibrate a bond supply shock that corresponds to the observed change in the time premium in euro area when the APP program was introduced. With some model simulations, we show that the effectiveness of both unconventional monetary policy and fiscal policy are enhanced, when the yield curve control is applied. Thus, we find that the yield curve control can be an effective tool, if applied in a credible manner for a long enough time period during an effective lower bound episode.
    Keywords: Yield curve control,monetary policy,fiscal policy,efficient lower bound,liquidity trap
    JEL: E52 E58
    Date: 2020
  26. By: Stanley, Abban
    Abstract: Currency union with a common policy is welfare superlative to the use of sovereign currencies even if a member of the East African Community uses a convertible currency. In this background, the study evaluates whether adopting a common currency will lead to trade using an augmented gravity model of international trade. Additionally, the study investigates the effect of tariffs and nontariff on trade in EAC. The results show that adopting a common currency will lead to trade. Also, the study showed that trade will be enhanced by six-folds when tariffs and nontariff is eliminated. The study concludes that a currency union with a common policy could serve as a panacea when the appropriate institutional policy framework is adopted to ensure transparency by reducing trade and non-trade barriers.
    Keywords: Currency union, Sovereign currencies, tariff, nontariff, gravity model of international trade, panacea, Optimal Currency Area, intra-regional trade
    JEL: E6 F1 F15 F4 F45
    Date: 2020–04–11
  27. By: Funke, Michael; Tsang, Andrew
    Abstract: The People’s Bank of China (PBoC) has taken numerous measures to cushion the impacts of the COVID-19 health crisis on the Chinese economy. As the current monetary policy framework features a multi-instrument mix of liquidity tools and pricing signals, we employ a dynamic-factor modeling approach to derive an indicator of China’s monetary policy stance. Our approach assumes that comovements of several monetary policy instruments share a common element that can be captured by an underlying unobserved component. We use the derived indicator to trace the response of the PBoC to the coronavirus pandemic. The estimates reveal that the PBoC has implement novel policy measures to ensure that commercial banks maintain liquidity access and credit provision during the COVID-19 crisis.
    JEL: C54 E32 E52 I15
    Date: 2020–05–31
  28. By: Stuart, Rebecca
    Abstract: The ability of the term structure (specifically the term spread, or the difference between the long and short ends of the yield curve) to predict economic activity is empirically well-established for the US, but less so for small open economies. The literature emphasizes the role of monetary policy for this predictive ability. Between 1972-2018, Ireland experienced three monetary regimes: first, the Irish Pound was fixed to Sterling (1972-1979); second the Pound floated in a band when Ireland was a member of the EMS (1979-1998); and third, as a member of the euro area (1999-2018). Using dynamic probit models and monthly data, I show that the term spread only had predictive power during the second regime, the only one in which the Central Bank of Ireland had any discretion to set interest rates based on domestic conditions.
    Keywords: Ireland,term structure,recessions,monetary regimes
    JEL: C25 E00 E43 N14
    Date: 2020

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