nep-cba New Economics Papers
on Central Banking
Issue of 2020‒07‒27
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Shocks Matter: Managing Capital Flows with Multiple Instruments in Emerging Economies By Ruy Lama; Juan Pablo Medina
  2. Macroeconomic Effects of Large-Scale Asset Purchases: New Evidence By Kyungmin Kim; Thomas Laubach; Min Wei
  3. Shock-Dependent Exchange Rate Pass-Through in Russia By Ivan Khotulev
  4. Inflation volatility in small and large advanced open economies By Balatti, Mirco
  5. Monetary Policy Implementation: Operational Issues for Countries with Evolving Monetary Policy Frameworks By Nils Mæhle
  6. The Signalling Channel of Negative Interest Rates By de Groot, Oliver; Haas, Alexander
  7. How Fed Swap Lines Supported the U.S. Corporate Credit Market amid COVID-19 Strains By Nicola Cetorelli; Linda S. Goldberg; Fabiola Ravazzolo
  8. Toward a Macroprudential Regulatory Framework for Mutual Funds By Christos Argyropoulos; Bertrand Candelon; Jean-Baptiste Hasse; Ekaterini Panopoulou
  9. Japan’s Experience with Yield Curve Control By Matthew Higgins; Thomas Klitgaard
  10. Monetary policy and the management of uncertainty: a narrative approach By Tuckett, David; Holmes, Douglas; Pearson, Alice; Chaplin, Graeme
  11. Making a Breach: The Incorporation of Agent-Based Models into the Bank of England's Toolkit By Romain Plassard
  12. Thinking ahead of the next big crash: Clues from Athens in classical times By Bitros, George C.
  13. Systemic Risk Modeling: How Theory Can Meet Statistics By Raphael A Espinoza; Miguel A. Segoviano; Ji Yan
  14. Gains from wage Flexibility and the Zero Lower Bound By Roberto M. Billi; Jordi Galí
  15. The effect of Emergency Liquidity Assistance (ELA) on bank lending during the euro area crisis By Heather D. Gibson; Stephen G. Hall; Pavlos Petroulas; Vassilis Spiliotopoulos; George S. Tavlas
  16. Monetary policy and intangible investment By Döttling, Robin; Ratnovski, Lev
  17. Inflation in the G7 Countries: Persistence and Structural Breaks By Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
  18. Interest rate setting and communication at the ECB By Cour-Thimann, Philippine; Jung, Alexander
  19. Comfort in Floating: Taking Stock of Twenty Years of Freely-Floating Exchange Rate in Chile By Elías Albagli; Mauricio Calani; Metodij Hadzi-Vaskov; Mario Marcel; Luca A Ricci
  20. Reallocation effects of monetary policy By Daisuke Miyakawa; Koki Oikawa; Kozo Ueda
  21. Insider-Outsider Labor Markets, Hysteresis and Monetary Policy By Jordi Galí
  22. Share Buybacks, Monetary Policy and the Cost of Debt By Assia Elgouacem; Riccardo Zago
  23. The Rise in Foreign Currency Bonds: The Role of US Monetary Policy and Capital Controls By Philippe Bacchetta; Rachel Cordonier; Ouarda Merrouche
  24. FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability By Damiano Sandri
  25. International spillovers of forward guidance shocks By Callum Jones; Mariano Kulish; Daniel Rees
  26. The cleansing effect of banking crises By Gropp, Reint; Ongena, Steven; Rocholl, Jörg; Saadi, Vahid
  27. Are Unconventional Monetary Policies a Priced Risk Factor for Hedge Fund Strategies? By Massimo Guidolin; Alexei Orlov
  28. Bank Heterogeneity and Financial Stability By Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang

  1. By: Ruy Lama; Juan Pablo Medina
    Abstract: We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings. First, both foreign exchange intervention (FXI) and macroprudential polices are tools complementary to the monetary policy rate that can largely reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXI takes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results highlight the importance of calibrating the use of multiple instruments according to the underlying shocks that induce shifts in capital flows.
    Date: 2020–06–19
  2. By: Kyungmin Kim; Thomas Laubach; Min Wei
    Abstract: We examine the macroeconomic effect of large-scale asset purchases (LSAPs) and forward guidance (FG) using a proxy structural VAR estimated on data through 2015, where the stance of the LSAP policy is measured using primary dealer expectations of the Federal Reserve's asset holdings. Monetary policy shocks are identified using instruments constructed from event study yield changes, and additional assumptions are employed to separately identify LSAP and FG shocks. We find that unexpected expansions in the Federal Reserve's asset holdings during the ZLB period between 2008 and 2015 had significant expansionary effects on the macroeconomy, with real activity and inflation rising and unemployment declining notably following the shock. The policy accommodation appears to be transmitted to the economy both through financial markets-including Treasury yields, credit spreads and equity prices-and through bank lending. The effects on Treasury yields and term premiums appear to be longer-lived than previously documented, while the effects on credit spreads and especially bank lending also appear persistent. These results appear fairly robust to alternative identification and econometric methodologies, alternative policy indicators and instruments, and controlling for any possible Federal Reserve information effect. A counterfactual analysis shows that absent the LSAP3 program implemented between late 2012 and 2014, CPI inflation would have been about 1 percentage point lower, while the unemployment rate would have been about 4 percentage points higher, by the end of 2015.
    Keywords: Unconventional monetary policy; Macro effects; Quantitative easing (QE); Primary dealer survey; Forward guidance; External instruments; Identification; Structural VAR
    JEL: E44 E52 E58
    Date: 2020–06–17
  3. By: Ivan Khotulev (Bank of Russia, Russian Federation)
    Abstract: In this note, we study shock-dependent exchange rate pass-through (ERPT) to consumer prices in Russia. First, we estimate a traditional "shock-independent" ERPT on aggregate quarterly time series of the exchange rate, CPI, and control variables. Estimated coefficients confirm previous studies and official statements by the Bank of Russia. Rolling regression in different periods shows that the ERPT becomes more stable and more precisely estimated after 2014-2015 when the Bank of Russia switched to inflation targeting. We compare results with the ERPT from an estimated structural model. We obtain a forecast of macroeconomic time series from a DSGE model conditional on foreign variables observed. We run the same regression on forecasted data and obtain estimates of the "shock-independent" ERPT from the structural model. We compute shock-dependent ERPT from model impulse responses. The magnitude of the ERPT varies for different shocks with the highest value attributed to domestic monetary policy shocks. When estimating the pass-through of the exchange rate to prices, care must be taken of which shock caused changes in the exchange rate. Since monetary policy shocks appear to be associated with the highest ERPT, and the ERPT becomes more stable after 2014-2015, the Russian economy may be reaping an additional benefit of inflation targeting in the form of reduced monetary policy shocks and a more stable ERPT.
    Keywords: exchange rate pass-through, monetary policy, Russia
    Date: 2020–06
  4. By: Balatti, Mirco
    Abstract: Inflation volatility is clearly important for structural analysis, forecasting and policy purposes, yet it is often overlooked in the literature. This paper compares inflation volatility among advanced open economies with inflation targeting monetary policy frameworks. The results of the empirical exercise using a panel dataset suggest that, over the last two decades, the volatility of inflation was similar among countries, even when controlling for monetary policy activity and other factors. In particular, there is only a weak and statistically not significant correlation between inflation volatility and country size. Also, point-targeting central banks (in contrast with range-targeters) and commodity exporters are only weakly associated with higher inflation swings. Equivalent conclusions are reached when decomposing inflation volatility in a transitory and a permanent component. I thus argue that small and large advanced open economies are exposed to global fluctuations to a comparable extent. A range of robustness tests confirm that the results are not sensitive to methodological choices and the relationship was not altered by the Great Recession or the low interest rate environment. JEL Classification: E31, E42, E50, F10, F41
    Keywords: globalisation, inflation targeting, prices, volatility
    Date: 2020–07
  5. By: Nils Mæhle
    Abstract: This paper discusses operational issues for countries that want to reform their monetary policy frameworks. It argues that stabilizing short-term interest rates on a day-to-day basis has significant advantages, and thus that short-term interest rates, not reserve money, in most cases should be the daily operating target, including for countries relying on a money targeting policy strategy. The paper discusses how a policy formulation framework based on monetary aggregates can be combined with an operational framework that ensures more stable and predictable short-term rates to enhance policy transmission. It also discusses how to best configure an interest-rate-based operational framework when markets are underdeveloped and liqudity management capacity is weak.
    Keywords: Central banking and monetary issues;Bank rates;Financial crises;Financial instruments;Central bank operations;monetary policy operations,monetary targeting,monetary policy transmission,liqudity management,interest rate determination,WP,interbank,operational framework,excess reserve,short-term interest rate,policy stance
    Date: 2020–02–07
  6. By: de Groot, Oliver; Haas, Alexander
    Abstract: Negative interest rates are a new (and controversial) monetary policy tool. This paper studies a novel signalling channel and asks whether negative rates can be 1) an effective and 2) an optimal policy tool. 1) We build a financial-friction new-Keynesian model in which monetary policy can set a negative reserve rate, but deposit rates are constrained by zero. All else equal, a negative rate contracts bank net worth and increases credit spreads (the costly "interest margin" channel). However, it also signals lower future deposit rates, even with current deposit rates constrained, boosting aggregate demand and net worth. Quantitatively, we find the signalling channel dominates, but the effectiveness of negative rates depends crucially on three factors: i) degree of policy inertia, ii) level of reserves, iii) zero lower bound duration. 2) In a simplied model we prove two necessary conditions for the optimality of negative rates: i) time-consistent policy setting, ii) preference for policy smoothing.
    Keywords: forward guidance; liquidity trap; monetary policy; Taylor rule
    JEL: E44 E52 E61
    Date: 2020–01
  7. By: Nicola Cetorelli; Linda S. Goldberg; Fabiola Ravazzolo
    Abstract: The onset of the COVID-19 shock in March 2020 brought large changes to the balance sheets of the U.S. branches of foreign banking organizations (FBOs). Most of these branches saw sizable usage of committed credit lines by U.S.-based clients, resulting in increased funding needs. In this post, we show that branches of FBOs from countries whose central banks used standing swap lines with the Federal Reserve (“standing swap central banks”—SSCBs) met their increased funding needs by accessing dollars that flowed into the United States through their foreign parent banks. This volume of dollar inflows accounted for at least half of the late March aggregate take-up at SSCB dollar operations.
    Keywords: dollar; COVID-19; swap line; central bank; foreign banking organizations
    JEL: G2
    Date: 2020–06–12
  8. By: Christos Argyropoulos (Lancaster University); Bertrand Candelon (Université Catholique de Louvain); Jean-Baptiste Hasse (Aix-Marseille University); Ekaterini Panopoulou (University of Essex)
    Abstract: This paper highlights the procyclical and unstable behaviour of mutual fund returns. It proposes a novel factor model that allows for regime changes associated with macroeconomic variables. Estimated on a panel covering 825 US equity mutual funds over a period of 30 years, it appears that the yield curve, the dividend yield and the industrial production coincide with regimes switches in the Fama-French factors. Furthermore, the estimated regimes perfectly match financial crises and economic downturns, thus confirming the procyclical behaviour of mutual funds' returns. These findings, coupled with the emerging systemic role of mutual funds, promote the consideration for a specific macroprudential regulatory framework.
    Keywords: Financial Stability; MutualFundIndustry; Regulation; Macroprudential Framework
    JEL: G18 G23 G28
    Date: 2020–04–29
  9. By: Matthew Higgins; Thomas Klitgaard
    Abstract: In September 2016, the Bank of Japan (BoJ) changed its policy framework to target the yield on ten-year government bonds at “around zero percent,” close to the prevailing rate at the time. The new framework was announced as a modification of the Bank's earlier policy of rapid monetary base expansion via large-scale asset purchases—a policy that market participants increasingly regarded as unsustainable. While the BoJ announced that the rapid pace of government bond purchases would not change, it turned out that the yield target approach allowed for a dramatic scaling back in purchases. In Japan’s case, the commitment to purchase whatever was needed to keep the ten-year rate near zero has meant that very little in the way of asset purchases have been required.
    Keywords: asset purchases; monetary policy; monetary base; Bank of Japan; yield curve control
    JEL: E52 F0
    Date: 2020–06–22
  10. By: Tuckett, David (UCL Centre for the Study of Decision-Making Uncertainty, University College London); Holmes, Douglas (Binghamton University); Pearson, Alice (University of Cambridge); Chaplin, Graeme (Bank of England)
    Abstract: In this paper we explore how macroeconomic theory might be augmented, and the practice of monetary policy better understood, if approached through ideas from social and psychological science. A modern, inflation-targeting central bank faces ‘radical’ uncertainty both in understanding the economy and in knowing how best to communicate policy decisions to influence behaviour. We make use of narrative theory to explore these challenges, drawing on fieldwork with the Bank’s regional Agencies and conversations with staff and policy-makers. We find that the intelligence gathered from conversations with businesses is uniquely useful for both the analysis and communication of monetary policy. Such intelligence embodies knowledge about the plans which are making the future. It also provides insights into how economic agents understand the economy they are creating. These insights can help the Monetary Policy Committee to communicate its policy as a narrative the public understands and commits to. We propose further research to advance and test these ideas.
    Keywords: Monetary policy; narrative theory; uncertainty; inflation-targeting; central bank communication; macroeconomic theory; economic knowledge
    JEL: E52 E58
    Date: 2020–06–05
  11. By: Romain Plassard (Université Côte d'Azur, France; GREDEG CNRS)
    Abstract: After the financial crisis of 2008, several central banks incorporated agent-based models (ABMs) into their toolkit. The Bank of England (BoE) is a case in point. Since 2008, it has developed four ABMs. Under which conditions could ABMs breach the walls of the BoE? Then, there is the issue of the size of the breach. In which divisions economists used ABMs? Was agent-based modeling used to inform a wide range of policies? Last but not least, there is the issue of the fate of ABMs at the BoE. Is the breach going to narrow or, on the contrary, to widen? What are the forces underlying the deployment of ABMs at the BoE? My article aims to address these issues. I show that institutional reforms were central to the use of ABMs at the BoE. I also show that so far, ABMs have been a marginal tool at the BoE. They were not used to inform monetary policy. Neither were they used to coordinate the BoE's microprudential, macroprudential, and monetary policies. ABMs were only used to inform the BoE's macroprudential policy. I conclude the article by examining the conditions for a broader use of ABMs at the BoE.
    Keywords: Bank of England, agent-based models, macroprudential policy, monetary policy, DSGE models
    Date: 2020–06
  12. By: Bitros, George C.
    Abstract: Credible analyses and evidence submitted by experts from universities, international organizations and independent think tanks show that the trends which led to the 2008 worldwide financial crisis remain intact. As a result, central for responsible leaderships should be the concern how to forestall the next big one which might prove uncontrollable. Given the world dominance of the U.S. dollar, in a 2015 paper I discussed two paths of possible reforms: One bold but gradual, which would entail altering the present institutional setup of the U.S. Federal Open Market Committee (“the Fed”), provided that it maintains control over the Federal Funds Rate (FFR); and, if not, a radical one, which would entail replacing the Fed with a monetary regime based on free banking. In this paper I go a step further in the latter direction by drawing on the model of free banking that emerged in Athens in classical times and enabled the Athenian “empire” to turn the Attic drachma into the dollar of today, throughout the eastern Mediterranean and beyond, without causing major financial crises for over two centuries. More specifically, I argue that, even if the said model had not proved its potential as a highly successful historical precedent, as banker of the world, the U.S. ought to consider it as a benchmark for reference and adaptation, before an unexpected international financial crisis and/or the revolutionary technological developments in the front of gold-like digital currencies, precipitate a monetary regime change.
    Keywords: Classical Athens, Democracy, Central banks, Free banking, Athenian model of money and banking.
    JEL: D7 E4 E5 E6 G2 N4
    Date: 2020–06–16
  13. By: Raphael A Espinoza; Miguel A. Segoviano; Ji Yan
    Abstract: We propose a framework to link empirical models of systemic risk to theoretical network/ general equilibrium models used to understand the channels of transmission of systemic risk. The theoretical model allows for systemic risk due to interbank counterparty risk, common asset exposures/fire sales, and a “Minsky" cycle of optimism. The empirical model uses stock market and CDS spreads data to estimate a multivariate density of equity returns and to compute the expected equity return for each bank, conditional on a bad macro-outcome. Theses “cross-sectional" moments are used to re-calibrate the theoretical model and estimate the importance of the Minsky cycle of optimism in driving systemic risk.
    Keywords: Financial crises;Bank credit;Financial markets;Financial institutions;Macroprudential policies and financial stability;Systemic risk,Minsky effect,CIMDO,Default,WP,interbank,repayment rate,expected shortfall,time t,Minsky
    Date: 2020–03–13
  14. By: Roberto M. Billi; Jordi Galí
    Abstract: We analyze the welfare impact of greater wage flexibility in the presence of an occasionally binding zero lower bound (ZLB) constraint on the nominal interest rate. We show that the ZLB constraint generally amplifies the adverse effects of greater wage flexibility on welfare when the central bank follows a conventional Taylor rule. When demand shocks are the driving force, the ZLB implies that an increase in wage flexibility reduces welfare even under the optimal monetary policy with commitment.
    JEL: E24 E32 E52
    Date: 2020–06
  15. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (Bank of Greece); Pavlos Petroulas (Bank of Greece); Vassilis Spiliotopoulos (Bank of Greece); George S. Tavlas (Bank of Greece)
    Abstract: We examine the impact of emergency liquidity assistance (ELA) on bank lending in eleven euro area countries during the financial crisis. With the intensification of the crisis, ELA took on a pivotal role in some countries. However, assessments of the quantitative impact of ELA in the literature are non-existent. We estimate a structural panel model for the determination of bank lending, which includes the amount of ELA received by each bank, allowing us to investigate the direct effect of ELA on lending. Our model corrects a mis-specification found in the prototype model used in the literature. We then undertake a VAR analysis, which allows us to address the effect of ELA on GDP. Finally, we examine spillover effects among banks, indicating that ELA generated positive spillovers to other banks.
    Keywords: euro area financial crisis; emergency liquidity assistance (ELA); European banks; spatial panel model
    JEL: E3 G01 G14 G21
    Date: 2020–01
  16. By: Döttling, Robin; Ratnovski, Lev
    Abstract: We contrast how monetary policy affects intangible relative to tangible investment. We document that the stock prices of firms with more intangible assets react less to monetary policy shocks, as identified from Fed Funds futures movements around FOMC announcements. Consistent with the stock price results, instrumental variable local projections confirm that the total investment in firms with more intangible assets responds less to monetary policy, and that intangible investment responds less to monetary policy compared to tangible investment. We identify two mechanisms behind these results. First, firms with intangible assets use less collateral, and therefore respond less to the credit channel of monetary policy. Second, intangible assets have higher depreciation rates, so interest rate changes affect their user cost of capital relatively less. JEL Classification: E22, E52, G32
    Keywords: heterogeneity, intangible investment, monetary policy, stock returns
    Date: 2020–07
  17. By: Guglielmo Maria Caporale; Luis A. Gil-Alana; Carlos Poza
    Abstract: This paper examines long-range dependence in the inflation rates of the G7 countries by estimating their (fractional) order of integration d over the sample period January 1973 - March 2020. The results indicate that the series are very persistent, the estimated value of d being equal to or higher than 1 in all cases. Possible non-linearities in the form of Chebyshev polynomials in time are ruled out. Endogenous break tests are then carried out, and the degree of integration is estimated for each of the subsamples corresponding to the detected break dates. Significant differences are found between subsamples and countries in terms of the estimated degree of integration of the series.
    Keywords: inflation rates, G7, persistence, long memory, long-range dependence
    JEL: C22 E31
    Date: 2020
  18. By: Cour-Thimann, Philippine; Jung, Alexander
    Abstract: Based on ordered Probit models and twenty years of euro area data, we estimate empirical reaction functions for the ECB´s monetary policy and augment them with communication indicators. First, we find that the ECB responded to risks to price stability in line with its primary objective, and that the account of post-meeting communications about risks to price stability and to growth significantly enhances the modelling of its reaction function. Second, we detect that the ECB also responded to the evolution of the federal funds rate, thereby confirming the importance of international interest rate linkages or the global cycle that it reflects. Third, while confirming Gerlach’s (2007) finding on the relevance of M3 growth for explaining future interest rate changes, we show that this result only holds for the period before the global financial crisis. JEL Classification: E43, E52, C22, C25
    Keywords: communication indicators, monetary policy reaction function, Probit model, staff projections, Survey of Professional Forecasters
    Date: 2020–07
  19. By: Elías Albagli; Mauricio Calani; Metodij Hadzi-Vaskov; Mario Marcel; Luca A Ricci
    Abstract: Chile offers an example of a country that has overcome the fear of floating by reducing balance sheet mismatches, enhancing financial market development, as well as improving monetary, fiscal, and political institutions, and strengthening policy credibility. Under the floating regime, Chile’s economic adjustment to external shocks appears significantly improved, and its exchange rate pass-through has substantially declined. Our results reinforce the case that moving to a clear and credible floating regime can be associated with a reduction in the fear of floating via economic transformation (like smaller balance sheet mismatches, a larger hedging market, and a lower exchange rate pass-through).
    Date: 2020–06–19
  20. By: Daisuke Miyakawa; Koki Oikawa; Kozo Ueda
    Abstract: Responding to the increased attention on the distributional aspects of monetary policy, we investigate the reallocation among heterogeneous firms triggered by nominal growth. Japanese firm-level data show that large firms invest more in R&D and grow faster than small firms under higher inflation. We then construct a model that introduces nominal rigidity into R&D-driven endogenous growth with heterogeneous firms. The model shows that high nominal growth leads to an increase in the market share of innovative firms because menu-cost burdens are relatively heavier for less innovative firms. This reallocation effect yields a positive effect of monetary expansion on both real growth and welfare. The optimal nominal growth can be strictly positive even under nominal rigidity. Moreover, the presence of menu costs can improve welfare.
    Keywords: Reallocation, firm dynamics, creative destruction, menu cost, optimal inflation rate
    JEL: E5 O3 O4
    Date: 2020–06
  21. By: Jordi Galí
    Abstract: I develop a version of the New Keynesian model with insider-outsider labor markets and hysteresis that can account for the high persistence of European unemployment. I study the implications of that environment for the design of monetary policy. The optimal policy calls for strong emphasis on (un)employment stabilization which a standard interest rate rule fails to deliver, with the gap between the two increasing in the degree of hysteresis. Two simple targetiing rules are shown to approximate well the optimal policy. The properties of the model and effects of different policies are analyzed through the lens of the labor wedge and its components.
    JEL: E24 E31 E32
    Date: 2020–06
  22. By: Assia Elgouacem; Riccardo Zago
    Abstract: Share buybacks have become common practice across U.S corporations. This paper shows that firms finance these operations mostly through newly issued corporate bonds, and that the exogenous variation in the cost of debt -due to innovations in monetary policy- is key in explaining managers' incentives to repurchase their own shares. Under our identification strategy, we find that firms are more likely to repurchase in periods of accommodative monetary policy when the yield on bond adjusts in the same direction. This behavior has macroeconomic implications as it diverts resources from investment and employment, thus reducing the transmission of accommodative monetary policy at firm-level.
    Keywords: Share Buybacks, Monetary Policy, Corporate Yield, EPS Targeting .
    JEL: E52 G11 G35 G32
    Date: 2020
  23. By: Philippe Bacchetta (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute); Rachel Cordonier (Swiss National Bank); Ouarda Merrouche (University of Lausanne)
    Abstract: An unintended consequence of loose US monetary policy is the increase in currency risk exposure abroad. Using firm-level data on corporate bond issuances in 17 emerging market economies (EME) between 2003 and 2015, we find that EME companies are more likely to issue bonds in foreign currency when US interest rates are low. This increase occurs across the board, including for firms more vulnerable to foreign exchange exposure, and is particularly strong for bonds issued in local markets. Interestingly, capital controls on bond inflows significantly decrease the likelihood of issuing in foreign currency and can even eliminate the adverse impact of low US interest rates. In contrast, macroprudential foreign exchange regulations tend to increase foreign currency issuances of non-financial corporates, although this effect can be significantly reduced using capital controls.
    Keywords: foreign currency, corporate bonds, emerging markets, capital controls, currency risk
    JEL: G21 G30 E44
    Date: 2020–06
  24. By: Damiano Sandri
    Abstract: We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable in expectation, suggesting that FX intervention is used to stabilize the exchange rate in the face of temporary excessive movements rather than to manipulate it away from fundamental values. In line with this interpretation, we find that the scale of FX intervention responds to the degree of exchange rate misalignment relative to UIP conditions. We also document that intervention is more aggressive when there is less uncertainty about the medium-term level of the exchange rate and when the exchange rate is overvalued rather than undervalued.
    Date: 2020–06–12
  25. By: Callum Jones; Mariano Kulish; Daniel Rees
    Abstract: We estimate a two-country model of the US and Canada over the post 2009 sample to study the cross-country spillovers of forward guidance shocks. To do so, we propose a method to identify forward guidance shocks during the fixed interest rate regime. US forward guidance shocks have a larger impact than conventional monetary policy shocks. A 2 quarter expansionary forward guidance shock decreases Canadian output by about 0.2% to 0.4% on impact. The effect of US forward guidance shocks on Canadian output, unlike conventional policy shocks, depends crucially on the state of the US risk premium shock. The estimated forward guidance shocks coincide with significant US monetary policy announcements such as the introduction of calendar based guidance.
    Keywords: forward guidance shocks, identification, spillovers, zero lower bound
    JEL: E2 E4 E5 F4
    Date: 2020–07
  26. By: Gropp, Reint; Ongena, Steven; Rocholl, Jörg; Saadi, Vahid
    Abstract: We assess the cleansing effects of the recent banking crisis. In U.S. regions with higher levels of supervisory forbearance on distressed banks during the crisis, there is less restructuring in the real sector and the banking sector remains less healthy for several years after the crisis. Regions with less supervisory forbearance experience higher productivity growth after the crisis with more firm entries, job creation, and employment, wages, patents, and output growth. Supervisory forbearance is greater for state-chartered banks and in regions with weaker banking competition and more independent banks, while recapitalisation of distressed banks through TARP does not facilitate cleansing.
    Keywords: cleansing effect,banking crises,supervisory for bearance,productivity growth
    JEL: G01 G21 G28 O43
    Date: 2020
  27. By: Massimo Guidolin; Alexei Orlov
    Abstract: We test whether the unconventional monetary policy (UMP) announcements by the Federal Reserve and the European Central Bank represent a risk factor for the hedge fund industry as a whole and for ten commonly used strategies in particular. Using modified event studies and Markov switching models, we find that UMP announcements represent a risk factor for Convertible Arbitrage, Dedicated Short Bias, Emerging Markets, Equity Market Neutral, Fixed Income Arbitrage strategies as well as the Multi-Strategy type. We further test whether UMP announcements have an indirect effect on hedge funds’ performance through breaks in the parameters of the conventional risk factors. Using Chow and Bai-Perron tests, we find that for the industry as a whole and for all strategies, most of the UMP announcements correspond to break dates for the traditional factor loadings.
    Keywords: Hedge fund strategies, unconventional monetary policy, risk factors, modified event studies, Markov switching models, breakpoint tests
    JEL: G12 G11 G17 C32 C53
    Date: 2020
  28. By: Itay Goldstein; Alexandr Kopytov; Lin Shen; Haotian Xiang
    Abstract: We study how heterogeneity in banks’ asset holdings affects fragility. In the model, banks face a risk of bank runs and have to liquidate long-term assets in a common market to repay runners. Liquidation prices are depressed when many banks sell their assets at the same time. When banks are homogeneous, their selling behaviors are synchronized, and bank runs are exacerbated. We show that differentiating banks to some extent enhances the stability of all banks, even those whose asset performance ends up being weaker. Our analyses provide new insights about the regulation of banking sector’s architecture and the design of government support during crises.
    JEL: G01 G21 G23
    Date: 2020–06

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