nep-cba New Economics Papers
on Central Banking
Issue of 2020‒08‒10
34 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Effects of credit restrictions in the Netherlands and lessons for macroprudential policy By Gabriele Galati; Jan Kakes; Richhild Moessner
  2. Central Bank Communication: Information and Policy shocks By Ostapenko, Nataliia
  3. Identifying indicators of systemic risk By Hartwig, Benny; Meinerding, Christoph; Schüler, Yves
  4. Bank capital regulation in a zero interest environment By Döttling, Robin
  5. One Shock, Many Policy Responses By Rui Mano; Silvia Sgherri
  6. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework between the first quarter of 2018 and the fourth quarter of 2019 By Sylvestre, Julie; Coutinho, Cristina
  7. Effects of Fed policy rate forecasts on real yields and inflation expectations at the zero lower bound By Gabriele Galati; Richhild Moessner
  8. Intervention Under Inflation Targeting--When Could It Make Sense? By David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
  9. The Risk-Taking Channel in the US: A GVAR Approach By Alzuabi, Raslan; Caglayan, Mustafa; Mouratidis, Kostas
  10. Asymmetric macroeconomic effects of QE-induced increases in excess reserves in a monetary union By Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel
  11. Central bank digital currency and informal economy By Eun Young Oh; Shuonan Zhang
  12. Optimal Forbearance of Bank Resolution By Schilling, Linda Marlene
  13. Inefficient Relative Price Fluctuations By Daeha Cho; Kwang Hwan Kim
  14. Operational Risk Capital By Thomas Conlon; Xing Huan; Steven Ongena
  15. A Framework for Studying the Monetary and Fiscal History of Latin America, 1960–2017 By Timothy J. Kehoe; Juan Pablo Nicolini; Thomas J. Sargent
  16. ECB Debt Certificates: the European counterpart to US T-bills By Daniel C. Hardy
  17. Monetary policy transmission over the leverage cycle: evidence for the euro area By Rünstler, Gerhard; Bräuer, Leonie
  18. Central banks' voting contest By Charemza, Wojciech
  19. Covid 19: a new challenge for the EMU By Anne-Laure Delatte; Alexis Guillaume
  20. On the Essentiality of Credit and Banking at the Friedman Rule By Paola Boel; Christopher J. Waller
  21. Seigniorage and Sovereign Default: The Response of Emerging Markets to COVID-19 By Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez
  22. Global banks' dollar funding needs and central bank swap lines By Iñaki Aldasoro; Torsten Ehlers; Patrick McGuire; Goetz von Peter
  23. Bank Risk-Taking and Monetary Policy Transmission: Evidence from China By Xiaoming Li; Zheng Liu; Yuchao Peng; Zhiwei Xu
  24. The Credit Line Channel By Daniel L. Greenwald; John Krainer; Pascal Paul
  25. How Do Markets React to Tighter Bank Capital Requirements? By Cyril Couaillier; Dorian Henricot
  26. The impact of real economic activity on the effectiveness of monetary policy transmission: The case of Tunisia By Ons Mastour
  27. Inflation at risk from Covid-19 By Ryan Niladri Banerjee; Aaron Mehrotra; Fabrizio Zampolli
  28. Measuring the Natural Rate of Interest: The Role of Inflation Expectations By J. David Lopez-Salido; Gerardo Sanz-Maldonado; Carly Schippits; Min Wei
  29. Designing the Policy Mix in a Monetary Union By Hubert Kempf
  30. Dynamics of Czech Inflation: The Role of the Trend and the Cycle By Michal Franta; Ivan Sutoris
  31. Dollar shortages and central bank swap lines By Eguren-Martin, Fernando
  32. Disciplining expectations and the forward guidance puzzle By Christoffel, Kai; Mazelis, Falk; Montes-Galdón, Carlos; Müller, Tobias
  33. Has monetary policy made you happier? By Bunn, Philip; Haldane, Andrew; Pugh, Alice
  34. Mitigating the forward guidance puzzle: inattention, credibility, finite planning horizons and learning By de Groot, Oliver; Mazelis, Falk

  1. By: Gabriele Galati; Jan Kakes; Richhild Moessner
    Abstract: Credit restrictions were used as a monetary policy instrument in the Netherlands from the 1960s to the early 1990s. We study the effects of credit restrictions being active on the balance sheet structure of banks and other financial institutions. We find that banks mainly responded to credit restrictions by making adjustments to the liability side of their balance sheets, particularly by increasing the proportion of long-term funding. Responses on the asset side were limited, while part of the banking sector even increased lending after the installment of a restriction. These results suggest that banks and financial institutions responded by switching to long-term funding to meet the restriction and shield their lending business. Arguably, the credit restrictions were therefore still effective in reaching their main goal, i.e. containing money growth.
    Keywords: credit restrictions, monetary policy, macroprudential policy
    JEL: E42 E51 E52 E58 G28
    Date: 2020–07
  2. By: Ostapenko, Nataliia
    Abstract: The study proposes an alternative way to decompose Federal Reserve (Fed) information shocks from monetary policy shocks by employing a textual analysis to Federal Open Market Committee (FOMC) statements. I decompose Fed statements into economic topics using Latent Dirichlet Allocation (LDA). The model was trained on the business section from major US newspapers. After decomposing surprises in Fed futures into a part that is explained by topics from the Fed statements and that is not explained, the study employs these purged series as proxies for monetary policy and Fed information shocks. The results show that, compared to surprises in 3-month federal funds futures, a policy shock identified in this study has a more negative effect on GDP and a more prolonged negative effect on inflation. In the short-run it causes S&P500 to decline and the Fed to raise its interest rate. Identified Fed information shock affects the macroeconomy as the standard news shock: it has positive long-run effects on S&P500, interest rates, and real GDP, whereas it has a negative short-run effect on inflation. Moreover, the Fed information shock reduces credit costs.
    Keywords: FOMC, statements, Latent Dirichlet Allocation, monetary policy, information, shocks
    JEL: E52
    Date: 2020–05–22
  3. By: Hartwig, Benny; Meinerding, Christoph; Schüler, Yves
    Abstract: We operationalize the definition of systemic risk provided by the IMF, BIS, and FSB and derive testable hypotheses to identify indicators of systemic risk. We map these hypotheses into a two-stage hierarchical testing framework, combining insights from the early-warning literature on financial crises with recent advances on growth-at-risk. Applying this framework to a set of candidate variables, we find that the Basel III credit-to-GDP gap does not indicate systemic risk coherently across G7 countries. Credit growth and house price growth also do not pass our test in many cases. By contrast, a composite financial cycle signals systemic risk consistently for all countries except Canada. Overall, our results suggest that systemic risk may be consistently measured only once the turning points of indicators have been observed. Therefore, pre-emptive countercyclical macroprudential policy may smooth the financial cycle in boom phases, which then indirectly mitigates the amount of systemic risk in the future.
    Keywords: systemic risk,macroprudential regulation,forecasting,growth-at-risk,financial cycles
    JEL: E37 E44 G17
    Date: 2020
  4. By: Döttling, Robin
    Abstract: How do near-zero interest rates affect optimal bank capital regulation and risk-taking? I study this question in a dynamic model, in which forward-looking banks compete imperfectly for deposit funding, but households do not accept negative deposit rates. When deposit rates are constrained by the zero lower bound (ZLB), tight capital requirements disproportionately hurt franchise values and become less effective in curbing excessive risk-taking. As a result, optimal dynamic capital requirements vary with the level of interest rates if the ZLB binds occasionally. Higher inflation and unconventional monetary policy can alleviate the problem, though their overall welfare effects are ambiguous. JEL Classification: G21, G28, E44, E58
    Keywords: capital regulation, franchise value, search for yield, unconventional monetary policy, zero lower bound
    Date: 2020–06
  5. By: Rui Mano; Silvia Sgherri
    Abstract: Policymakers have relied on a wide range of policy tools to cope with capital flow shocks. And yet, the effects and interaction of these policies remain under debate, as does the motivation for using them. In this paper, quantile local projections are used to estimate the entire distribution of future policy responses to portfolio flow shocks for 20 emerging markets and understand the variety of policy choices across the sample. To assuage endogeneity concerns, estimates rely on the fact that global capital flows are exogenous from the viewpoint of any one of these countries. The paper finds that: (i) policy responses to capital flow shocks are heterogeneous across countries, fat-tailed—“extreme” responses tend to be more elastic than “typical” responses—and asymmetric—“extreme” responses tend to be more elastic with respect to outflows than to inflows; (ii) country characteristics are linked to policy choices—with cross-country differences in forex intervention relating to the size of balance sheet vulnerabilities and the depth of the forex market; (iii) the use of targeted macroprudential policy and capital flows management measures can help “free the hands” of monetary policy by allowing it to focus more squarely on domestic cyclical developments.
    Keywords: Exchange rate policy;International investment position;Foreign exchange reserves;Foreign exchange intervention;Central banks;Capital flows,emerging markets,macroprudential policies,capital flows management.,WP,policy response,policy tool,flow pressure,forex,policy action
    Date: 2020–01–17
  6. By: Sylvestre, Julie; Coutinho, Cristina
    Abstract: This paper provides a comprehensive overview of the use of the Eurosystem’s monetary policy instruments and the operational framework, from the first quarter of 2018 to the last quarter of 2019. It reviews the context of Eurosystem market operations; the design and operation of the Eurosystem’s counterparty and collateral frameworks; the fulfilment of minimum reserve requirements; participation in credit operations and recourse to standing facilities; and the conduct of outright asset purchase programmes. The paper also discusses the impact of monetary policy on the Eurosystem's balance sheet, excess liquidity and money market liquidity conditions. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2020–06
  7. By: Gabriele Galati; Richhild Moessner
    Abstract: We study the effects of quantitative policy rate forecasts by the Federal Reserve on real yields and inflation expectations at the zero lower bound (ZLB). We study the effects of surprises in policy rate forecasts from the Summary of Economic Projections (SEP) on real yields and breakeven inflation rates derived from government bonds for forward rates across the yield curve. We find that surprises in the SEP policy rate forecasts significantly affect real yields in the expected direction across the yield curve. By contrast, breakeven inflation rates are little affected across the yield curve. In particular, five-year breakeven inflation rates five years ahead, a common measure of monetary policy credibility, are not significantly affected by surprises in SEP policy rate forecasts. This suggests that policy rate forecasts by the Fed at the ZLB managed to affect real yields without adversely affecting monetary policy credibility.
    Keywords: forward guidance, policy rate forecasts, zero lower bound
    JEL: E52 E58
    Date: 2020–07
  8. By: David J Hofman; Marcos d Chamon; Pragyan Deb; Thomas Harjes; Umang Rawat; Itaru Yamamoto
    Abstract: We investigate the motives inflation-targeting central banks in emerging markets may have for intervening in foreign exchange markets and evaluate the case for such interventions based on the existing literature. Our findings suggest that the rationale for interventions depends on initial conditions and country-specific circumstances. The case is strongest in the presence of large currency mismatches or underdeveloped markets. While interventions can have benefits in the short-term, sustained over time they could entrench unfavorable initial conditions, though more work is needed to establish this empirically. A first effort to measure the cost of interventions to the credibility of policy frameworks suggests that the negative impact may be smaller than often assumed—at least for the set of more sophisticated inflation-targeting emerging-market central banks considered here.
    Keywords: Central banks;Exchange rate policy;Central bank policy;Exchange markets;Central banking and monetary issues;emerging markets,monetary and exchange rate policies,inflation targeting,foreign exchange intervention,capital flows,WP,EME,inflation target,policy instrument,exchange rate,targeter
    Date: 2020–01–17
  9. By: Alzuabi, Raslan; Caglayan, Mustafa; Mouratidis, Kostas
    Abstract: Using a panel of large US banks, we examine banks' risk-taking behaviour in response to monetary policy shocks. Our investigation provides support for the presence of a risk-taking channel: banks' nonperforming loans increase in the medium to long-run following an expansionary monetary policy shock. We also find that banks' capital structure plays an important role in explaining bank's risk-taking appetite. Impulse response analysis shows that shocks emanating from larger banks spillover to the rest of the sector but no such effect is observed for smaller banks. These findings are confirmed for banks' Z-score.
    Keywords: Risk-taking channel: GVAR: Monetary policy shocks; Spillover effects; Impulse response analysis
    JEL: E44 E52 G01
    Date: 2020–06–01
  10. By: Horst, Maximilian; Neyer, Ulrike; Stempel, Daniel
    Abstract: The Eurosystem's large-scale asset purchases (quantitative easing, QE) induce a strong and persistent increase in excess reserves in the euro area banking sector. These excess reserves are heterogeneously distributed across euro area countries. This paper develops a two-country New Keynesian model { calibrated to represent a high- and a low-liquidity euro area member { to analyze the macroeconomic effects of (QE-induced) heterogeneous increases in excess reserves and deposits in a monetary union. QE triggers economic activity and increases the union-wide consumer price level after a negative preference shock. However, its efficacy is dampened by a reverse bank lending channel that weakens the interest rate channel of QE. These dampening effects are higher in the high-liquidity country. We find similar results in response to a monetary policy shock. Furthermore, we show that a shock in the form of a deposit shift between the two countries, interpreted as capital ight, has negative (positive) effects for the economy of the country receiving (losing) the deposits.
    Keywords: unconventional monetary policy,quantitative easing (QE),monetary policytransmission,excess liquidity,credit lending,heterogeneous monetary union,New Keynesianmodel
    JEL: E51 E52 E58 F41 F45
    Date: 2020
  11. By: Eun Young Oh (University of Portsmouth); Shuonan Zhang (University of Portsmouth)
    Abstract: The central bank digital currency (CBDC) attracts discussions on its merits and risks but much less attention is paid to the adoption of a CBDC. In this paper, we show that the CBDC may not be widely accepted in the presence of a sizeable informal economy. Based on a two-sector monetary model, we show an L-shaped relationship between the informal economy and CBDC. The CBDC can formalize the informal economy but this effect becomes marginally significant in countries with significantly large informal economies. In order to promote CBDC adoption and improve its effectiveness, tax reduction and the positive CBDC interest rate can be useful tools. We further show that CBDC policy rate adjustment triggers a reallocation effect between formal and informal sectors, through which improves the effectiveness of both conventional monetary policy and fiscal policy.
    Keywords: Central Bank Digital Currency, Informal Economy, Quantitative Analysis
    JEL: E26 E40 E42 E58
    Date: 2020–07–21
  12. By: Schilling, Linda Marlene
    Abstract: We analyze optimal strategic delay of bank resolution ('grq forbearance') and deposit insurance coverage. After bad news on the bank's assets, depositors fear for the uninsured part of their deposit and withdraw while the regulator observes withdrawals and needs to decide when to intervene. Optimal policy maximizes the joint value of the demand deposit contract and the insurance fund to avoid inefficient risk-shifting towards the fund while also preventing inefficient runs. Under low insurance coverage, the optimal intervention policy is never to intervene (laissez-faire). Optimal deposit insurance coverage is always interior. The paper sheds light on the differences between the U.S. and the European Monetary Union concerning their bank resolution policies.
    Keywords: bank resolution; bank run; deposit freeze; deposit insurance; Forbearance; global games; mandatory stay; Recovery Rates; suspension of convertibility
    JEL: D8 E6 G21 G28 G33
    Date: 2019–12
  13. By: Daeha Cho (University of Mellbourne); Kwang Hwan Kim (Yonsei Univ)
    Abstract: We measure inefficient fluctuations in the relative price of investment in the US using an estimated two-sector New Keynesian model. In the presence of these fluctuations, we find that monetary policy faces a quantitatively significant trade-off among the sectoral output gaps and the sectoral price and wage inflation rates. While optimal monetary policy is effective in stabilizing the sectoral inflation rates, it has a limited effect on stabilizing the sectoral output gaps.
    Keywords: Relative price of investment; Policy trade-off;Optimal monetary policy
    JEL: E32 E58 E61
    Date: 2020–03
  14. By: Thomas Conlon (University College Dublin); Xing Huan (University of Warwick - Accounting Group); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We study the response of banks to the introduction of a new capital requirement relating to operational risk. To isolate the effect of this new regulation on realized operational risk losses, we take advantage of the partial US implementation relative to full European adoption. Operational risk losses are reduced in treated banks. The extent of loss reduction depends upon the measurement approach used to calibrate operational risk capital requirements. Banks with low institutional ownership and those without binding regulatory capital constraints also present significant loss reduction. We link these findings to incentives for improved risk management and governance post treatment.
    Keywords: Bank Regulation, Basel II, Measurement Approach, Monitoring, Operational Risk
    Date: 2020–07
  15. By: Timothy J. Kehoe; Juan Pablo Nicolini; Thomas J. Sargent
    Abstract: We develop a conceptual framework for analyzing the interactions between aggregate fiscal policy and monetary policy. The framework draws on existing models that analyze sovereign debt crises and balance-of-payments crises. We intend this framework as a guide for analyzing the monetary and fiscal history of a set of eleven major Latin American countries—Argentina, Brazil, Bolivia, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela—from the 1960s until now.
    Keywords: Debt crisis; Monetary policy; Off-budget transfers; Banking crisis; Fiscal policy
    JEL: E52 E63 H63 N16
    Date: 2020–07–21
  16. By: Daniel C. Hardy
    Abstract: The role of the euro in financial markets is limited by the scarcity of euro-denominated liquid short-term safe instruments to serve as “near money†and high-quality collateral—a role fulfilled by US Treasury bills in the US dollar financial “ecosystem.†It is argued that the ECB could eliminate this scarcity by issuing a large volume of its own debt certificates, and thereby expand and stabilize demand for the euro. The initiative is shown to be easy to implement and consistent with the monetary implementation framework. The main objections are likely to be political rather than economic.
    Date: 2020–07–02
  17. By: Rünstler, Gerhard; Bräuer, Leonie
    Abstract: We study state dependence in the impact of monetary policy shocks over the leverage cycle for a panel of 10 euro area countries. We use a Bayesian Threshold Panel SVAR with regime classifications based on credit and house prices cycles. We find that monetary policy shocks trigger a smaller response of GDP, but a larger response of inflation during low states of the cycle. The shift in the inflation-output trade-off may result from higher macro-economic uncertainty in low leverage states. For an alternative regime classification based on turning points we find larger effects on GDP during contractions. JEL Classification: C32, E32, E44
    Keywords: Bayesian Threshold Panel VAR, financial cycle, monetary policy
    Date: 2020–06
  18. By: Charemza, Wojciech
    Abstract: This paper compares how effective different voting algorithms are for the decisions taken by monetary policy councils. A voting activity index is proposed and computed as the ratio of the number of all possible decisions to the total number of different combinations of decisions available to a given composition of an MPC. The voting systems considered are these used by the US Federal Reserve Board and the central banks of the UK, Australia, Canada, Sweden and Poland. In the dynamic simulation model, which emulates voting decisions, the heterogeneous agents act upon individual forecast signals and optimise a Taylor-like decision function. The selection criterion is based on the simulated probability of staying within the bounds that define the inflationary target. The general conclusion is that the voting algorithm used by the Bank of Sweden is the best given the criteria applied, especially when inflation is initially outside the target bounds. It is observed that a decrease in inflation forecast uncertainty, which is inversely proportional to the correlation between the forecast signals delivered to members of the monetary policy board, makes the voting less effective.
    Keywords: voting algorithms, monetary policy, inflation targeting, forecast uncertainty
    JEL: D72 E4 E47 E58
    Date: 2020–05–31
  19. By: Anne-Laure Delatte; Alexis Guillaume
    Abstract: Although the pandemic was an exogenous shock, it triggered portfolio rebalancing in the Euro Area (EA) implying a divergence of sovereign risk premia in the first phase of the crisis eventually followed by a narrowing of the spreads. We estimate the determinants of sovereign bond spreads in the EA during the pandemic from January 2 2020 to May 25 2020. We find that: 1) the countries’ resilience to the COVID shock depended on healthcare capacity, the strength of the banking sector and the fiscal outlook; 2) during the crisis, ECB speeches were a game changer and made a much greater contribution than securities purchase programs; 3) coordination by the European Council also helped to reduce the spreads but the effect was partly offset by loan-based financial assistance programs
    Keywords: Sovereign Risk;European Monetary Union;Covid;Public Policy
    JEL: F30 F45 H63
    Date: 2020–07
  20. By: Paola Boel; Christopher J. Waller
    Abstract: We investigate the essentiality of credit and banking in a microfounded monetary model in which agents face heterogeneous idiosyncratic time preference shocks. Three main results arise from our analysis. First, the constrained-efficient allocation is unattainable without banks. Second, financial intermediation can improve the equilibrium allocation even at the Friedman rule because it relaxes the liquidity constraints of impatient borrowers. Third, changes in credit conditions are not necessarily neutral in a monetary equilibrium at the Friedman rule. If the debt limit is sufficiently low, money and credit are perfect substitutes and tightening the debt limit is neutral. As the debt limit increases, however, patient agents always hold money but impatient agents prefer not to since it is costly for them to do so given they are facing a positive shadow rate. Borrowing instead is costless when interest rates are zero and increasing the debt limit improves the allocation.
    Keywords: Money; Credit; Banking; Heterogeneity; Friedman rule
    JEL: E40 E50
    Date: 2020–07
  21. By: Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez
    Abstract: Monetary policy affects the tradeoffs faced by governments in sovereign default models. In the absence of lump-sum taxation, governments rely on both disortionary taxes and seigniorage to finance expenditure. Furthermore, monetary policy adds a time-consistency problem in debt choice, which may mitigate or exacerbate the incentives to accumulate debt. A deterioration of the terms-of-trade leads to an increase in sovereign-default risk and inflation, and a reduction in growth, which are consistent with the empirical evidence for emerging economies. An unanticipated shock resembling the COVID-19 pandemic generates a significant currency depreciation, increased inflation, and distress in government finances.
    Keywords: Crises; Default; Sovereign Debt; Exchange Rate; Country Risk; Inflation; Seigniorage; Fiscal Policy; Emerging Markets; Time-consistency; COVID-19
    JEL: E52 E62 F34 F41 G15
    Date: 2020–07–10
  22. By: Iñaki Aldasoro; Torsten Ehlers; Patrick McGuire; Goetz von Peter
    Abstract: At $13 trillion, the gross dollar liabilities of banks headquartered outside the United States at end-2019 were nearly as high as before the Great Financial Crisis. Most of their dollar funding was booked outside the United States. We measure non-US banks' short-term dollar funding needs by comparing short-term dollar liabilities (including off-balance sheet FX swaps) with holdings of liquid dollar assets. The scale of the central bank swap lines are of similar magnitude to banks' short-term dollar funding needs. Swap line usage peaked in May at $449 billion and has subsided since. However, dollar funding needs of corporates may yet reveal a broader need for dollars outside the banking system.
    Date: 2020–07–16
  23. By: Xiaoming Li; Zheng Liu; Yuchao Peng; Zhiwei Xu
    Abstract: We present evidence that monetary policy easing reduces bank risk-taking but exacerbates capital misallocation in China after implementing the Basel III capital regulationsin2013. Thenewregulationstightenedbankcapitalrequirementsandintroduced a new risk-weighting approach to calculating the capital adequacy ratio (CAR). To meet tightened capital requirements, a bank can boost its effective CAR by raising capital or by increasing the share of lending to low-risk borrowers. Using confidential loan-level data from a large Chinese commercial bank, merged with firm-level data on a large set of manufacturing firms, we document robust evidence that a monetary policy expansion raises the share of new bank loans to state-owned enterprises (SOEs) after 2013, but not before, because SOE loans receive high credit ratings under government guarantees. Since SOEs are on average less productive than private firms, shifts in bank lending toward SOEs exacerbate capital misallocations, reducing aggregate productivity. We construct a two-sector general equilibrium model with bank portfolio choices and show that, under calibrated parameters, an expansionary monetary policy shock raises the share of bank lending to SOEs, leading to persistent declines in total factor productivity that partially offset the expansionary effects of monetary policy.
    Keywords: risk assessment; Monetary policy - China; risk management; china
    JEL: E52 G18 G21 O42
    Date: 2020–08
  24. By: Daniel L. Greenwald; John Krainer; Pascal Paul
    Abstract: Aggregate bank lending to firms expands following adverse macroeconomic shocks, such as the outbreak of COVID-19 or a monetary policy tightening, at odds with canonical models. Using loan-level supervisory data, we show that these dynamics are driven by draws on credit lines by large firms. Banks that experience larger drawdowns restrict term lending more — an externality onto smaller firms. Using a structural model, we show that credit lines are necessary to reproduce the flow of credit toward less constrained firms after adverse shocks. While credit lines increase total credit growth, their redistributive effects exacerbate the fall in investment.
    Keywords: covid-19; Banks; Firms; Credit Lines; Monetary Policy
    JEL: E32 E43 E44 E52 E60 G21 G32
    Date: 2020–07
  25. By: Cyril Couaillier; Dorian Henricot
    Abstract: We use hikes in the countercyclical capital buffer [CCyB] to measure how tighter bank capital requirements affect their solvency and value, according to market participants. Two features of the CCyB in Europe allow for a unique identification strategy of the effect of such requirements. First, national authorities make quarterly announcements of CCyB rates. Second, these hikes affect all European banks proportionally to their exposure to the country of activation. We show that CCyB hikes translate in lower CDS spreads for affected banks, indicating that markets perceive higher solvency. On the other hand, bank valuations do not react. Markets therefore consider that higher capital requirements translate into more stable banks at no material cost for shareholders. We claim that these effects relate to the capital constraint itself, as opposed to the potential signal conveyed on the state of the financial cycle.
    Keywords: Event Studies, Banking, Capital Requirements .
    JEL: G14 G21 G28
    Date: 2020
  26. By: Ons Mastour (Central Bank of Tunisia)
    Abstract: We study the relationship between the strength of the bank credit channel (BCC) of monetary policy transmission and real GDP growth in Tunisia using quarterly commercial bank-level data between 2008 and 2019. We find evidence of the existence of the bank credit channel in Tunisia in both its broad and strict senses. Classification of banks by total assets allows us to conclude that funding-constrained banks are very reactive to changes in the policy rate regardless of the economic cycle. However, identification of the strength of the BCC during different economic cycles is not possible in our case due to the lack of significance of the coefficients of interest. Furthermore, we find that the BCC operated exclusively through specific loan categories and banks during the sample period.
    Keywords: Bank lending channel; monetary policy transmission; bank balance sheet channel; GDP growth.
    JEL: E3 E5 G2
    Date: 2020–08–04
  27. By: Ryan Niladri Banerjee; Aaron Mehrotra; Fabrizio Zampolli
    Abstract: The pandemic has increased downside tail risks in advanced economies (AEs), while it has increased both downside and upside tail risks in emerging market economies (EMEs). The collapse in output and oil prices, on balance, increases downside inflation risks. Recent exchange rate depreciations increase upside risks to inflation in EMEs. Tighter financial conditions raise both downside and upside risks. In AEs, the increase in downside risks is more prominent.
    Date: 2020–07–23
  28. By: J. David Lopez-Salido; Gerardo Sanz-Maldonado; Carly Schippits; Min Wei
    Abstract: The "natural" or equilibrium real rate of interest is an important concept in macroeconomics. On the one hand, the natural (real) rate provides a description of the real interest rate path consistent with the eventual full capacity of utilization of available resources in the context of low and stable inflation.
    Date: 2020–06–19
  29. By: Hubert Kempf
    Abstract: This paper studies the design of the policy mix in a monetary union, that is, the institutional arrangement specifying the relationships between the various policymakers present in the union and the extent of their capacity of action. It is assumed that policymakers do not cooperate. Detailing several institutional variants imposed on an otherwise standard macromodel of a monetary union, we prove that there is no Pareto-superior design when cooperation between policymakers is impossible.
    Keywords: monetary union, fiscal policy, monetary policy, cooperation, policy mix
    JEL: E58 E62 F45 H76
    Date: 2020
  30. By: Michal Franta; Ivan Sutoris
    Abstract: We decompose the Czech inflation time series into the trend and short-lived deviations from the trend by means of an unobserved component stochastic volatility model. We then carry out a regression analysis to interpret the two inflation components. The results indicate a fall in the inflation trend since the start of the sample (1998) which coincides with the introduction of the inflation targeting regime and with subsequent changes to the inflation target pursued by the Czech National Bank. Moreover, the regression analysis suggests that inflation expectations play a dominant role in the evolution of the trend. The behavior of the deviations from the trend exhibits features of an open-economy Phillips curve.
    Keywords: Czech inflation, inflation trend, Phillips curve, UCSV
    JEL: E5 E31
    Date: 2020–07
  31. By: Eguren-Martin, Fernando (Bank of England)
    Abstract: We explore the role of ‘dollar shortage’ shocks and central bank swap lines in a two-country New Keynesian model with financial frictions. Domestic banks issue both domestic and foreign currency debt and lend in domestic currency. Foreign currency-specific funding shocks, which are amplified via their effect on the exchange rate given balance sheet mismatches, lead to uncovered interest rate parity deviations, a contraction in lending and have a significant negative effect on macroeconomic variables. We show that central bank swap lines can attenuate these dynamics provided they are large enough.
    Keywords: Central bank swap lines; liquidity facilities; dollar shortages; uncovered interest rate parity condition; financial frictions
    JEL: E32 E44 E58 F33 F41 G15
    Date: 2020–07–10
  32. By: Christoffel, Kai; Mazelis, Falk; Montes-Galdón, Carlos; Müller, Tobias
    Abstract: Forward guidance operates via the expectations formation process of the agents in the economy. In standard quantitative macroeconomic models, the expectations are unobserved state variables and little scrutiny is devoted to analysing the dynamic behaviour of these expectations. We show that the introduction of survey and financial market-based forecasts in the estimation of the model disciplines the expectations formation process in DSGE models. When the model-implied expectations are matched to observed expectations, the additional information of the forecasts restrains the agents’ expectations formation. We argue that the reduced volatility of the agents’ expectations dampens the model reactions to forward guidance shocks and improves the out-of-sample forecast accuracy of the model. Furthermore, we evaluate the case for introducing a discount factor as a reduced form proxy for a variety of microfounded approaches, proposed to mitigate the forward guidance puzzle. Once data on expectations is considered, the empirical support to introduce a discount factor dissipates. JEL Classification: C13, C52, E3, E47, E52
    Keywords: Bayesian estimation, DSGE models, expectations formation, forecasting, monetary policy
    Date: 2020–06
  33. By: Bunn, Philip (Bank of England); Haldane, Andrew (Bank of England); Pugh, Alice (Bank of England)
    Abstract: Concerns were raised about the distributional impact of the loosening in UK monetary policy following the financial crisis. We assess the impact of this loosening on well-being using household-level data and estimated utility functions. The welfare benefits are found to have been positive, in aggregate and across most of the household distribution, relative to what otherwise would have happened. They are significantly larger than when looking at financial factors alone due to the non-financial benefits of lower unemployment and financial distress. Most people were made better-off in welfare terms from the monetary loosening, rich and poor, although the young have benefited more than the old.
    Keywords: Monetary policy; households; inequality; well-being
    JEL: D12 D31 E52 E58
    Date: 2020–07–17
  34. By: de Groot, Oliver; Mazelis, Falk
    Abstract: This paper develops a simple, consistent methodology for generating empirically realistic forward guidance simulations using existing macroeconomic models by modifying expectations about policy announcements. The main advantage of our method lies in the exact preservation of all other shock transmissions. We describe four scenarios regarding how agents incorporate information about future interest rate announcements: “inattention”, “credibility”, “finite planning horizon”, and “learning”. The methodology consists of describing a single loading matrix that augments the equilibrium decision rules and can be applied to any standard DSGE, including large-scale policy-institution models. Finally, we provide conditions under which the forward guidance puzzle is resolved. JEL Classification: C63, E32, E52
    Keywords: expectations, monetary policy, unconventional policy
    Date: 2020–06

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