nep-cba New Economics Papers
on Central Banking
Issue of 2020‒07‒13
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Estimating the effects of the Eurosystem's asset purchase programme at the country level By Mandler, Martin; Scharnagl, Michael
  2. Monetary policy with weakened unions. By Amélie BARBIER-GAUCHARD; Francesco De PALMA; Thierry BETTI
  3. Macroprudential Policy and the Probability of a Banking Crisis By Nakatani, Ryota
  4. Poland, the international monetary system and the Bank of England, 1921–1939 By William Anthony Allen
  6. The fiscal footprint of macroprudential policy By Reis, Ricardo
  7. The anchoring of long-term inflation expectations of consumers: insights from a new survey By Gabriele Galati; Richhild Moessner; Maarten van Rooij
  8. Monetary Policy Rule and Taylor Principle in Emerging ASEAN Economies: GMM and DSGE Approaches By Taguchi, Hiroyuki
  9. Seigniorage and central banks’ financial results in times of unconventional monetary policy By Zbigniew Polański; Mikołaj Szadkowski
  10. Tweeting on Monetary Policy and Market Sentiments: The Central Bank Surprise Index By Donato Masciandaro; Davide Romelli; Gaia Rubera
  12. Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation By Yifei Wang; Toni M. Whited; Yufeng Wu; Kairong Xiao
  13. Resolution Funding; Who Pays When Financial Institutions Fail? By Oana M Croitoru; Marc C Dobler; Johan Molin
  14. The monetary policy of the South African Reserve Bank- stance, communication and credibility By Alberto Coco; Nicola Viegi
  15. Emission-based Interest Rates and the Transition to a Low-carbon Economy By Florian Böser; Chiara Colesanti Senni
  16. Monetary Policy Expectations, Fund Managers, and Fund Returns: Evidence from China By John Ammer; John Rogers; Gang Wang; Yang Yu
  17. Should central banks be forward-looking? By De Grauwe, Paul; Ji, Yuemei
  18. The (ir)relevance of the nominal lower bound for real yield curve analysis By Schupp, Fabian
  19. Taking up the climate change challenge: a new perspective on central banking By Paola D'Orazio; Lilit Popoyan
  20. Does Policy Communication during COVID-19 Work? By Coibion, Olivier; Gorodnichenko, Yuriy; Weber, Michael
  21. Tight and Loose, and Red and Blue: A 'Dance' of Macro Policies in the US By Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro

  1. By: Mandler, Martin; Scharnagl, Michael
    Abstract: We assess the macroeconomic effects of the Eurosystem's asset purchases on the four largest euro area economies using simulation exercises that combine unconventional monetary policy shocks with a fixed policy rate for the duration of the purchase programme. We identify unconventional monetary policy shocks in a large Bayesian vector autoregressive (BVAR) model as shocks to the term structure of interest rates using zero and sign restrictions. We propose a multi-country model in which we impose identification assumptions mainly on euro area aggregate financial variables and on country averages of output and price responses. Furthermore, the multi-country structure allows testing for cross-country differences in the effects of the asset purchase programme in a statistically rigorous way using the posterior of the difference between the country-specific effects. We estimate positive output effects in all countries as well as positive effects on bank lending to firms. Effects on HICP inflation, generally, are much weaker. We find substantial cross-country heterogeneity with the largest price level effects in Spain while output effects were smallest in France and inflation effects were smallest in Italy.
    Keywords: asset purchase programme,unconventional monetary policy,euro area,Bayesian vector autoregression,regional effects of monetary policy
    JEL: C32 E47 E52 E58
    Date: 2020
  2. By: Amélie BARBIER-GAUCHARD; Francesco De PALMA; Thierry BETTI
    Abstract: We assess the impact of union bargaining power on inflation and employment in the case of efficiency bargaining following Mac Donald & Solow (1981). We consider a Stackelberg two-stage game between the Central Bank and social partners (firms and union). Firms and unions negotiate employment and nominal wage, the Central Bank sets the inflation rate. We show that a decrease in union bargaining power tends to reduce nominal wage and employment. In such a context, where the Central Bank is concerned with inflation and employment, the optimal monetary policy consists in a stronger stabilization of employment at the expense of inflation stabilization. We then employ a panel data model for 36 OECD countries to empirically assess the link between the bargaining power of unions and inflation. Our estimates confirm this theoretical result by showing that a low degree of union bargaining power is associated with higher inflation.
    Keywords: monetary policy, employment, inflation, wage setting, union bargaining power, efficiency bargaining, conservatism.
    JEL: E02 E24 E52 E58 J51
    Date: 2020
  3. By: Nakatani, Ryota
    Abstract: The ultimate purpose of macroprudential policy is to avoid financial instability, such as banking crises, which have a long-lasting and devastating effect on the economy. Although a growing number of studies have examined the effects of macroprudential policy on credit growth, few empirical studies have analyzed its effect on the probability of a banking crisis. Does macroprudential policy actually affect the probability of a banking crisis? Do other macroeconomic policies matter for the effectiveness of macroprudential policy? To answer these questions, this paper empirically investigates the effect of macroprudential policy on the probability of a banking crisis and its relationship with other macroeconomic policies. Specifically, using data on 65 countries from 2000 to 2016, we employ a probit model to analyze the effect of changes in the loan-to-value (LTV) ratio on crisis probability. Our results show that macroprudential policy is effective in changing the probability of a banking crisis via a credit channel and that its effectiveness depends on other macroeconomic policies. Changes in the LTV ratio are found to be effective in influencing the probability of a banking crisis in countries that have inflation targeting frameworks, floating exchange rate regimes, and/or no capital controls. Our results underscore the importance of policy coordination among different government bodies to design an appropriate macroprudential policy, especially in the current context of the Covid-19 crisis.
    Keywords: macroprudential policy; loan-to-value (LTV) ratio; banking crisis; probit model; monetary policy; exchange rate regime; capital control
    JEL: E52 E61 F33 F38 G01 G28 R31 R38
    Date: 2020–06–15
  4. By: William Anthony Allen (National Institute of Economic and Social Research London, England, United Kingdom)
    Abstract: The paper uses archive material, mainly from the Bank of England, to give an account of the relationship between Poland and the international monetary system between 1921 and 1939, as seen from the United Kingdom. It describes the 1923 – 1924 Hilton Young mission of ‘money doctors’ and its role in the establishment of the Bank Polski and the introduction of the złoty in 1924; the abandonment of the złoty’s gold parity in 1925; the tortuous negotiations leading to the stabilisation programme and stabilisation loan of 1927, including the Bank of England’s unsuccessful efforts to induce Poland to accept the oversight of the League of Nations; Poland’s gold purchases after the stabilisation loan; the process of deflation during the Great Depression; the abortive discussions in 1934 – 1936 of the possibility of Danzig, Germany and Poland pegging their exchange rates to sterling; the imposition of exchange restrictions in 1936; debt default in 1937; and the approach of war. It also provides information about the management of Poland’s gold and foreign exchange reserves. The narrative makes clear that it is impossible to understand Poland’s international financial affairs without reference to the international political tensions of the period.
    Keywords: Poland, United Kingdom, international monetary system, Bank Polski, Bank of England, złoty, gold exchange standard, foreign exchange, sterling bloc, exchange restrictions, default, Genoa conference, money doctors, stabilisation, League of Nations, Polish Corridor, Federal Reserve, Bank of France, Reichsbank, J.P. Morgan, Council of Foreign Bondholders, Danzig, Germany, France, Norman, Hilton Young, Grabski, Karpiński, Młynarski, Barański, Koc, Strong, Harrison, Moreau, Niemeyer, Siepmann, Schacht, Kemmerer.
    JEL: E42 E58 F33 F34 F52 N34 N44
    Date: 2020
  5. By: Donato Masciandaro
    Abstract: We have helicopter money when there is a one-shot creation of irredeemable fiat money through intended central bank capital losses and/or a permanent monetary base change. This extraordinary monetary policy option appears whenever there is a significant economic crisis. But then the helicopter never flies. This article shows that political reasons can explain such as outcome. An independent central bank can credibly define a social optimal helicopter money. But as the redistributive effects of helicopter money increase, the risk of citizen hostility towards the central bank policy increases and helicopter money becomes unlikely. Such situation is more likely to occur if the government in charge is made up of career-concerned politicians and citizens are heterogeneous. The framework is applied in discussing the possibility of having the European Central Bank as buyer of Perpetual Bonds.
    Keywords: helicopter helicopter money, monetary policy, fiscal policy, political economy, central bank independence, modern monetary theory, populism, European Central Bank
    JEL: D72 D78 E31 E52 E58 E62
    Date: 2020
  6. By: Reis, Ricardo
    Abstract: Monetary policy leaves a fiscal footprint. In some circumstances, relieving the fiscal burden becomes the main goal of policy, and inflation control is subordinate. This article notes that the same is true of macroprudential policy, and it characterizes the size and sign of its fiscal footprint, as well as the states of the world in which the temptation for fiscal goals to dominate may be higher. Macroprudential policies that increase the demand for government bonds by banks directly lower the cost of rolling over public debt, but decrease lending, real activity, and tax collections. They lower the incidence and fiscal cost of a financial crisis, but they may make a fiscal crisis more likely.
    Keywords: financial crisis,sovereign default,diabolic loop,capital and liquidity regulation
    JEL: E58 E62 G01 G28 H63
    Date: 2020
  7. By: Gabriele Galati; Richhild Moessner; Maarten van Rooij
    Abstract: We provide new evidence on the level and probability distribution of consumers' longterm expectations of inflation in the euro area and the Netherlands, using a representative Dutch survey. We find that consumers' long-term (ten years ahead) euro area inflation expectations are not well anchored at the ECB's inflation aim. First, median long-term euro area inflation expectations are 4%, 2pp above the ECB's inflation aim of 2%. Second, individual probability distributions of long-term euro area inflation expectations show that expected probabilities of higher inflation (2pp or more above the ECB's inflation aim) are much higher, at 28% on average, than those of lower inflation (2pp or more below the ECB's inflation aim), at 12%. This suggest that the de-anchoring of Dutch consumers' long-term euro area inflation expectations is mainly due to expected high inflation, rather than to expected low inflation (or deflation). This finding is in contrast to recent concerns by ECB monetary policymakers about a possible de-anchoring of long-term inflation expectations on the downside. Furthermore, we find that consumers' long-term euro area inflation expectations are significantly higher if respondents have lower incomes. Based on measures of anchoring calculated directly from individual consumers' probability distributions of expected long-term inflation, namely the probability of inflation being close to target, the probability of inflation being far above target, and the probability of deflation, we also find that long-term euro area inflation expectations are better anchored for consumers with higher net household income.
    Keywords: Inflation expectations
    JEL: E31 E58 F62
    Date: 2020–06
  8. By: Taguchi, Hiroyuki
    Abstract: This paper aims to reassess the performances of inflation targeting adopted by emerging ASEAN countries, Indonesia, the Philippines and Thailand, by examining their monetary policy rules, both through generalized-method-of-moments (GMM) estimations of policy reaction functions and through Bayesian estimations of the New Keynesian dynamic-stochastic-general-equilibrium (DSGE) model. The main findings are summarized as follows. First, the GMM estimations identified inflation-responsive rules fulfilling the Taylor principle, with a forward-looking manner in Indonesia and Thailand and with a contemporaneous way in the Philippines. Second, the Bayesian estimations of the New Keynesian DSGE could reassure the GMM estimation results, as the former estimations produced consistent outcomes with the latter ones on the policy rate reactions to inflation with the Taylor principle.
    Keywords: Taylor principle; Inflation targeting; Emerging ASEAN; Generalized method of moments (GMM); New Keynesian dynamic stochastic general equilibrium (DSGE)
    JEL: E52 E58 O53
    Date: 2020–06
  9. By: Zbigniew Polański (SGH Warsaw School of Economics and Narodowy Bank Polski (NBP)); Mikołaj Szadkowski (Narodowy Bank Polski (NBP) and SGH Warsaw School of Economics)
    Abstract: In this paper, we estimate seigniorage and compare it with central banks’ financial results and the size of transfers to the government, adopting the view of seigniorage as the monetary authority’s net income from cash (currency) issuance. Based on the accounting data from the 2003-18 period, the paper analyzes seven monetary authorities: four of the larger economies (Bank of England, Bank of Japan, Eurosystem, Federal Reserve System), and three of the smaller ones (Narodowy Bank Polski, Swedish Riksbank, Swiss National Bank). With the exception of the Polish central bank, following the Global Financial Crisis and the euro area sovereign debt crisis, all of them have adopted unconventional monetary policy measures extensively. Since 2008 we have observed growing divergences between estimates of seigniorage (being typically well below 0.5 per cent of GDP) and financial results (reaching in some cases and years well above 0.5 per cent of GDP), and implied transfers to governments, the latter subject also to different rules of central banks’ profit distribution. We attribute these differences primarily to unconventional activities of central banks in the case of larger economies, and to strong volatility of exchange rates in the case of smaller ones (the Riksbank being an intermediate case). We close our analysis by showing that cash and the resulting seigniorage can play the role of a buffer during the monetary policy normalization process.
    Keywords: seigniorage, financial result, central bank finances, central bank profits, global financial crisis, great recession, euro area sovereign debt crisis, unconventional monetary policy, exit policies, normalization
    JEL: E52 E58 E65 G01 N20
    Date: 2020
  10. By: Donato Masciandaro; Davide Romelli; Gaia Rubera
    Abstract: This paper explores the relationship between central bank communication and market sentiment, and proposes a new measure. Market sentiment is proxied using a Twitter-based metric: the Central Bank Surprise Index. The empirical study covers three cases: the Federal Reserve, the European Central Bank and the Bank of England.
    Keywords: monetary policy, central bank communication, financial market, social media, Twitter, Federal Reserve System, European Central Bank, Bank of England, Bank of Japan
    JEL: E44 E52 E58 G14 G15
    Date: 2020
  11. By: Donato Masciandaro
    Abstract: This article discusses a form of fiscal monetization that produces losses in the central bank’s balance sheet, without a permanent increase in the money base. If an independent central bank acts as a long-sighted policymaker, an optimal helicopter monetary policy can be identified. At the same time, if the government in charge is made up of career-concerned politicians and citizens are heterogenous, then the policy mix will produce distributional effects, and conflicts between politicians and central bankers will be likely. Political pressures will arise and the helicopter money option will be less likely. The framework is applied in a discussion of the economics and politics of issuing COVID-19 perpetual bonds with the European Central Bank as the buyer.
    Keywords: helicopter money, monetary policy, fiscal policy, political economy, central bank independence, modern monetary theory, populism, European Central Bank
    JEL: D72 D78 E31 E52 E58 E62
    Date: 2020
  12. By: Yifei Wang; Toni M. Whited; Yufeng Wu; Kairong Xiao
    Abstract: We quantify the impact of bank market power on monetary policy transmission through banks to borrowers. We estimate a dynamic banking model in which monetary policy affects imperfectly competitive banks’ funding costs. Banks optimize the pass-through of these costs to borrowers and depositors, while facing capital and reserve regulation. We find that bank market power explains much of the transmission of monetary policy to borrowers, with an effect comparable to that of bank capital regulation. When the federal funds rate falls below 0.9%, market power interacts with bank capital regulation to produce a reversal of the effect of monetary policy.
    JEL: E51 E52 G21 G28
    Date: 2020–05
  13. By: Oana M Croitoru; Marc C Dobler; Johan Molin
    Abstract: A key element of the international reform agenda since the Global Financial Crisis has been to strengthen resolution regimes and make government bailouts the last, not first, resort. A new international standard prescribes a range of tools, powers, and funding arrangements needed to resolve “any financial institution that could be systemically significant or critical if it fails.” It recommends having resolution funding arrangements set up in advance, “so that authorities are not constrained to rely on public ownership or bail-out funds as a means of resolving firms.” It leaves open significant flexibility with respect to the arrangements that would provide the resources authorities will need to carry out effective resolution. This paper offers a framework for weighing the relative advantages of different resolution funding options that could meet the standard. It presents the main developments to date and discusses the advantages and disadvantages of different options.
    Keywords: Bank resolution;Central banks and their policies;Deposit insurance;Bank bailouts;Financial crises;Systemically important financial institutions;Crisis resolution;resolution, resolution funds, systemic financial institutions, deposit insurance funds, financial crisis
    Date: 2018–08–16
  14. By: Alberto Coco; Nicola Viegi
    Abstract: This paper analyses the evolution of the monetary policy stance, communication and credibility of the South African Reserve Bank (SARB) since 2000, when it adopted a flexible Inflation Targeting (IT) regime to facilitate the achievement of its price stability mandate. Empirical results indicate that the stance became accommodative after the global financial crisis of 2009, with a tendency of the implicit inflation target to increase, while after 2014 it turned tighter and the implicit target started declining. In addition, after the crisis the monetary policy has become less active, with a lower response of policy rates to output and inflation gaps. At the same time, applying Natural Language Processing techniques to the SARB monetary policy statements shows a move towards a more ‘forward-looking’ and balanced communication strategy, complementing to some extent the less frequent changes of monetary policy rates. Finally, the behavior of market interest rates and inflation expectations shows that monetary policy has been gradually better at anchoring expectations, especially in the last few years. The analysis helps to understand the interaction between policy, communication and credibility by showing a consistent picture across all different aspects of monetary policy making.
    Date: 2020–06–19
  15. By: Florian Böser (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland); Chiara Colesanti Senni (Center of Economic Research (CER-ETH), ETH Zurich, Switzerland)
    Abstract: We use a dynamic general equilibrium model to study a climate-oriented monetary policy in the form of emission-based interest rates set by the central bank. Liquidity costs of banks increase with the emission intensity of their asset portfolio, leading banks to favor low-carbon assets and to improve the financing conditions for clean sectors. We show that such a monetary policy supports the decarbonization of the economy and reduces climate damage, as more resources are channeled to low-carbon sectors and incentives to adopt cleaner technologies increase across all sectors. We illustrate these effects by calibrating our model to data for the Euro Area.
    Keywords: climate change, monetary policy, banks, innovation, financial stability
    JEL: E42 E52 E58 O44
    Date: 2020–06
  16. By: John Ammer; John Rogers; Gang Wang; Yang Yu
    Abstract: Although many central banks in the 21st century have become more transparent, Chinese monetary policy communications have been relatively opaque, making it more difficult for financial market participants to make decisions that depend on the future path of interest rates. We conduct a novel systematic textual analysis of the discussion in the quarterly reports of China fund managers, from which we infer their near-term expectations for monetary policy. We construct an aggregate index of manager expectations and show that, as a forecast of Chinese monetary policy, it compares favorably with both market-based and model-based alternative projections. We find that expectations are more accurate for funds that commit more analytical resources, have higher management fees, and with stronger managerial educational background. We also show that fund managers act on these expectations, and that correctly anticipating shifts in Chinese monetary policy improves fund performance. Our results imply that manager skill is an important determinant of fund returns, providing the first evidence from China on a question for which studies of asset management in other countries have reached conflicting conclusions. economy.
    Keywords: Chinese monetary policy; Fund managers; Textual analysis
    JEL: E52 G23
    Date: 2020–06–25
  17. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We show that in a world where agents have limited cognitive abilities and, as a result, are prevented from having rational expectations the answer to this question is negative. We find that in "tranquil periods" when market sentiments (animal spirits) are neutral a forward-looking Taylor rule produces similar results as current-looking Taylor rule in terms of output and inflation volatility. However, when the economy is in a regime of booms and bust produced by extreme values of animal spirits the forward-looking central bank will make many policy errors that have to be corrected afterwards. Thus in a regime of extreme uncertainty the use of a forward Taylor rule reduces the quality of policy-making, leading to greater variability of the output and inflation. It is then better for the central bank to use currently observed output and inflation to set the interest rate. The empirical evidence suggests that central banks are often not forward looking. Our model provides the theoretical justification for this.
    Keywords: animal spirits; behavioural macroeconomics; Taylor rule
    Date: 2020–03
  18. By: Schupp, Fabian
    Abstract: I propose a new term structure model for euro area real and nominal interest rates which explicitly incorporates a time-varying lower bound for nominal interest rates. Results suggest that the lower bound is of importance in structural analyses implying time-varying impulse responses of yield components. With short-term rate expectations at or close to the lower bound, premium components are less reactive to inflation shocks, while real rate responses change their sign from positive to negative. However, it is further shown that the lower bound is of only little relevance for decomposing yields into their expectations and premium components once survey information is incorporated. Overall, results support the conclusion that reaching the effective lower bound may change the way macroeconomic shocks propagate along the term structure of nominal as well as real interest rates.
    Keywords: Joint real-nominal term structure modelling,lower bound,inflation expectations,inflation risk premium,survey information,yield curve decomposition,monetary policy,euro area
    JEL: E31 E43 E44 E52
    Date: 2020
  19. By: Paola D'Orazio; Lilit Popoyan
    Abstract: The awareness about climate-related financial risks is gaining momentum both in the policy and academic debates. The role of countriesù institutional dimension and central bank governance structures in the adoption of green prudential regulation is, however, overlooked in the current discussion. The paper fills this gap by proposing an analysis of the state-of-the-art, challenges and perspectives, of ''green'' central banking. The study complements existing research that usually points to an ''extended'' monetary policy mandate, including, for example, sustainability objectives or green growth, as the primary motivation for a central bank to engage in ''green'' financial policymaking. According to our research, the decision to implement green regulations is not exclusively related to the mandate per se, but on the central bank's independence and on how the interaction between the monetary and prudential policy is structured. Moreover, the higher exposure to climate-related adverse events also plays a crucial role in the adoption of green prudential regulations. To avoid potential conflicts between monetary policy and green prudential regulation caused by existing intertwined transmission mechanisms, on the one hand, our analysis emphasizes the importance of having a central bank that hosts the green prudential regulation under its governance roof. On the other hand, when the ''green'' governance models studied in the paper are in place, the Tinbergen principle is safeguarded.
    Keywords: Central banking; Policy mandate; Macroprudential policy; Central bank governance; Climate change.
    Date: 2020–07–02
  20. By: Coibion, Olivier (University of Texas at Austin); Gorodnichenko, Yuriy (University of California, Berkeley); Weber, Michael (World Bank)
    Abstract: Using a large-scale survey of U.S. households during the Covid-19 pandemic, we study how new information about fiscal and monetary policy responses to the crisis affects households' expectations. We provide random subsets of participants in the Nielsen Homescan panel with different combinations of information about the severity of the pandemic, recent actions by the Federal Reserve, stimulus measures, as well as recommendations from health officials. This experiment allows us to assess to what extent these policy announcements alter the beliefs and spending plans of households. In short, they do not, contrary to the powerful effects they have in standard macroeconomic models.
    Keywords: subjective expectations, fiscal policy, monetary policy, COVID-19, surveys
    JEL: E31 C83 D84 J26
    Date: 2020–06
  21. By: Tatiana Kirsanova; Celsa Machado; Ana Paula Ribeiro
    Abstract: Using optimising policy framework, we build and estimate a small-scale DSGE model of the US, and tell the story of monetary and fiscal policy interactions in 1955-2018. We find that fiscal policy is important to identify shifts in monetary policy preferences, and it is shaped by the political color. We use this model to analyse the episode of zero lower bound on interest rate in 2008-15. We find that the bound constrained monetary policy, explain some observed irregularities in macroeconomic data, and demonstrate that a change to price level targeting could have generated a powerful lift-off from the constraint.
    Keywords: Optimal Noncooperative Monetary and Fiscal Policy, Zero Lower Bound, Price Level Targeting, Political Color, Bayesian Estimation with Markov Switching
    JEL: E31 E52 E62 E63
    Date: 2020–06

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