nep-cba New Economics Papers
on Central Banking
Issue of 2020‒09‒07
thirty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The effect of macroprudential policies on credit developments in Europe 1995-2017 By Budnik, Katarzyna
  2. Strategic Interactions in U.S. Monetary and Fiscal Policies By Xiaoshan Chen; Eric M. Leeper; Campbell B. Leith
  3. Macroprudential institutions in Europe - what are the blind spots? By Nettekoven, Zeynep Mualla
  4. The Macroeconomic Effects of Macroprudential Policy: Evidence from a Narrative Approach By Diego Rojas; Carlos A. Vegh; Guillermo Vuletin
  5. Implications of state-dependent pricing for DSGE model-based policy analysis in Indonesia By Denny Lie
  6. Kicking the Can Down the Road: Government Interventions in the European Banking Sector By Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen
  7. The International Aspects of Macroprudential Policy By Kristin J. Forbes
  8. Dampening Global Financial Shocks: Can Macroprudential Regulation Help (More than Capital Controls)? By Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
  9. The importance of deposit insurance credibility By Diana Bonfim; João A. C. Santos
  10. Fading the effects of coronavirus with monetary policy By Alain Malata; Christian Pinshi
  11. Implications of household-level evidence for policy models: the case of macro-financial linkages By John Muellbauer
  12. Persistence-Dependent Optimal Policy Rules Persistence-Dependent Optimal Policy Rules By Jean-Bernard Chatelain; Kirsten Ralf
  13. The Impact of Monetary Policy Communication in an Emerging Economy: The Case of Indonesia By Calixte Ahokpossi; Agnes Isnawangsih; Md. Shah Naoaj; Ting Yan
  14. Rise of the central bank digital currencies: drivers, approaches and technologies By Raphael Auer; Giulio Cornelli; Jon Frost
  15. Public Debt, Policy Mix and European Stability By François Langot
  16. Staggered Price Indexation By Martín Uribe
  17. A Quantity-Driven Theory of Term Premia and Exchange Rates By Robin Greenwood; Samuel G. Hanson; Jeremy C. Stein; Adi Sunderam
  18. Monetary Policy and Economic Performance since the Financial Crisis By Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
  19. Increasing the International Role of the Euro: A Long Way to Go By Marek Dabrowski
  20. Increasing systemic risk during the Covid-19 pandemic: A cross-quantilogram analysis of the banking sector By Baumöhl, Eduard; Bouri, Elie; Hoang, Thi-Hong-Van; Shahzad, Syed Jawad Hussain; Výrost, Tomáš
  21. Design Choices for Central Bank Digital Currency: Policy and Technical Considerations By Sarah Allen; Srđjan Čapkun; Ittay Eyal; Giulia Fanti; Bryan A. Ford; James Grimmelmann; Ari Juels; Kari Kostiainen; Sarah Meiklejohn; Andrew Miller; Eswar Prasad; Karl Wüst; Fan Zhang
  22. Securing Secured Finance: The Term Asset-Backed Securities Loan Facility By Elizabeth Caviness; Asani Sarkar
  23. A Survey of Research on Retail Central Bank Digital Currency By John Kiff; Jihad Alwazir; Sonja Davidovic; Aquiles Farias; Ashraf Khan; Tanai Khiaonarong; Majid Malaika; Hunter K Monroe; Nobu Sugimoto; Hervé Tourpe; Peter Zhou
  24. Understanding the German Criticism of the Target System and the Role of Central Bank capital By Roberto Perotti
  25. One Money, Many Markets: Monetary Transmission and Housing Financing in the Euro Area By Giancarlo Corsetti; Joao B. Duarte; Samuel Mann
  26. Back testing fan charts of activity and inflation: the Chilean case By Jorge Fornero; Andrés Gatty
  27. Uncertainty and monetary policy in good and bad times: A Replication of the VAR investigation by Bloom (2009) By Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
  28. Beyond moral hazard arguments: The role of national deposit insurance schemes for member states' preferences on EDIS By Tümmler, Mario; Thiemann, Matthias
  29. The asymmetric effects of uncertainty shocks By Valentina Colombo; Alessia Paccagnini
  30. Human Capital and Income Inequality in a Monetary Schumpeterian Growth Model By Zheng, Zhijie; Huang, Chien-Yu; Wan, Xi
  31. Bubbles, the U.S. Interest Policy, and the Impact on Global Economic Growth: Reverse Growth Effects of Lower Interest Rates after Bubble Bursting By Atsushi Motohashi

  1. By: Budnik, Katarzyna
    Abstract: The paper inspects the credit impact of policy instruments that are commonly applied to contain systemic risk. It employs detailed information on the use of capital-based, borrower-based and liquidity-based instruments in 28 European Union countries in 1995—2017 and a macroeconomic panel setup. The paper finds a significant impact of capital buffers, profit distribution restrictions, specific and general loan-loss provisioning regulations, sectoral risk weights and exposure limits, borrower-based measures, caps on long-term maturity and exchange rate mismatch, and asset-based capital requirements on credit to the non-financial private sector. Furthermore, the business cycle and monetary policy influence the effectiveness of most of the macroprudential instruments. Therein, capital buffers and sectoral risk weights act countercyclically irrespectively of the prevailing monetary policy stance, while a far richer set of policy instruments can act countercyclically in combination with the appropriate monetary policy stance. JEL Classification: E51, E52, G21
    Keywords: borrower-based instruments, capital requirements, liquidity requirements, macroprudential policy, monetary policy
    Date: 2020–08
  2. By: Xiaoshan Chen; Eric M. Leeper; Campbell B. Leith
    Abstract: We estimate a model in which fiscal and monetary policy behavior arise from the optimizing behavior of distinct policy authorities, with potentially different welfare functions. Optimal time-consistent policy behavior fits U.S. time series at least as well as rules-based behavior. American policies often do not conform to the conventional mix of conservative monetary policy and debt-stabilizing fiscal policy. Even after the Volcker disinflation, policies did not achieve that conventional mix, as fiscal policy did not act to stabilize debt until the mid 1990s. A credible conservative central bank that follows a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. Had that strategic policy mix been in place, American might have avoided the Great Inflation. Enhancing cooperation between policy makers without an ability to commit may be detrimental to welfare.
    JEL: E31 E32 E52 E61 E62 E63
    Date: 2020–07
  3. By: Nettekoven, Zeynep Mualla
    Abstract: After the Great Financial Crisis of 2007-2008, macroprudential policy has increasingly become the mainstream. New institutions and regulations were introduced for macroprudential supervision in the EU Member States as well as at the supranational level. This leads us to the research question: what are the blind spots of this new macroprudential institutional design in the EU? This question gained even more in substance due to the repercussions of Covid-19 pandemic. Based on desk research and talks with experts, we group the blind spots into three categories: shadow banking system, institutional power hierarchies, and monetary and macroprudential policy interactions. In this paper, we discuss these blind spots and some policy recommendations for a functional macroprudential institutional design.
    Keywords: macroprudential policy,institutions,Great Financial Crisis,shadow banking system
    JEL: E52 E58 G28
    Date: 2020
  4. By: Diego Rojas; Carlos A. Vegh; Guillermo Vuletin
    Abstract: We analyze the macroeconomic effects of macroprudential policy – in the form of legal reserve requirements – in three Latin American countries (Argentina, Brazil, and Uruguay). To correctly identify innovations in changes in legal reserve requirements, we develop a narrative approach – based on contemporaneous reports from the IMF and Central Banks in the spirit of Romer and Romer (2010) – that classifies each change into endogenous or exogenous to the business cycle. We show that this distinction is critical in understanding the macroeconomic effects of reserve requirements. In particular, we show that output falls in response to exogenous increases in legal reserve requirements but would seem not to be affected (or could even increase!) when using all changes and relying on traditional time-identifying strategies. This bias reflects the practical relevance of the misidentification of endogenous countercyclical changes in reserve requirements. We also push the empirical frontier along two important dimensions. First, in measuring legal reserve requirements, we take into account both the different types of legal reserve requirements in terms of maturity and currency of denomination as well as the structure of deposits. Second, since in practice reserve requirement policy is tightly linked to monetary policy, we also jointly analyze the macroeconomic effects of changes in central bank interest rates. To properly identify exogenous central bank interest rate shocks, we follow Romer and Romer (2004).
    JEL: E32 E52 E58 F31 F41
    Date: 2020–08
  5. By: Denny Lie
    Abstract: This paper studies the implications of state-dependent pricing in a small open-economy dynamic stochastic general equilibrium (DSGE) model for Indonesia. I show that variations in the timing and frequency of price adjustment inherent in a state-dependent pricing assumption could have important implications for DSGE model-based policy analysis in Indonesia. This extensive margin effect produces disparities in the conditional variance decompositions and the impulse responses to various shocks responsible for business cycle fluctuations. An investigation into the impact of COVID-19 pandemic shocks indicates that such variations non-trivially affect the analysis on the appropriate degree of monetary policy response to the shocks. A state-dependent pricing model would call for a greater degree of monetary easing in response to the COVID-19 pandemic, than that prescribed by a traditional time-dependent pricing model. The broader implication is clear. For modelling and analyzing the Indonesian economy, in which the inflation rates have historically been moderate-to-high and highly variable, state-dependent pricing is an essential model feature.
    Keywords: state-dependent pricing, monetary policy, DSGE model for Indonesia, COVID-19 pandemic
    JEL: E12 E32 E58 E61 F41
    Date: 2020–08
  6. By: Viral V. Acharya; Lea Borchert; Maximilian Jager; Sascha Steffen
    Abstract: We analyze the determinants and the long-run consequences of government interventions in the eurozone banking sector during the 2008/09 financial crisis. Using a novel and comprehensive dataset, we document that fiscally constrained governments “kicked the can down the road” by providing banks with guarantees instead of full-fledged recapitalizations. We adopt an econometric approach that addresses the endogeneity associated with governmental bailout decisions in identifying their consequences. We find that forbearance caused undercapitalized banks to shift their assets from loans to risky sovereign debt and engage in zombie lending, resulting in weaker credit supply, elevated risk in the banking sector, and, eventually, greater reliance on liquidity support from the European Central Bank.
    JEL: E44 G21 G28 G32 G34
    Date: 2020–07
  7. By: Kristin J. Forbes
    Abstract: Countries are using macroprudential tools more actively with the goal of improving the resilience of their broader financial systems. A growing body of evidence suggests that these tools can accomplish specific domestic goals and should reduce country vulnerability to many domestic and international shocks. The evidence also suggests, however, that these policies are not an elixir. They will not insulate economies from volatility and they generate leakages to the non-bank financial system and spillovers through international borrowing, lending and other cross-border exposures. Some of these unintended consequences can mitigate the effectiveness of macroprudential policies and generate new vulnerabilities and risks. The “Corona Crisis” provides a lens to evaluate the effectiveness of current macroprudential regulations during a period of extreme market volatility and economic stress. Experience to date suggests that macroprudential tools provide some benefits and can help achieve certain macroeconomic goals, but they have limitations and expectations of what they can accomplish must be realistic.
    JEL: E44 E5 F33 F36 F38 G21 G23 G28
    Date: 2020–08
  8. By: Katharina Bergant; Francesco Grigoli; Niels-Jakob H Hansen; Damiano Sandri
    Abstract: We show that macroprudential regulation can considerably dampen the impact of global financial shocks on emerging markets. More specifically, a tighter level of regulation reduces the sensitivity of GDP growth to VIX movements and capital flow shocks. A broad set of macroprudential tools contribute to this result, including measures targeting bank capital and liquidity, foreign currency mismatches, and risky forms of credit. We also find that tighter macroprudential regulation allows monetary policy to respond more countercyclically to global financial shocks. This could be an important channel through which macroprudential regulation enhances macroeconomic stability. These findings on the benefits of macroprudential regulation are particularly notable since we do not find evidence that stricter capital controls provide similar gains.
    Date: 2020–06–26
  9. By: Diana Bonfim; João A. C. Santos
    Abstract: The success of deposit insurance arrangements at eliminating bank runs is likely closely tied to their credibility. We investigate this hypothesis building on two episodes which tested the insurance protection offered by the Portuguese arrangement in the midst of the country’s sovereign debt crisis. Our results show that Portuguese depositors responded to foreign banks’ decision to convert their subsidiaries into branches by relocating their deposits into the latter. We find a similar response following the announcement that insured depositors in Cyprus would lose part of their savings. On both instances responses are concentrated on household deposits. Given that foreign banks’ branches offer the insurance protection of these banks’ home countries, rather than that granted by their host country arrangement, our findings confirm that the credibility of the deposit insurance arrangement is critical for the protection it offers banks against the risk of depositor runs. These results show that sovereign-bank links can be detrimental to financial stability through a novel channel: the credibility of deposit insurance.
    JEL: G01 G21 G28
    Date: 2020
  10. By: Alain Malata; Christian Pinshi (UNIKIN - University of Kinshasa)
    Abstract: The Central Bank of Congo (BCC) reduced the policy rate in response to the uncertain effects of the coronavirus. The impact of the pandemic on the economy is still uncertain and depends on many factors. Using the Bayesian technique of the VAR model we notice that cutting the policy rate would not help the economy to cope with the consequences of COVID-19, we should rethink other tactics and strategies, such as a good communication strategy and / or try unconventional monetary policy measures. However, coordination with fiscal policy is a driver key in blurring the effects of the coronavirus crisis.
    Keywords: Monetary policy,coronavirus,coordination
    Date: 2020–07–03
  11. By: John Muellbauer
    Abstract: Macroeconomic policy models should track the different channels of monetary transmission, providing a framework for Monetary Policy Committees. They should also be useful for assessing risks to financial stability, including for designing macroprudential stress tests and instrument settings in the new macroprudential toolkits. Current policy models, including the ‘semi-structural’ non-DSGE econometric models such as FRB-US, are seriously deficient in these respects, failing to capture the credit channel and the role of real estate in the financial accelerator that operated in the global financial crisis, and in key transmission channels in the recovery. Furthermore, developments in economic theory, greatly encouraged by new evidence, have rendered redundant the previously accepted micro-foundations for household behaviour in these policy models. A multi-purpose policy model needs to include a household-housing sub-system. This should contain a consumption function broadly consistent with the micro-evidence with equations for permanent income, for the balance sheet drivers, and for residential investment. To capture the credit channel, this block of the model needs to embed common credit conditions in the equations. Sub-system estimation is required to impose the cross-equation restrictions implied by these common factors.
    Keywords: macroeconomic policy models, micro foundations, consumption, finance and the real economy, financial crisis, credit constraints, household portfolios, asset prices
    JEL: E17 E21 E44 E51 E52 E58 G01
    Date: 2020–08–26
  12. By: Jean-Bernard Chatelain (PSE - Paris School of Economics, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement); Kirsten Ralf (Ecole Supérieure du Commerce Extérieur - ESCE - International business school)
    Abstract: A policy target (for example inflation) may depend on the persistent component of exogenous shocks, such as the cost-push shock of oil, energy or imported prices. The larger the persistence of these exogenous shocks, the larger the welfare losses and the larger the response of policy instrument to this exogenous shock in a feedback rule, in order to decrease the sensitivity of the policy target to this shock.
    Keywords: Core inflation,Imported inflation,Optimal Policy,Welfare,Policy rule
    Date: 2020–08
  13. By: Calixte Ahokpossi; Agnes Isnawangsih; Md. Shah Naoaj; Ting Yan
    Abstract: Since the adoption of the inflation targeting framework by Bank Indonesia (BI), monetary policy communication has played an increasingly important role in BI’s policy toolkit. This paper assesses BI’s monetary policy communication from three perspectives: i) its transparency and clarity, ii) its ability to align market expectation and BI’s policy decisions (predictability), and iii) its impact on financial markets. In particular, we assess the impact of BI’s monetary policy practices by focusing on its monetary policy press releases and monetary policy reports. The results show that Bank Indonesia has made significant progress in the transparency of its communication as well as in the institutional framework to support this. Nonetheless, the results also suggest ways in which the impact of communication can be further improved, including by strengthening the clarity of policy messages, its consistency with the policy framework and the depth of the money market.
    Date: 2020–06–26
  14. By: Raphael Auer; Giulio Cornelli; Jon Frost
    Abstract: Central bank digital currencies (CBDCs) are receiving more attention than ever before. Yet the motivations for issuance vary across countries, as do the policy approaches and technical designs. We investigate the economic and institutional drivers of CBDC development and take stock of design efforts. We set out a comprehensive database of technical approaches and policy stances on issuance, relying on central bank speeches and technical reports. Most projects are found in digitised economies with a high capacity for innovation. Work on retail CBDCs is more advanced where the informal economy is larger. We next take stock of the technical design options. More and more central banks are considering retail CBDC architectures in which the CBDC is a direct cash-like claim on the central bank, but where the private sector handles all customer-facing activity. We conclude with an in-depth description of three distinct CBDC approaches by the central banks of China, Sweden and Canada.
    Keywords: central bank digital currency, CBDC, central banking, digital currency, digital money, distributed ledger technology, blockchain
    JEL: E58 G21
    Date: 2020–08
  15. By: François Langot (IZA - Institute for the Study of Labor, Gains - Groupe d’Analyse des Itinéraires et Niveaux Salariaux, PSE - Paris School of Economics)
    Abstract: This paper highlights the specics of a monetary union, such as the Euro area, regarding the possible choices of monetary and scal policies. As the dynamics of public debt are specic to the choices made by each government, I show that the dynamic stability of the area requires coordination of scal policies, particularly in the case of a liquidity trap situation. My results suggest that a scal union, taking the form of a common debt, guarantees the dynamic stability of the area, notwithstanding the monetary policy, chosen or constrainedthus improving institutional robustness of the European Union.
    Keywords: Euro area,Taylor rule,Fiscal rule,public debt,NK model,Fiscal theory of price level
    Date: 2020–07–09
  16. By: Martín Uribe
    Abstract: Empirical studies using micro data find that about two thirds of all product prices do not change in a given quarter. This evidence has been interpreted as indicating the absence of price indexation. Further, models of staggered price setting without indexation interpret all price changes as optimal. However, the empirical evidence is mute with regard to whether price changes are optimal or not. To reconcile the possibility of price indexation with the micro evidence on the frequency of price changes, I modify the Calvo sticky price model by allowing each period a fraction of randomly picked prices to change optimally, another fraction of randomly picked prices to change due to indexation, and the remaining prices to be constant. The paper presents five main findings: (1) with staggered price indexation the Phillips curve includes a state variable that carries information about all past inflation rates; (2) as the degree of staggered price indexation increases, the Phillips curve becomes flatter; (3) staggered indexation dampens the short-run effect of monetary policy on inflation and amplifies its effect on output; (4) fixing the probability of a price change to 33% per quarter (in accordance with the empirical evidence), a small-scale new-Keynesian model estimated on U.S. data yields a probability of indexation of 19\% per quarter (and therefore a probability of an optimal price change of 14% per quarter); and (5) according to the estimated model, staggered indexation explains more than half of the observed persistence of inflation in the United States.
    JEL: E1 E3 E5
    Date: 2020–08
  17. By: Robin Greenwood; Samuel G. Hanson; Jeremy C. Stein; Adi Sunderam
    Abstract: We develop a model in which specialized bond investors must absorb shocks to the supply and demand for long-term bonds in two currencies. Since long-term bonds and foreign exchange are both exposed to unexpected movements in short-term interest rates, a shift in the supply of long-term bonds in one currency influences the foreign exchange rate between the two currencies, as well as bond term premia in both currencies. Our model matches several important empirical patterns, including the co-movement between exchange rates and term premia, as well as the finding that central banks' quantitative easing policies impact exchange rates. An extension of our model sheds light on the persistent deviations from covered interest rate parity that have emerged since 2008.
    JEL: F31 G12
    Date: 2020–07
  18. By: Dario Caldara; Etienne Gagnon; Enrique Martínez-García; Christopher J. Neely
    Abstract: We review macroeconomic performance over the period since the Global Financial Crisis and the challenges in the pursuit of the Federal Reserve’s dual mandate. We characterize the use of forward guidance and balance sheet policies after the federal funds rate reached the effective lower bound. We also review the evidence on the efficacy of these tools and consider whether policymakers might have used them more forcefully. Finally, we examine the post-crisis experience of other major central banks with these policy tools.
    Keywords: Global Financial Crisis 2007–09; monetary policy; effective lower bound; structural changes; forward guidance; balance sheet policies
    JEL: E31 E32 E52 E58
    Date: 2020–08
  19. By: Marek Dabrowski
    Abstract: The euro is the second most important global currency after the US dollar. However, its inter-national role has not increased since its inception in 1999. The private sector prefers using the US dollar rather than the euro because the financial market for US dollar-denominated assets is larger and deeper; network externalities and inertia also play a role. Increasing the attractive-ness of the euro outside the euro area requires, among others, a proactive role for the European Central Bank and completing the Banking Union and Capital Market Union.
    Keywords: global currency, dominant currency, euro, US dollar, international monetary system, European Union, euro area, network externalities, power of incumbency
    JEL: E42 E58 F33
    Date: 2020
  20. By: Baumöhl, Eduard; Bouri, Elie; Hoang, Thi-Hong-Van; Shahzad, Syed Jawad Hussain; Výrost, Tomáš
    Abstract: Over the last few decades, large banks worldwide have become more interconnected. As a result, the failure of one can trigger the failure of many. In finance, this phenomenon is often known as financial contagion, which can act like a domino effect. In this paper, we show an unprecedented increase in bank interconnectedness during the outbreak of the Covid-19 pandemic. We measure how extreme negative stock market returns from one bank can spill over to the other banks within the network. Our contribution relies on the establishment of a new systemic risk index based on the cross-quantilogram approach of Han et al. (2016). The results indicate that the systemic risk and the density of the spillover network among 83 banks in 24 countries have never been as high as during the Covid-19 pandemic – much higher than during the 2008 global financial crisis. Furthermore, we find that US banks are the most important risk transmitters, and Asian banks are the most important risk receivers. In contrast, European banks were strong risk transmitters during the European sovereign debt crisis. These findings may help investors, portfolio managers and policymakers adapt their investment strategies and macroprudential policies in this context of uncertainty.
    Keywords: Systemic risk,Banks,Covid-19 pandemic,Cross-quantilogram,Financial networks
    JEL: G01 G15 G21 G28 C21
    Date: 2020
  21. By: Sarah Allen; Srđjan Čapkun; Ittay Eyal; Giulia Fanti; Bryan A. Ford; James Grimmelmann; Ari Juels; Kari Kostiainen; Sarah Meiklejohn; Andrew Miller; Eswar Prasad; Karl Wüst; Fan Zhang
    Abstract: Central banks around the world are exploring and in some cases even piloting Central Bank Digital Currencies (CBDCs). CBDCs promise to realize a broad range of new capabilities, including direct government disbursements to citizens, frictionless consumer payment and money-transfer systems, and a range of new financial instruments and monetary policy levers. CBDCs also give rise, however, to a host of challenging technical goals and design questions that are qualitatively and quantitatively different from those in existing government and consumer payment systems. A well-functioning CBDC will require an extremely resilient, secure, and performant new infrastructure, with the ability to onboard, authenticate, and support users on massive scale. It will necessitate an architecture simple enough to support modular design and rigorous security analysis, but flexible enough to accommodate current and future functional requirements and use cases. A CBDC will also in some way need to address an innate tension between privacy and transparency, protecting user data from abuse while selectively permitting data mining for end-user services, policymakers, and law enforcement investigations and interventions. In this paper, we enumerate the fundamental technical design challenges facing CBDC designers, with a particular focus on performance, privacy, and security. Through a survey of relevant academic and industry research and deployed systems, we discuss the state of the art in technologies that can address the challenges involved in successful CBDC deployment. We also present a vision of the rich range of functionalities and use cases that a well-designed CBDC platform could ultimately offer users.
    JEL: E42 E52 E58 O31
    Date: 2020–08
  22. By: Elizabeth Caviness; Asani Sarkar
    Abstract: The asset-backed securities (ABS) market, by supporting loans to households and businesses such as credit card and student loans, is essential to the flow of credit in the economy. The COVID-19 pandemic disrupted this market, resulting in higher interest rate spreads on ABS and halting the issuance of most ABS asset classes. On March 23, 2020, the Fed established the Term Asset-Backed Securities Loan Facility (TALF) to facilitate the issuance of ABS backed by a variety of loan types including student loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA), thereby re-enabling the flow of credit to households and businesses of all sizes. In this post, we describe how the TALF works, its impact on market conditions, and how it differs from the TALF that the Fed established in 2009.
    Keywords: COVID-19; coronavirus; pandemic; Federal Reserve; ABS; Term Asset-Backed Securities Loan Facility (TALF); asset backed securities
    JEL: I18 E5
    Date: 2020–08–07
  23. By: John Kiff; Jihad Alwazir; Sonja Davidovic; Aquiles Farias; Ashraf Khan; Tanai Khiaonarong; Majid Malaika; Hunter K Monroe; Nobu Sugimoto; Hervé Tourpe; Peter Zhou
    Abstract: This paper examines key considerations around central bank digital currency (CBDC) for use by the general public, based on a comprehensive review of recent research, central bank experiments, and ongoing discussions among stakeholders. It looks at the reasons why central banks are exploring retail CBDC issuance, policy and design considerations; legal, governance and regulatory perspectives; plus cybersecurity and other risk considerations. This paper makes a contribution to the CBDC literature by suggesting a structured framework to organize discussions on whether or not to issue CBDC, with an operational focus and a project management perspective.
    Date: 2020–06–26
  24. By: Roberto Perotti
    Abstract: Criticism of the Target system by a group of central European scholars has become a widespread argument against the policies of the European Central Bank and even the integrity of the monetary union, and even standard fare in the media and in the political debate in Germany. Most academics and practitioners that have participated in the debate have been dismissive of the German preoccupations. In this paper, I first try and clarify the many remaining misunderstandings about the workings and implications of the Target system. I propose a unified, systematic and simple approach to the study of the workings of the Target system in response to different shocks and in comparison with different alternative regimes. I then argue that the German criticism of the Target system is not so unfounded after all, and should be taken seriously, both on theoretical grounds and for its political implications.
    JEL: E58 E63 F33
    Date: 2020–07
  25. By: Giancarlo Corsetti; Joao B. Duarte; Samuel Mann
    Abstract: We study the transmission of monetary shocks across euro-area countries using a dynamic factor model and high-frequency identification. We develop a methodology to assess the degree of heterogeneity, which we find to be low in financial variables and output, but significant in consumption, consumer prices, and variables related to local housing and labor markets. Building a small open economy model featuring a housing sector and calibrating it to Spain, we show that varying the share of adjustable-rate mortgages and loan-to-value ratios explains up to one-third of the cross-country heterogeneity in the responses of output and private consumption.
    Date: 2020–06–26
  26. By: Jorge Fornero; Andrés Gatty
    Abstract: Any forecast has associated a measure of predictive uncertainty. The Central Bank of Chile (CBoC) communicates with fan charts the projections’ uncertainty of inflation and GDP growth in the Monetary Policy Report (MPR). This work aims at evaluating ex post their properties with empirical techniques. In general, we find that fan charts have been a relatively accurate in illustrating the true density generated by the conditional mean within forecasting horizons of up to one year. While inflation forecasts are unbiased, forecasts of GDP growth have been optimistic on average. The analysis of a recent sub-sample in which risks for GDP growth was made explicit, we graphically examine whether asymmetric fan charts are more accurate ex –post than symmetric fan charts. For these cases, the median projection seem to have provided a better guide than the mode.
    Date: 2020–06
  27. By: Giovanni Caggiano; Efrem Castelnuovo; Gabriela Nodari
    Abstract: This paper revisits the well-known VAR evidence on the real effects of uncertainty shocks by Bloom (Econometrica 2009(3): 623-685. doi: 10.3982/ECTA6248). We replicate the results in a narrow sense using Eviews. In a wide sense, we extend his study by working with a smooth transition-VAR framework that allows for business cycle-dependent macroeconomic responses to an uncertainty shock. We find a significantly stronger response of real activity in recessions. Counterfactual simulations point to a greater effectiveness of systematic monetary policy in stabilizing real activity in expansions.
    Keywords: Uncertainty shocks, nonlinear Smooth Transition Vector AutoRegressions, Generalized Impulse Response Functions, systematic monetary policy
    JEL: C32 E32
    Date: 2020–08
  28. By: Tümmler, Mario; Thiemann, Matthias
    Abstract: Discussions regarding the planned European Deposit Insurance Scheme (EDIS), the missing third pillar of the European Banking Union, have been ongoing since the Commission published its initial legislative proposal in 2015. A breakthrough in negotiations has yet to be achieved. The gridlock on EDIS is most commonly attributed to moral hazard concerns over insufficient risk reduction harboured on the side of northern member states, particularly Germany, due to the weak state of some other member states' banking sectors. While moral hazard based on uneven risk reduction is helpful for explaining divergent member-state preferences on the scope of necessary risk reduction, this does not explain preferences on the institutional design of EDIS. In this paper, we argue that contrary to persistent differences on necessary risk reduction, preferences regarding the institutional design of EDIS have become more closely aligned. We analyse how preferences on EDIS developed in the key member states of Germany, France, and Italy. In all sampled countries, we find path-dependent benefits connected to the current design of national Deposit Guarantee Schemes (DGS) that shifted preferences of the banking sector or significant subsectors in favour of retaining national DGSs. Overall, given that a compromise on riskreduction can be accomplished, we argue that current preferences in these key member states provide an opportunity to implement EDIS in the form of a reinsurance system that maintains national DGSs in combination with a supranational fund.
    Keywords: Banking Union,Deposit Insurance,EDIS
    Date: 2020
  29. By: Valentina Colombo; Alessia Paccagnini
    Abstract: This study evaluates the effects of financial uncertainty shocks in the US, investigating the role of the monetary policy stance. Estimating a nonlinear Vector Autoregressive, we find that an uncertainty shock triggers asymmetric and negative effects across the business cycle. The reactions of consumption and investments are state-dependent and drive the fluctuations of GDP. The variance of macroeconomic variables due to the shock is from four to six times larger in recessions than in normal times. A counterfactual exercise shows that the Balance Sheet-related monetary policy mitigates the persistence and the magnitude of the recessionary effects of the shock.
    Keywords: Uncertainty, Smooth Transition VAR, Nonlinearities, Monetary Policy
    JEL: C50 E32 E52
    Date: 2020–08
  30. By: Zheng, Zhijie; Huang, Chien-Yu; Wan, Xi
    Abstract: This paper investigates the effects of monetary policy on income inequality in a Schumpeterian growth model with endogenous human capital accumulation and household heterogeneity. The source of heterogeneity arises from both unequal distributions of (tangible) wealth and (intangible) human capital. We find that inflation unambiguously lowers economic growth rate, whereas its impact on the income inequality is quite diverse, depending on the relative dispersions of human capital and wealth, and the response of the relative interestwage income share to inflation. Inflation may increase income inequality when the dispersion of human capital dominates (is dominated by) that of wealth, and the relative interest-wage income share is decreasing (increasing) in inflation rate. One interesting scenario in our analysis is that the model can generate a non-monotonic U-shaped relationship between income inequality and inflation. Moreover, our quantitative example shows that this U-shaped relationship is likely to occur in a reasonable range of parameter configuration and the threshold level of inflation is consistent with the current empirical findings using the U.S. data.
    Keywords: Income Inequality; Inflation; Endogenous economic growth; Human capital.
    JEL: D31 E41 O30 O40
    Date: 2020
  31. By: Atsushi Motohashi (Kyoto University)
    Abstract: This study analyzes the impact of the U.S. interest rate policy on the global economy. We extend the literature and build a global model consisting of a large country (the U.S.) and many small countries to investigate the mechanism by which economic growth and asset prices accelerate rapidly after a U.S. interest rate reduction. Specifically, we show that a U.S. interest rate reduction not only increases economic growth rates but also expands asset bubbles as long as the bubbles exist in small open economies. We also show, however, that this low interest rate policy has a large side effect, that is, a collapse of the asset bubbles causes a larger drop in the growth rate of small open countries than that in the case without a lower interest rate. This conclusion implies that small countries need to be prepared for overheated asset prices associated with U.S. interest policies.
    Keywords: Asset Bubbles; U.S. Interest Rate Policy; Economic Growth; Collapse of Asset Bubbles; Asset Prices
    JEL: E32 E44 F43
    Date: 2020–08

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