nep-cba New Economics Papers
on Central Banking
Issue of 2020‒07‒20
34 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Estimated Policy Rules for Capital Controls By Gurnain Kaur Pasricha
  2. Estimating the Neutral Interest Rate in the Kyrgyz Republic By Iulia Ruxandra Teodoru; Asel Toktonalieva
  3. Negative interest rates, capital flows and exchange rates By Romina Ruprecht
  4. Synergies Between Monetary and Macroprudential Policies in Thailand By Ichiro Fukunaga; Manrique Saenz
  5. Patterns of Foreign Exchange Intervention under Inflation Targeting By Gustavo Adler; Kyun Suk Chang; Zijiao Wang
  6. Monetary Policy and Macroeconomic Stability Revisited By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  7. Raising the Inflation Target: How Much Extra Room Does It Really Give? By Jean-Paul L'Huillier; Raphael Schoenle
  8. Monetary Policies and Destabilizing Carry Trades under Adaptive Learning By Cyril Dell'eva; Eric Girardin; Patrick Pintus
  9. Credibility Dynamics and Disinflation Plans By Rumen Kostadinov; Francisco Roldán
  10. Rethinking Communication in Monetary Policy: Towards a Strategic leaning for the BCC By KIBADHI, Plante M; PINSHI, Christian P.
  11. Macroprudential Policies, Economic Growth, and Banking Crises By Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Jean-Charles Wijnandts
  12. When Banks Punch Back: Macrofinancial Feedback Loops in Stress Tests By Mario Catalan; Alexander W. Hoffmaister
  13. Drivers of Financial Access: the Role of Macroprudential Policies By Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu
  14. The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis By Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
  15. Idiosyncratic Shocks, Lumpy Investment and the Monetary Transmission Mechanism By Reiter, Michael; Sveen, Tommy; Weinke, Lutz
  16. Causal Relationships Between Inflation and Inflation Uncertainty By William Barnett; Fredj Jawadi; Zied Ftiti
  17. Liquidity at Risk: Joint Stress Testing of Solvency and Liquidity By Rama Cont; Artur Kotlicki; Laura Valderrama
  18. A New Daily Federal Funds Rate Series and History of the Federal Funds Market, 1928-1954 By Sriya Anbil; Mark A. Carlson; Christopher Hanes; David C. Wheelock
  19. A Model of the Fed's View on Inflation By Thomas Hasenzagl; Filippo Pellegrino; Lucrezia Reichlin; Giovanni Ricco
  20. Effects of Macroprudential Policy: Evidence from Over 6,000 Estimates By Juliana Dutra Araujo; Manasa Patnam; Adina Popescu; Fabian Valencia; Weijia Yao
  21. Impact of Negative Interest Rate Policy on Emerging Asian markets: An Empirical Investigation. By Anand, Abhishek; Chakraborty, Lekha
  22. Bad bank resolutions and bank lending By Brei, Michael; Gambacorta, Leonardo; Lucchetta, Marcella; Parigi, Bruno
  23. The Anatomy of the Transmission of Macroprudential Policies By Viral V. Acharya; Katharina Bergant; Matteo Crosignani; Tim Eisert; Fergal McCann
  24. Measuring Regulatory Complexity By Colliard, Jean-Edouard; Georg, Co-Pierre
  25. Keynesian models of depression. Supply shocks and the COVID-19 Crisis By Ignacio Escanuela Romana
  26. The Side Effects of Safe Asset Creation By Acharya, Sushant; Dogra, Keshav
  27. Reading between the lines - Using text analysis to estimate the loss function of the ECB By Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Vänni, Ilona
  28. How Loose, How Tight? A Measure of Monetary and Fiscal Stance for the Euro Area By Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
  29. Monetary policy and borrowing costs for different household income groups By Kerschyl Singh; David Fowkes
  30. Cross-border lending and the international transmission of banking crises By Dieckelmann, Daniel
  31. The Cost of Omitting the Credit Channel in DSGE Models: A Policy Mix Approach By Takeshi Yagihashi
  32. What drives consumers’ inflation perceptions in the euro area? By Zekaite, Zivile
  33. Managing Households' Expectations with Unconventional Policies By Francesco D’Acunto; Daniel Hoang; Michael Weber
  34. Shock dependence of exchange rate pass-through: a comparative analysis of BVARs and DSGEs By Mariarosaria Comunale

  1. By: Gurnain Kaur Pasricha
    Abstract: This paper borrows the tradition of estimating policy reaction functions from monetary policy literature to ask whether capital controls respond to macroprudential or mercantilist motivations. I explore this question using a novel, weekly dataset on capital control actions in 21 emerging economies from 2001 to 2015. I introduce a new proxy for mercantilist motivations: the weighted appreciation of an emerging-market currency against its top five trade competitors. This proxy Granger causes future net initiations of non-tariff barriers in most countries. Emerging markets systematically respond to both mercantilist and macroprudential motivations. Policymakers respond to trade competitiveness concerns by using both instruments—inflow tightening and outflow easing. They use only inflow tightening in response to macroprudential concerns. Policy is acyclical to foreign debt; however, high levels of this debt reduces countercyclicality to mercantilist concerns. Higher exchange rate pass-through to export prices, and having an inflation targeting regime with non-freely floating exchange rates, increase responsiveness to mercantilist concerns.
    Date: 2020–06–05
  2. By: Iulia Ruxandra Teodoru; Asel Toktonalieva
    Abstract: This paper estimates the neutral interest rate in the Kyrgyz Republic using a range of methodologies. Results indicate that the real neutral rate is about 4 percent based on an average of models and 3.7 percent based on a Quarterly Projection Model. This is higher than in many emerging markets and is likely explained by higher public debt and an elevated risk premium, low creditor rights and contractual enforcement, and low domestic savings. The use of an estimate of the neutral interest rate provides useful guidance to monetary policy and enhances transparency and independence of the central bank. Our estimate provides a quantitative benchmark for the monetary policy stance in the context of a central bank that is building analytical capacity, integrating additional insights in its decision-making process, and working to improve its communication. Strengthening the monetary transmission mechanism will be critical to enhance the effectiveness of monetary policy, including by allowing more exchange rate flexibility to support the transition to a full-fledged inflation targeting regime, and reducing excess liquidity to enhance the credit channel, reducing dollarization and high interest rate spreads that adversely affect the transmission of the policy rate to the economy.
    Date: 2020–06–05
  3. By: Romina Ruprecht
    Abstract: This paper develops a dynamic general equilibrium model with two currencies to study the effect of negative interest rates on domestic money demand and exchange rates. Money demand for a currency depends on the relative ratio of the money market rate and the deposit rate of the central bank. If agents choose to hold only domestic currency, a decrease in the deposit rate of the central bank will not affect the exchange rate. If agents choose to hold both currencies, a decrease in the deposit rate will cause an appreciation (depreciation) if the money market rate decreases to a larger (smaller) extent. If agents are subject to bank deposit rates that are sticky below zero, then a decrease of the central bank deposit rate leads to a depreciation of the currency regardless of the size of the effect on the money market rate.
    Keywords: Monetary policy, negative interest rates, exchange rates
    JEL: E52 E58 F31
    Date: 2020–06
  4. By: Ichiro Fukunaga; Manrique Saenz
    Abstract: A dynamic stochastic general equilibrium (DSGE) model tailored to the Thai economy is used to explore the performance of alternative monetary and macroprudential policy rules when faced with shocks that directly impact the financial cycle. In this context, the model shows that a monetary policy focused on its traditional inflation and output objectives accompanied by a well targeted counter-cyclical macroprudential policy yields better macroeconomic outcomes than a lean-against-the-wind monetary policy rule under a wide range of assumptions.
    Date: 2020–06–05
  5. By: Gustavo Adler; Kyun Suk Chang; Zijiao Wang
    Abstract: The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.
    Date: 2020–05–29
  6. By: Yasuo Hirose (Keio University); Takushi Kurozumi (Bank of Japan); Willem Van Zandweghe (Federal Reserve Bank of Cleveland)
    Abstract: A large literature has established the view that the Fed's change from a passive to an active policy response to inflation led to U.S. macroeconomic stability after the Great Inflation of the 1970s. We revisit this view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for indeterminacy of equilibrium and adopts a sequential Monte Carlo algorithm. The estimated model empirically outperforms canonical New Keynesian models that confirm the literature's view. It also points to substantial uncertainty about whether the policy response to inflation was active or passive during the Great Inflation. More importantly, a more active policy response to inflation alone does not suffice for explaining the U.S. macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. This extends the literature by emphasizing the importance of the changes in other aspects of monetary policy in addition to its response to inflation.
    Keywords: Monetary policy; Great Inflation; Indeterminacy; Trend inflation; Sequential Monte Carlo
    JEL: C11 C52 C62 E31 E52
    Date: 2020–02–28
  7. By: Jean-Paul L'Huillier; Raphael Schoenle
    Abstract: Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target from 2 percent to 4 percent, the monetary authority gets only between 0.51 and 1.60 percentage points of effective extra policy room for monetary policy (not 2 percentage points as intended). Getting 2 percentage points of effective extra room requires raising the target to more than 4 percent. Taking this channel into consideration raises the optimal inflation target by roughly 1 percentage points relative to earlier computations.
    Keywords: zero lower bound; price stability; timidity trap; liquidity traps; central bank design; inflation targeting; Lucas proof
    JEL: E52 E58 E31
    Date: 2020–06–16
  8. By: Cyril Dell'eva (University of Pretoria [South Africa]); Eric Girardin (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Patrick Pintus (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This paper investigates how different monetary policy designs alter the effect of carry trades on a host small open economy. Capital inflows are expansionary, leading the central bank to raise the interest rate, increasing carry trades' returns, and generating further capital inflows (carry trades' vicious circle). This paper shows how monetary authorities can mitigate or suppress this vicious circle, when agents do not have full information about the central bank's objectives. The best way to deal with the destabilizing effect of carry trades is to target both inflation and capital inflows.
    Keywords: Index terms-Capital inflows,Carry trades,interest rate differential,Vicious circle,Inflation targeting JEL classification: E44,E52,E58,F31,G15
    Date: 2020–06
  9. By: Rumen Kostadinov; Francisco Roldán
    Abstract: We study the optimal design of a disinflation plan by a planner who lacks commitment. Having announced a plan, the Central banker faces a tradeoff between surprise inflation and building reputation, defined as the private sector's belief that the Central bank is committed to the plan. Some plans are harder to sustain: the planner recognizes that paving out future grounds with temptation leads the way for a negative drift of reputation in equilibrium. Plans that successfully create low inflationary expectations balance promises of lower inflation with dynamic incentives that make them more credible. When announcing the disinflation plan, the planner takes into account these anticipated interactions. We find that, even in the zero reputation limit, a gradual disinflation is preferred despite the absence of inflation inertia in the private economy.
    Date: 2020–06–05
  10. By: KIBADHI, Plante M; PINSHI, Christian P.
    Abstract: The ability of a central bank to influence the economy depends on its ability to manage the expectations of the general public and the financial system regarding the future development of macroeconomic indicators. The communication strategy (in this time of crisis and uncertainty) increases transparency, improves public understanding and support for the monetary policy and democratic accountability of the Central Bank of Congo (BCC), serving to convergence towards the balance of expectations. This paper agrees that a strategic direction of communication, focused on coherent messages, can help break down pessimistic expectations, maintain confidence, reduce the cost of the crisis and stabilize the economy. In conclusion, the article suggests a dozen recommendations, to be able to strengthen and redirect the BCC’s communication strategy and contribute to the effectiveness of monetary policy.
    Keywords: Communication, Monetary policy
    JEL: E58
    Date: 2020–05
  11. By: Mohamed Belkhir; Sami Ben Naceur; Bertrand Candelon; Jean-Charles Wijnandts
    Abstract: Using a sample that covers more than 100 countries over the 2000-2017 period, we assess the impact of macroprudential policies on financial stability. In particular, we examine whether the activation of macroprudential policies is conducive to a lower incidence of systemic banking crises. Our empirical setup is designed to account for the potential direct and indirect effects that macroprudential policies can have on banking crises. We find that while macro-prudential policies exert a direct stabilizing effect, they also have an indirect destabilizing effect, which works through the depressing of economic growth. A Generalized Impulse Response Function analysis of a dynamic system composed of the probability of a banking crisis and economic growth reveals, however, that macroprudential policies have a positive net effect on financial stability (lower likelihood of systemic banking crises).
    Keywords: Real sector;Financial crises;Macroprudential policies and financial stability;Financial institutions;Financial systems;Macroprudential Policies,Banking crises,Economic Growth,WP,emerge market economy,bank crisis,advanced economy,MPI,basis point
    Date: 2020–05–22
  12. By: Mario Catalan; Alexander W. Hoffmaister
    Abstract: In the presence of adverse macroeconomic shocks, simultaneous capital losses in multiple banks can prompt them to contract their balance sheets. These bank responses generate externalities that propagate in the form of macro-financial feedback loops. This paper develops a credit response and externalities analysis model (CREAM) that integrates a disaggregated banking sector into an otherwise standard macroeconomic structural vector autoregressive model. It shows that accounting for macro-financial feedback loops can significantly affect macroeconomic outcomes and bank-specific stress tests results. The heterogeneity in bank lending responses matters: it determines how each bank fares under adverse conditions and the external effects that banks impose on each other and on economic activity. The model can thus be used to assess the contributions of individual banks to systemic risk along the time dimension.
    Date: 2020–05–29
  13. By: Corinne Deléchat; Lama Kiyasseh; Margaux MacDonald; Rui Xu
    Abstract: This study analyzes the drivers of the use of formal vs. informal financial services in emerging and developing countries using the 2017 Global FINDEX data. In particular, we investigate whether individuals’ choice of financial services correlates with macro-financial and macro-structural policies and conditions, in addition to individual and country characteristics. We start our analysis on middle and low-income countries, and then zoom in on sub-Saharan Africa, currently the region that most relies on informal financial services, and which has the largest uptake of mobile banking. We find robust evidence of an association between macroprudential policies and individuals’ choice of financial access after controlling for personal and country-level characteristics. In particular, macroprudential policies aimed at controlling credit supply seem to be associated with greater resort to informal financial services compared with formal, bank-based access. This highlights the importance for central bankers and financial sector regulators to consider the potential spillovers of monetary policy and financial stability measures on financial inclusion.
    Date: 2020–05–29
  14. By: Pierre-Olivier Gourinchas; Philippe Martin; Todd E. Messer
    Abstract: Despite a formal ‘no-bailout clause’, we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal and Spain, ranging from roughly 0.5% (Ireland) to 43% (Greece) of 2011 output during the recent Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road’.
    JEL: F34 F45
    Date: 2020–06
  15. By: Reiter, Michael (Institute for Advanced Studies, Vienna, and NYU Abu Dhabi); Sveen, Tommy (BI Norwegian Business School); Weinke, Lutz (Humboldt-Universitaet zu Berlin)
    Abstract: Standard (S,s) models of lumpy investment allow us to match many aspects of the micro data, but it is well known that the implied interest rate sensitivity of investment is unrealistically large. The monetary transmission mechanism is therefore a particularly clean experiment to assess the macroeconomic relevance of any investment theory. Our results show that lumpy investment can coexist with a realistic monetary transmission mechanism, but that we are nevertheless still a step away from a micro-founded theory of monetary policy.
    Keywords: Lumpy Investment, Sticky Prices
    JEL: E22 E31 E32
    Date: 2020–05
  16. By: William Barnett (Department of Economics, The University of Kansas; Center for Financial Stability, New York City; IC2 Institute, University of Texas at Austin); Fredj Jawadi (University of Lille, Lille, 104 Avenue du Peuple Blege, 104 Avenue du Peuple Belge, 59043 Lille Cedex, Office B655, France); Zied Ftiti (EDC Paris Business School, Paris, France)
    Abstract: Since the publication of Friedman’s (1977) Nobel lecture, the relationships between the mean function of the inflation stochastic process and its uncertainty, and between inflation uncertainty (IU) and real output growth have been the subject of much research, with some studies justifying this causality and some reaching the opposite conclusion or finding an inverse correlation between mean inflation and inflation volatility with causation in either direction. We conduct a systematic econometric study of the relationships between the first two moments of the inflation stochastic process and between IU and output growth using state-of-the-art approaches and propose a time-varying inflation uncertainty measure based on stochastic volatility to consider unpredictable shocks. Further, we extend the literature by providing a new econometric specification of this relationship using two semi-parametric approaches: the frequency evolutionary co-spectral approach and continuous wavelet methodology. We theoretically justify their use through an extension of Ball's (1992) model. These frequency approaches have two advantages: they provide the analyses for different frequency horizons and do not impose restriction on the data. While the literature focused on the US data, our study explores these relationships for five major developed and emerging countries/regions (the US, the UK, the euro area, South Africa, and China) over the past five decades to investigate the robustness of our inferences and sources of inconsistencies among prior studies. This selection of countries permits investigation of the inflation versus inflation uncertainty relationship under different hypotheses, including explicit versus implicit inflation targets, conventional versus unconventional monetary policy, independent versus dependent central banks, and calm versus crisis periods. Our findings show a significant relationship between inflation and inflation uncertainty, which varies over time and frequency, and offer an improved comprehension of this ambiguous relationship. The relationship is positive in the short and medium terms during stable periods, confirming the Friedman–Ball theory, and negative during crisis periods. Additionally, our analysis identifies the phases of leading and lagging inflation uncertainty. Our general approach nests within it the earlier approaches, permitting explanation of the prior appearances of ambiguity in the relationship and identifies the conditions associated with the various outcomes.
    Keywords: Inflation, Inflation uncertainty, Output growth, Frequency approach, Wavelet, Semi-parametric approach, Stochastic volatility
    JEL: C14 E31
    Date: 2020–07
  17. By: Rama Cont; Artur Kotlicki; Laura Valderrama
    Abstract: The traditional approach to the stress testing of financial institutions focuses on capital adequacy and solvency. Liquidity stress tests have been applied in parallel to and independently from solvency stress tests, based on scenarios which may not be consistent with those used in solvency stress tests. We propose a structural framework for the joint stress testing of solvency and liquidity: our approach exploits the mechanisms underlying the solvency-liquidity nexus to derive relations between solvency shocks and liquidity shocks. These relations are then used to model liquidity and solvency risk in a coherent framework, involving external shocks to solvency and endogenous liquidity shocks arising from these solvency shocks. We define the concept of ‘Liquidity at Risk’, which quantifies the liquidity resources required for a financial institution facing a stress scenario. Finally, we show that the interaction of liquidity and solvency may lead to the amplification of equity losses due to funding costs which arise from liquidity needs. The approach described in this study provides in particular a clear methodology for quantifying the impact of economic shocks resulting from the ongoing COVID-19 crisis on the solvency and liquidity of financial institutions and may serve as a useful tool for calibrating policy responses.
    Date: 2020–06–05
  18. By: Sriya Anbil; Mark A. Carlson; Christopher Hanes; David C. Wheelock
    Abstract: This article describes the origins and development of the federal funds market from its inception in the 1920s to the early 1950s. We present a newly digitized daily data series on the federal funds rate that covers the period from April 1928 through June 1954. We compare the behavior of the funds rate with other money market interest rates and the Federal Reserve discount rate. Our federal funds rate series will enhance the ability of researchers to study an eventful period in U.S. financial history and to better understand how monetary policy was transmitted to banking and financial markets. For the 1920s and 1930s, our series is the best available measure of the overnight risk-free interest rate, better than the call money rate which many studies have used for that purpose. For the 1940s-1950s, our series provides new information about the transition away from wartime interest-rate pegs culminating in the 1951 Treasury-Federal Reserve Accord.
    Keywords: federal funds rate; call loan rate; money market; Federal Reserve System
    JEL: E43 E44 E52 G21 N22
    Date: 2020–06–26
  19. By: Thomas Hasenzagl; Filippo Pellegrino; Lucrezia Reichlin; Giovanni Ricco
    Abstract: We develop a medium-size semi-structural time series model of inflation dynamics that is consistent with the view - often expressed by central banks - that three components are important: a trend anchored by long-run expectations, a Phillips curve and temporary fluctuations in energy prices. We find that a stable long-term inflation trend and a well identified steep Phillips curve are consistent with the data, but they imply potential output declining since the new millennium and energy prices affecting headline inflation not only via the Phillips curve but also via an independent expectational channel. A high-frequency energy price cycle can be related to global factors affecting the commodity market, and often overpowers the Phillips curve thereby explaining the inflation puzzles of the last ten years.
    Date: 2020–06
  20. By: Juliana Dutra Araujo; Manasa Patnam; Adina Popescu; Fabian Valencia; Weijia Yao
    Abstract: This paper builds a novel database on the effects of macroprudential policy drawing from 58 empirical studies, comprising over 6,000 results on a wide range of instruments and outcome variables. It encompasses information on statistical significance, standardized magnitudes, and other characteristics of the estimates. Using meta-analysis techniques, the paper estimates average effects to find i) statistically significant effects on credit, but with considerable heterogeneity across instruments; ii) weaker and more imprecise effects on house prices; iii) quantitatively stronger effects in emerging markets and among studies using micro-level data; and iii) statistically significant evidence of leakages and spillovers. Other findings include relatively stronger impacts for tightening than loosening actions and negative effects on economic activity in the near term.
    Keywords: Systemically important financial institutions;Financial crises;Reserve requirements;Domestic credit;Credit demand;Macroprudential Policy,financial stability,Meta-analysis.,WP,outcome variable,average effect,MPM,micro-level,Claessens
    Date: 2020–05–22
  21. By: Anand, Abhishek (Harvard Kennedy School, Cambridge); Chakraborty, Lekha (National Institute of Public Finance and Policy)
    Abstract: In last few years, several central banks have implemented negative interest rate policies (NIRP) to boost domestic economy. However, such policies may have some unintended consequences for the emerging Asian markets (EAMs). The objective of this paper is to provide an assessment of the domestic and global implications of negative interest rate policy. We also present how the implications differ from that of quantitative easing (QE). The analysis shows that the impact NIRP is heterogeneous; with differential impacts for big Asian economies (India and Indonesia)and small trade dependent economies (STDE) (Hong Kong, Philippines, South Korea, Singapore and Thailand). Nominal GDP and exports are adversely impacted in EMs in response to NIRP, especially in India and Indonesia. The inflation goes significantly high in EMs in response to plausible negative interest rates but the impact is much more severe for India and Indonesia than in STDEs. The local currencies also depreciate in all EAMs in response to negative interest rates. QE, on the other hand, has no significant impact on inflation but nominal GDP growth declines in EAMs. The currency appreciates and exports decline. The impact is much more severe in big emerging economies like India and Indonesia.
    Keywords: Negative interest rate policy ; Quantitative easing ; emerging economies
    JEL: E52 E58
    Date: 2020–06
  22. By: Brei, Michael; Gambacorta, Leonardo; Lucchetta, Marcella; Parigi, Bruno
    Abstract: The paper investigates whether impaired asset segregation tools, otherwise known as bad banks, and recapitalisation lead to a recovery in the originating banks' lending and a reduction in non-performing loans (NPLs). Results are based on a novel data set covering 135 banks from 15 European banking systems over the period 2000-16. The main finding is that bad bank segregations are effective in cleaning up balance sheets and promoting bank lending only if they combine recapitalisation with asset segregation. Used in isolation, neither tool will suffice to spur lending and reduce future NPLs. Exploiting the heterogeneity in asset segregation events, we find that asset segregation is more effective when: (i) asset purchases are funded privately; (ii) smaller shares of the originating bank's assets are segregated; and (iii) asset segregation occurs in countries with more efficient legal systems. Our results continue to hold when we address the potential endogeneity problem associated with the creation of a bad bank.
    Keywords: bad banks; lending; Non-performing loans; recapitalisations; rescue packages; resolutions
    JEL: E41 G01 G21
    Date: 2020–02
  23. By: Viral V. Acharya; Katharina Bergant; Matteo Crosignani; Tim Eisert; Fergal McCann
    Abstract: We analyze how regulatory constraints on household leverage—in the form of loan-to-income and loan-to-value limits—a?ect residential mortgage credit and house prices as well as other asset classes not directly targeted by the limits. Supervisory loan level data suggest that mortgage credit is reallocated from low-to high-income borrowers and from urban to rural counties. This reallocation weakens the feedback loop between credit and house prices and slows down house price growth in “hot” housing markets. Consistent with constrained lenders adjusting their portfolio choice, more-a?ected banks drive this reallocation and substitute their risk-taking into holdings of securities and corporate credit.
    Keywords: Financial crises;Macroprudential policies and financial stability;Bank credit;Central banks;Economic conditions;Macroprudential Regulation,Household Leverage,Residential Mortgage Credit,House Prices,WP,mortgage credit,reallocation,borrower,LTV,central bank of Ireland
    Date: 2020–05–22
  24. By: Colliard, Jean-Edouard; Georg, Co-Pierre
    Abstract: Despite a heated debate on the perceived increasing complexity of financial regulation, there is no available measure of regulatory complexity other than the mere length of regulatory documents. To fill this gap, we propose to apply simple measures from the computer science literature by treating regulation like an algorithm: a fixed set of rules that determine how an input (e.g., a bank balance sheet) leads to an output (a regulatory decision). We apply our measures to the regulation of a bank in a theoretical model, to an algorithm computing capital requirements based on Basel I, and to actual regulatory texts. Our measures capture dimensions of complexity beyond the mere length of a regulation. In particular, shorter regulations are not necessarily less complex, as they can also use more "high-level" language and concepts. Finally, we propose an experimental protocol to validate measures of regulatory complexity.
    Keywords: Basel Accords; Capital regulation; financial regulation; Regulatory Complexity
    JEL: G18
    Date: 2020–02
  25. By: Ignacio Escanuela Romana
    Abstract: The objective of this work is twofold: to expand the depression models proposed by Tobin and analyse a supply shock, such as the Covid-19 pandemic, in this Keynesian conceptual environment. The expansion allows us to propose the evolution of all endogenous macroeconomic variables. The result obtained is relevant due to its theoretical and practical implications. A quantity or Keynesian adjustment to the shock produces a depression through the effect on aggregate demand. This depression worsens in the medium/long-term. It is accompanied by increases in inflation, inflation expectations and the real interest rate. A stimulus tax policy is also recommended, as well as an active monetary policy to reduce real interest rates. On the other hand, the pricing or Marshallian adjustment foresees a more severe and rapid depression in the short-term. There would be a reduction in inflation and inflation expectations, and an increase in the real interest rates. The tax or monetary stimulus measures would only impact inflation. This result makes it possible to clarify and assess the resulting depression, as well as propose policies. Finally, it offers conflicting predictions that allow one of the two models to be falsified.
    Date: 2020–07
  26. By: Acharya, Sushant; Dogra, Keshav
    Abstract: We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safety widens spreads, causing the ZLB to bind and increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. This entails permanently lower investment which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt is optimal if alternative instruments are unavailable. Alternative policies which permit negative real interest rates - higher inflation targets, negative nominal rates - achieve full employment without reducing investment.
    Keywords: Crowding out; liquidity traps; negative natural rate; Risk premium; safe assets
    JEL: E3 E4 E5 G1 H6
    Date: 2020–02
  27. By: Paloviita, Maritta; Haavio, Markus; Jalasjoki, Pirkka; Kilponen, Juha; Vänni, Ilona
    Abstract: We measure the tone (sentiment) of the ECB’s Governing Council regarding economic outlook at the time of each monetary policy meeting and use this information together with the Eurosystem/ECB staff macroeconomic projections to directly estimate the Governing Council’s loss function. Our results support earlier, more indirect findings, based on reaction function estimations, that the ECB has been either more averse to inflation above 2% ceiling or that the de facto inflation aim has been considerably below 2%. Our results suggest further that an inflation aim of 2% combined with asymmetry is a plausible specification of the ECB’s preferences.
    JEL: E31 E52 E58
    Date: 2020–07–06
  28. By: Nicoletta Batini; Alessandro Cantelmo; Giovanni Melina; Stefania Villa
    Abstract: This paper builds a model-based dynamic monetary and fiscal conditions index (DMFCI) and uses it to examine the evolution of the joint stance of monetary and fiscal policies in the euro area (EA) and in its three largest member countries over the period 2007-2018. The index is based on the relative impacts of monetary and fiscal policy on demand using actual and simulated data from rich estimated models featuring also financial intermediaries and long-term government debt. The analysis highlights a short-lived fiscal expansion in the aftermath of the Global Financial Crisis, followed by a quick tightening, with monetary policy left to be the “only game in town” after 2013. Individual countries’ DMFCIs show that national policy stances did not always mirror the evolution of the aggregate stance at the EA level, due to heterogeneity in the fiscal stance.
    Date: 2020–06–05
  29. By: Kerschyl Singh; David Fowkes
    Date: 2020–06–17
  30. By: Dieckelmann, Daniel
    Abstract: This paper introduces a new transmission channel of banking crises where sizable cross-border bank claims on foreign countries with high domestic crisis risk enable contagion to the home economy. This asset-side channel opposes traditional views that see banking crises originating from either domestic credit booms or from cross-border borrowing. I propose a combined model that predicts banking crises using both domestic and foreign factors. For developed economies, the channel is predictive of crises irrespective of other types of capital ows, while it is entirely inactive for emerging economies. I show that policy makers can significantly enhance current early warning models by incorporating exposure-based risk from cross-border lending.
    Keywords: cross-border bank lending,banking crises,systemic risk,financial linkages
    JEL: C53 E44 F34 G01 G21
    Date: 2020
  31. By: Takeshi Yagihashi (Senior Economist, Policy Research Institute)
    Abstract: This paper examines whether the omission of the credit channel from policy models used by both monetary and fiscal policymakers would lead to a noticeably gbad h policy outcome through model simulation. First, we simulate a financial crisis in which the financial market friction grows and the risk premium becomes more volatile. Next, both monetary and fiscal policymakers readjust their policy to stabilize the economy using an approximating DSGE model that does not feature the credit channel. We show that while the model misspecification does not affect much how policymakers perceive the crisis, the newly adopted policy based on the approximating model would cause further destabilization of the economy. We also show that the destabilization of the economy could be prevented if the fiscal policymaker is equipped with the correctly-specified credit channel model and chooses its new policy while taking into account the decision-making of the monetary policymaker. Finally, under the scenario that the correctlyspecified model is unknown, we show that the destabilization of the economy could still be prevented if both policymakers can apply judgement to unreasonable parameter estimates during the crisis period. In sum, prediction of policy outcomes and cautiousness in interpreting estimation results can help in mitigating the credit channel misspecification.
    Keywords: DSGE model, Lucas Critique, Bayesian estimation, Financial Accelerator model, monetary policy, fiscal policy, policy mix
    Date: 2020–03
  32. By: Zekaite, Zivile (Central Bank of Ireland)
    Abstract: Survey data shows consumers tend to think that inflation is higher than it actually is. Inflation perceptions by consumers may influence economic and financial decisions of households and so understanding what drives perceptions is an important question. This Letter examines which goods and services are driving inflation perceptions of consumers in the euro area. Various components of the Harmonised Index of Consumer Prices (HICP) – the official measure of consumer price inflation in the euro area - are considered as well as the index of residential property prices, which is not part of the HICP. The main findings are as follows. Firstly, consumers appear to have a different basket of goods and services in mind from that used in the HICP when forming their views on consumer price developments. Some goods and services are likely being disregarded. Secondly, inflation perceptions are driven by price developments in a number of HICP items covering a relatively broad range of goods and services. For some price indices, however, the relative importance in determining perceived inflation differs from the relative weight in the HICP. In addition, residential property prices are also important in explaining perceived inflation. Finally, it appears that consumers may find it difficult to adjust observed prices for changes in quality. From a policy perspective, more communication on what the official inflation measure is and how it is constructed may help to reduce the bias in consumers’ perceptions. This is important as perceptions of inflation may influence decisions to save and spend.
    Date: 2020–06
  33. By: Francesco D’Acunto; Daniel Hoang; Michael Weber
    Abstract: With a binding effective lower bound on interest rates and large government deficits, conventional policies are unviable and policymakers resort to unconventional policies, which target households' expectations directly. Using unique micro data and a difference-in-differences strategy, we assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to stimulate consumption via raising households' inflation expectations. All households' inflation expectations and spending plans react to unconventional fiscal policy. Instead, households, contrary to experts, do not react to forward guidance. We argue that policies aiming to affect households directly are ineffective if (non-expert) households do not understand them.
    JEL: D12 D84 D91 E21 E31 E52 E65
    Date: 2020–06
  34. By: Mariarosaria Comunale (Bank of Lithuania)
    Abstract: In this paper, we make use of the results from Structural Bayesian VARs taken from several studies for the euro area, which apply the idea of a shock-dependent Exchange Rate Pass-Through, drawing a comparison across models and also with respect to available DSGEs. On impact, the results are similar across Structural Bayesian VARs. At longer horizons, the magnitude in DSGEs increases because of the endogenous response of monetary policy and other variables. In BVARs particularly, shocks contribute relatively little to observed changes in the exchange rate and in HICP. This points to a key role of systematic factors, which are not captured by the historical shock decomposition. However, in the APP announcement period, we do see demand and exogenous exchange rate shocks countribute significantly to variations in exchange rates. Nonetheless, it is difficult to find a robust characterization across models. Moreover, the modelling challenges increase when looking at individual countries, because exchange rate and monetary policy shocks (also taken relative to the US) are common to the whole euro area. Hence, we provide a local projection exercise with common euro area shocks, identified in euro area-specific Structural Bayesian VARs and in DSGE, extrapolated and used as regressors. For common exchange rate shocks, the impact on consumer prices is the largest in some new member states, but there are a wide range of estimates across models. For core consumer prices, the coefficients are smaller. Regarding common relative monetary policy shocks, the impact is larger than for exchange rate shocks in any case. Generally, euro area monetary policy plays a big role for consumer prices, and this is especially so for new member states and the euro area periphery.
    Keywords: euro area, exchange rate pass-through, Bayesian VAR, local projections, monetary policy
    JEL: E31 F31 F45
    Date: 2020–03–26

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