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on Central Banking |
| By: | Andersson, Fredrik N.G. (Department of Economics, Lund University); Jonung, Lars (Department of Economics, Lund University) |
| Abstract: | Negative interest rates were once seen as impossible outside the realm of economic theory. However, several central banks have recently adopted negative policy rates. The Federal Reserve is coming under increasing pressure to follow suit in the wake of the coronavirus crisis. This paper investigates the actual effects of negative interest rates using the Swedish experience from 2015 to 2019. The Swedish Riksbank was one of the first central banks to introduce a negative interest rate in 2015 and the first central bank to abandon a negative rate in 2019. We find that negative rates had a modest effect on consumer price inflation due to globalization, but significant effects on the exchange rate and domestic asset prices, thus fostering financial imbalances. We conclude by discussing the implications of our results for larger economies such as the United States. |
| Keywords: | Monetary policy; inflation targeting; Sweden; United States; negative interest rates; forward guidance; quantitative easing |
| JEL: | D78 E40 E43 E47 E50 E52 E65 |
| Date: | 2020–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2020_015&r=all |
| By: | Lucía Arango-Lozano; Lukas Menkhoff; Daniela Rodríguez-Novoa; Mauricio Villamizar-Villegas |
| Abstract: | There is ample empirical literature centering on the effectiveness of foreign exchange intervention (FXI). Given the mix of objectives and country-heterogeneity, the general lack of consensus thus far is no surprise. We shed light on this debate by conducting the first comprehensive meta-analysis in the FXI literature, with 279 reported effects that stem from 74 distinct empirical studies. We cover estimations conducted in 19 countries across five decades. Overall, our meta-survey reports an average depreciation of domestic currency of 1% and a reduction of exchange rate volatility of 0.6%, in response to a $1 billion US dollar purchase. Results are qualitatively confirmed but smaller in size under fixed and random-effect estimations. When narrowing in on different economic factors, we find that effects are magnified for cases consistent with the monetary trilemma (greater if financial openness and monetary independence are low). Effects are also larger in emerging than advanced economies, when banking crises remain mild, and when interventions are large in size and are announced. |
| Keywords: | Foreign exchange intervention, exchange rate, meta-analysis |
| JEL: | C83 E58 F31 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1895&r=all |
| By: | Ricardo J. Caballero; Alp Simsek |
| Abstract: | We analyze optimal monetary policy when asset prices influence aggregate demand with a lag (as is well documented). In this context, as long as the central bank's main objective is to minimize the output gap, the central bank optimally induces asset price overshooting in response to the emergence of a negative output gap. In fact, even if there is no output gap in the present but the central bank anticipates a weak recovery dragged down by insufficient demand, the optimal policy is to preemptively support asset prices today. This support is stronger if the acute phase of the recession is expected to be short lived. These dynamic aspects of optimal policy give rise to potentially large temporary gaps between the performance of financial markets and the real economy. One vivid example of this situation is the wide disconnect between the main stock market indices and the state of the real economy in the U.S. following the Fed's powerful response to the Covid-19 shock. |
| JEL: | E21 E32 E43 E44 E52 G12 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27712&r=all |
| By: | Angelo Ranaldo; Benedikt Ballensiefen; Hannah Winterberg |
| Abstract: | We analyze and quantify how two forms of segmentation lead to the monetary policy disconnect. To do this, we study the monetary policy transmission through the main short-term funding market, the repurchase agreement (repo) market. First, the lending rates of banks with access to the central bank's deposit facility are less responsive to the monetary policy target rate. Second, rates of repos secured by assets eligible Quantitative Easing programs diverge more from the target rate. We also find that both forms of segmentation add to one another, suggesting an amplifying effect in weakening monetary policy transmission. |
| Keywords: | Interest rate pass-through, Monetary policy, Market segmentation, Short-term interest rates, Repo |
| JEL: | E40 E43 E50 E52 E58 G18 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:usg:sfwpfi:2020:03&r=all |
| By: | Jonas E. Arias; Martin Bodenstein; Hess Chung; Thorsten Drautzburg; Andrea Raffo |
| Abstract: | Several structural developments in the U.S. economy—including lower neutral interest rates and a flatter Phillips curve—have challenged the ability of the current monetary policy framework to deliver on the Federal Open Market Committee’s (FOMC) dual-mandate goals. This paper explores whether makeup strategies, in which policymakers seek to stabilize average inflation around the inflation target over some horizon, could strengthen the FOMC’s ability to fulfill its dual mandate. The quantitative analysis discussed here suggests that credible makeup strategies may provide some moderate stabilization gains. The practical implementation of these strategies, however, faces a number of challenges that would have to be surmounted for the full benefit of these strategies to be realized. |
| Keywords: | Inflation stabilization; Effective lower bound; Taylor rule; Alternative monetary policy strategies; Monetary policy communication |
| JEL: | E31 E52 E58 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-68&r=all |
| By: | Harald Badinger (Department of Economics, Vienna University of Economics and Business); Stefan Schiman (Austrian Institute of Economic Research (WIFO)) |
| Abstract: | We propose a novel identification strategy to measure monetary policy in a structural VAR. It is based exclusively on known past policy shocks, which are uncovered from high-frequency data, and does not rely on any theoretical a-priori restrictions. Our empirical analysis for the euro area reveals that interest rate decisions of the ECB surprised financial markets at least fifteen times since 1999. This information is used to restrict the sign and magnitude of the structural residuals of the policy rule equation at these shock dates accordingly. In spite of its utmost agnostic nature, this approach achieves strong identification, suggesting that unexpected ECB decisions have an immediate impact on the short-term money market rate, the narrow money stock, commodity prices, consumer prices and the Euro-Dollar exchange rate, and that real output responds gradually. Our close to assumption-free approach obtains as an outcome what traditional sign restrictions on impulse responses impose as an assumption. |
| Keywords: | Structural VAR, Set Identification, Monetary Policy, ECB |
| JEL: | C32 E52 N14 |
| Date: | 2020–07 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp300&r=all |
| By: | Gomis-Porqueras, Pedro; Rafiq, Shuddhasattwa; Yao, Wenying |
| Abstract: | This paper investigates how different commodity prices are affected by unconventional monetary policies (UMP) implemented by the Federal Reserve of the United States as a response to the Global Financial Crisis. We analyze impulse responses using local projections proposed by Jorda (2005) and follow Swanson (2017)’s identification strategy for UMP shocks. We show that forward guidance (FG) and large-scale asset purchase (LSAP) shocks lead to distinct responses from commodity prices. We find that asset-like commodities, such as gold and silver, respond to these UMP shocks most aggressively. While an easing FG shock leads to increases in their prices, an easing LSAP shock has the opposite effect. This differential response suggests that these asset-like commodities are being used as inflation and exchange rate hedges. In contrast, production-like and agricultural commodities respond to UMP shocks in the same way as conventional monetary policy shocks. Consistent with previous literature, we find that easing LSAP shocks, to some extent, signal a negative economic outlook. Policymakers can exploit these different commodities when evaluating the effectiveness of monetary policy in different sectors of the economy. |
| Keywords: | Unconventional monetary policy; Commodity price; Impulse response analysis. |
| JEL: | E5 G0 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102781&r=all |
| By: | Jonathan E. Goldberg; Elizabeth C. Klee; Edward Simpson Prescott; Paul R. Wood |
| Abstract: | This paper examines potential interactions between financial stability and the monetary policy strategies and tools considered in the Federal Reserve’s review of monetary policy strategy, tools, and communication practices. Achieving the Federal Reserve’s goals of full employment and price stability promotes financial stability. A key concern, however, is that with a low equilibrium real interest rate, a low policy rate will be necessary, and in turn, these low rates may contribute to an increase in financial system vulnerabilities. Our analysis suggests that there are typically significant macroeconomic and financial stability benefits of using these tools and strategies, but there are plausible situations in which financial vulnerabilities are such that it would be desirable to limit their use. A clear communications strategy can help minimize financial vulnerabilities. Should vulnerabilities arise, they are often best addressed with macroprudential tools. |
| Keywords: | U.S. monetary policy; Financial stability; Macroprudential policy |
| JEL: | E52 E58 G28 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-74&r=all |
| By: | Proaño Acosta, Christian; Lojak, Benjamin |
| Abstract: | In this paper we study the implementation of a state-dependent inflation target in a two-country monetary union model characterized by boundedly rational agents. In particular, we use the spread between the actual policy rate (which is constrained by the zero-lower-bound) and the Taylor rate (which can become negative) as a measure for the degree of ineffectiveness of conventional monetary policy as a stabilizing mechanism. The perception of macroeconomic risk by the agents is assumed to vary according to this measure by means of the Brock-Hommes switching mechanism. Our numerical simulations indicate a) that a state-dependent inflation target may lead to a better macroeconomic and inflation stabilization, and b) the perceived risk-sharing among the monetary union members influences the financing conditions of the member economies of the monetary union. |
| Keywords: | Monetary Policy,Monetary Unions,Zero Lower Bound,Inflation Targets,Behavioral Macroeconomics |
| JEL: | E52 F02 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bamber:161&r=all |
| By: | William White (C D Howe Institute) |
| Abstract: | While recent reforms are welcome in many ways, there are still significant reasons to doubt that the post-crisis tightening of international financial regulation guarantees future financial and economic stability. The most important reason is that the reforms have focused too narrowly on ensuring that an unstable financial sector will not aggravate downturns by restricting the supply of credit. More attention needs to be paid to ensuring that an overly exuberant financial system does not weaken other parts of the economy by encouraging a rapid buildup of debt during upturns. Some combination of time-varying monetary and regulatory policies (a macrofinancial stability framework) will be required to do this. In addition, many of the individual regulatory measures taken to date, both macroprudential and microprudential, have shortcomings. Their coherence as a package has also been questioned. |
| Keywords: | Too big to fail, financial safety, financial reform, financial crises, implicit subsidies, political economy |
| JEL: | E02 E32 E42 E52 E58 |
| Date: | 2020–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:thk:wpaper:inetwp131&r=all |
| By: | Hess Chung; Brian M. Doyle; James Hebden; Michael Siemer |
| Abstract: | We consider three ways that a monetary policy framework may employ a range for inflation outcomes: (1) ranges that acknowledge uncertainty about inflation outcomes (uncertainty ranges), (2) ranges that define the scope for intentional deviations of inflation from its target (operational ranges), and (3) ranges over which monetary policy will not react to inflation deviations (indifference ranges). After defining these three ranges, we highlight a number of costs and benefits associated with each. Our discussion of the indifference range is accompanied by simulations from the FRB/US model, illustrating the potential for long-term inflation expectations to drift within the range. |
| Keywords: | Forward guidance; Monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-75&r=all |
| By: | Andersson, Fredrik N. G. (Department of Economics, Lund University) |
| Abstract: | There is a never-ending quest for a stable economy with full employment and low inflation. Economists have suggested and policymakers have experimented with different fiscal and monetary policy regimes since at least the beginning of the industrial revolution. In this paper, we study Swedish stabilization policies through six policy regimes between 1873 and 2019. We focus on discretionary stabilization policies by estimating policy shocks. We then explore how Swedish stabilization policies have evolved over time through these shocks: how different institutional setups affected the policies and how policymakers responded to key economic events such as financial crises and wars. |
| Keywords: | monetary policy; fiscal policy; policy shocks; stabilization policies: financial crisis |
| JEL: | E42 E43 E52 E58 E62 E65 |
| Date: | 2020–08–26 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2020_016&r=all |
| By: | NADIM ALFOUHAILI (University Paris 1 Panthéon-Sorbonne) |
| Abstract: | This research examined the trade-off between risk and profitability under Basel III capital regulation (BCR) using a sample of 30 commercial banks in Lebanon. Because our approach in the study is qualitative, we used semi-structured interviews with chief risk officer (CRO) for our sample. In order to examine the impact of Basel III capital regulation (BCR) on risk and profitability, we asked our CFO?s to rate risk and profitability based on 5 scale metrics before and after the application Of Basel III in Lebanon. To analyze the data, we used ATLAS. ti version 8.3 software. The results showed that after the application of Basel III accord in Lebanon risk and profitability decreased in banks. We also noticed this effect is much greater in small and high-risk banks. This result aligns with Klomp and de Haan (2012) findings? that the Basel III accord has more effect on small and high-risk banks. |
| Keywords: | Basel III capital regulation (BCR); Banking risk; Banking Profitability; ATLAS. ti version 8.3 software |
| JEL: | G21 G32 |
| URL: | http://d.repec.org/n?u=RePEc:sek:iacpro:10612993&r=all |
| By: | Martin Baumgaertner (THM Business School) |
| Abstract: | This paper shows that uncertainty has an impact on the effectiveness of monetary policy shocks. As uncertainty increases, so does the risk that a restrictive forward guidance shock will increase rather than decrease stock prices. This effect can be seen not only in high-frequency variables, but also in VAR models with external instruments. The results suggest that uncertainty is an alternative approach to explain the phenomena previously known as "information shock" and should therefore receive more attention in monetary policy measures. |
| Keywords: | Uncertainty, High-Frequency Identication, Structural VAR, ECB |
| JEL: | E44 E52 E58 G14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202041&r=all |
| By: | Moritz Schularick; Lucas ter Steege; Felix Ward |
| Abstract: | Can central banks defuse rising stability risks in financial booms by leaning against the wind with higher interest rates? This paper studies the state-dependent effects of monetary policy on financial stability. Based on the near-universe of advanced economy financial cycles since the 19th century, we show that discretionary leaning against the wind policies during credit and asset price booms are more likely to trigger crises than prevent them. |
| Keywords: | financial crises, instrumental variable, open economy trilemma, local projections |
| JEL: | E44 E50 G01 G15 N10 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8484&r=all |
| By: | Laura Feiveson; Nils Gornemann; Julie L. Hotchkiss; Karel Mertens; Jae W. Sim |
| Abstract: | We show that makeup strategies, such as average inflation targeting and price-level targeting, can be more effective than a flexible inflation targeting strategy in overcoming the obstacles created by the effective lower bound in a heterogeneous agent New Keynesian (HANK) model. We also show that the macroeconomic stabilization benefits from such alternative strategies can be substantially larger in a HANK environment than in a representative agent New Keynesian model. We argue that gains in employment outcomes from switching to an alternative strategy would generate disproportionate improvements for historically disadvantaged households and thus have potentially long-lasting effects on the economic well-being of these groups. |
| Keywords: | Heterogeneous agent New Keynesian model; Representative agent New Keynesian model; Effective lower bound; Inequality; Hand to mouth; Average inflation targeting; Price-level targeting |
| JEL: | D31 E30 E52 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-73&r=all |
| By: | Andrea Ajello; Isabel Cairó; Vasco Curdia; Thomas A. Lubik; Albert Queraltó |
| Abstract: | Some key structural features of the U.S. economy appear to have changed in the recent decades, making the conduct of monetary policy more challenging. In particular, there is high uncertainty about the levels of the natural rate of interest and unemployment as well as about the effect of economic activity on inflation. At the same time, a prolonged period of below-target inflation has raised concerns about the unanchoring of inflation expectations at levels below the Federal Open Market Committee’s inflation target. In addition, a low natural rate of interest increases the probability of hitting the effective lower bound during a downturn. This paper studies how these factors complicate the attainment of the objectives specified in the Federal Reserve’s dual mandate in the context of a DSGE (dynamic stochastic general equilibrium) model, taking into account risk-management considerations. We find that these challenges may warrant pursuing more accommodative policy than would be desirable otherwise. However, such accommodative policy could be associated with concerns about risks to financial markets. |
| Keywords: | U.S. monetary policy; Optimal policy; Discretion |
| JEL: | E32 E52 E58 E61 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-66&r=all |
| By: | Lina El-Jahel (University of Auckland Business School); Robert MacCulloch (University of Auckland Business School); Hamed Shafiee (New Zealand Productivity Commission) |
| Abstract: | Models on the optimal design of monetary policy typically rely on a social welfare loss function defined over inflation and unemployment. Our estimates of such a function use measures of two different dimensions of well-being that have been distinguished by recent research. The first is Cantril’s ‘ladder-of-life’ question. The second captures the emotional quality of everyday experiences. Our Gallup World Poll sample includes one million people in 138 nations over 12 years. Unemployment and inflation reduce well-being, although the ratio of the size of the effect varies dramatically between 2 and 4.6, depending upon which dimension of well-being is chosen. |
| Keywords: | Social welfare; well-being; inflation; unemployment. |
| JEL: | E24 E31 E52 I31 |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:mtu:wpaper:20_06&r=all |
| By: | Jeffrey R. Campbell; Thomas B. King; Anna Orlik; Rebecca Zarutskie |
| Abstract: | We review two nonstandard uses of the policy rate tool, which provide additional stimulus when interest rates are close to or at the effective lower bound—forward guidance and negative interest rate policy. In particular, we survey the use of these tools since the star otf the Great Recession, review evidence of their effectiveness, and discuss key considerations that confront monetary policymakers while using them. |
| Keywords: | Monetary policy; Effective lower bound; Forward guidance; Central bank communication; Negative interest rate policy |
| JEL: | E32 E43 E44 E52 E58 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-70&r=all |
| By: | Enzo Rossi; Vincent Wolff |
| Abstract: | We study the tightness of the link between U.S. monetary and macroeconomic communication events and the exchange rate movements against the USD of four major currencies - the euro, the Swiss franc, the Brazilian real and the Mexican peso - since the global financial crisis (GFC). We find three main results. Approximately 20 percent of the U.S. communications events were associated with statistically significant exchange rate effects. Unconventional and conventional monetary policy announcements had equal impacts. The reactions of the advanced countries' currencies were more in line with each another than with those of the emerging markets' currencies. |
| Keywords: | Central bank communication, macroeconomic news, exchange rates, event study |
| JEL: | C22 E58 F31 G14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2020-18&r=all |
| By: | Saito, Yuta |
| Abstract: | This note investigates how the threat of a member’s exit from a monetary union affects the inflation bias of the common currency. The canonical Barro-Gordon model is extended to a currency union setting, where the monetary policy is determined by majority voting among the N member countries, which are heterogeneous with respect to the within- country output shocks. Once the policy is selected, each member decides whether to remain in the monetary union or not. If a country decides to exit, it has to pay a fixed social cost. If a member leaves the monetary union, it individually chooses the inflation of its own currency. It is shown that inflation bias is generated if more than one member exits. In other words, the optimal monetary policy, which does not generate inflation bias, can be implemented only if no members exit. |
| Keywords: | Currency Union; Time-Inconsistency; Barro-Gordon; Committee Policymaking |
| JEL: | E5 |
| Date: | 2020–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102717&r=all |
| By: | Wang, Gaowang; Zou, Heng-fu |
| Abstract: | We reexamine the optimal fiscal and monetary policy in combined shopping-time monetary models with capital accumulation. Four models are constructed to examine how the production cost of money and the utility from physical capital affect the toolbox of the fiscal and monetary policy. It is shown that the optimality of the Friedman rule hinges on the producing cost of money and capital-in-utility overturns the Chamley-Judd zero capital income taxation theorem. When the production cost of money approaches zero, the Friedman rule is optimal; and when the consumer cares about the utility from capital, the limiting capital income tax is not zero in general. |
| Keywords: | Transactions technology; Inflation tax; Capital income tax; Friedman rule; Capital in utility. |
| JEL: | E40 E52 H20 H21 |
| Date: | 2020–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:102753&r=all |
| By: | Brenneisen, Jan-Niklas |
| Abstract: | Although it is generally accepted that consumer confidence measures are informative signals about the state of the economy, theoretical macroeconomic models designed for the analysis of monetary policy typically do not provide a role for them. I develop a framework with asymmetric information in which the efficacy of monetary policy can be improved, when the imperfectly informed central banks include confidence measures in their information set. The beneficial welfare effects are quantitatively substantial in both a stylized New Keynesian model with optimal monetary policy and an estimated medium-scale DSGE model. |
| Keywords: | Consumer confidence,Monetary policy,Asymmetric information,Imperfect Information,New Keynesian macroeconomics,DSGE models |
| JEL: | D82 D83 D84 E52 E58 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:202004&r=all |
| By: | Francesco Zanetti; Masashige Hamano |
| Abstract: | This study provides new insights on the allocative effect of monetary policy. It shows that contractionary monetary policy exerts a non-trivial reallocation effect by cleansing unproductive firms and enhancing aggregate productivity. At the same time, however, reallocation involves a reduction in the number of product variety that is central to consumer preferences and hurts welfare. A contractionary policy prevents the entry of new firms and insulates existing firms from competition, reducing aggregate productivity. Under demand uncertainty, the gain of the optimal monetary policy diminishes in firm heterogeneity and increases in the preference for product variety. We provide empirical evidence on US data, which corroborates the relevance of monetary policy for product variety that results from firm entry and exit, and provides limited support to the cleansing effect of monetary policy. |
| Keywords: | Monetary policy; firm heterogeneity; product variety; reallocation |
| JEL: | E32 E52 L51 O47 |
| Date: | 2020–09–17 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:917&r=all |
| By: | Bernal-Ramirez, Joaquin; Ocampo, José Antonio |
| Abstract: | It is increasingly recognized that climate change generates major macroeconomic and financial risks. There are physical risks associated to the disasters generated by hydrometeorological events and to gradual but persistent changes in temperatures that have structural impacts on economic activity, productivity and incomes. Additionally, the process of adjustment towards a lower-carbon economy, prompted by changes in climate-related policies, technological disruptions and changes in consumer preferences, generates transition risks. After a brief analysis of the macroeconomic, fiscal and tax policies to manage these risks, this paper concentrates on: (i) how financial policies can help improve transparency and climate-related risk disclosure in financial institutions’ balance sheets and assets prices,particularly with appropriate prudential regulation and supervision; and (ii) how those risks could be taken into account in monetary policy and central banks’ balance sheets and operations. The paper ends with some reflections on the Covid-19 pandemic and the will for a “green” recovery. |
| Keywords: | climate change; carbon tax; financial policy; monetary policy; central banks |
| JEL: | E50 G18 H23 Q54 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:rie:riecdt:63&r=all |
| By: | Haelim Anderson; Selman Erol; Guillermo Ordoñez |
| Abstract: | Central banks provide public liquidity to traditional (regulated) banks with the intention of stabilizing the financial system. Shadow banks are not regulated, yet they indirectly access such liquidity through the interbank system. We build a model that shows how public liquidity provision may change the linkages between traditional and shadow banks, increasing systemic risk through three channels: reducing aggregate liquidity, expanding fragile short-term borrowing, and crowding out of private cross-bank insurance. We show that the creation of the Federal Reserve System and the provision of public liquidity changed the structure and nature of the U.S. interbank network in ways that are consistent with the model and its implications. We provide empirical evidence by constructing unique data on balance sheets and detailed disaggregated information on payments and funding connections in Virginia. |
| JEL: | D53 D85 E02 E44 G11 G21 G23 N21 |
| Date: | 2020–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27721&r=all |
| By: | Youssef El Jai |
| Abstract: | Prior to the colonial era, money issuance in West Africa depended on slave trade. With the advent of the colonial rule, silver coins were imported then progressively imposed as a tool of coercion. The post-colonial trajectory was different for former British and French colonies. While the former regained their monetary sovereignty, the latter continued under a monetary union under the auspices of France. The proposal of the Eco as a single currency for ECOWAS is therefore a whole new step for some countries and a simple exercise of adaptation for others. Hence, a bold policy agenda is needed if the currency union is to be a success. |
| Date: | 2020–06 |
| URL: | http://d.repec.org/n?u=RePEc:ocp:ppaper:pb20-61&r=all |
| By: | Mark A. Carlson; Stefania D'Amico; Cristina Fuentes-Albero; Bernd Schlusche; Paul R. Wood |
| Abstract: | This paper considers various ways of using balance sheet policy (BSP) to provide monetary policy stimulus, including the BSPs put in place by the Federal Reserve in the wake of the Global Financial Crisis, the choice between fixed-size and flow-based asset purchase programs, policies targeting interest rate levels rather than the quantity of asset purchases, and programs aimed at increasing more direct lending to households and firms. For each of these BSP options, we evaluate benefits and costs. We conclude by observing that BSPs’ relative effectiveness and thus optimal configuration will depend on the shocks affecting the economy. Consequently, it would be valuable for the Federal Reserve to keep a variety of tools at its disposal and employ the ones that best fit the situation that it faces. |
| Keywords: | Balance sheet policy; Quantitative easing; Yield curve control; Credit easing; Central bank lending authority |
| JEL: | E43 E44 E58 G12 G21 |
| Date: | 2020–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2020-71&r=all |
| By: | Michael Woodford |
| Abstract: | The COVID-19 pandemic presents a challenge for stabilization policy that is different from those resulting from either “supply” or “demand” shocks that similarly affect all sectors of the economy, owing to the degree to which the necessity of temporarily suspending some (but not all) economic activities disrupts the circular flow of payments, resulting in a failure of what Keynes (1936) calls “effective demand.” In such a situation, economic activity in many sectors of the economy can be much lower than would maximize welfare (even taking into account the public health constraint), and interest-rate policy cannot eliminate the distortions — not because of a limit on the extent to which interest rates can be reduced, but because monetary stimulus fails to stimulate demand of the right sorts. Fiscal transfers are instead well-suited to addressing the fundamental problem, and can under certain circumstances achieve a first-best allocation of resources without any need for a monetary policy response. |
| JEL: | E12 E52 E63 |
| Date: | 2020–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:27768&r=all |
| By: | Ludger Schuknecht; Vincent Siegerink |
| Abstract: | The paper empirically examines the implementation record of international financial regulation of the banking sector. The study finds that the size of the banking sector and the presence of global systemically important banks (G-SIBs) are positively associated with a stronger implementation record. These results suggest that cooperative motives of internalising externalities, creating a level playing field and preserving financial stability play a role in explaining the implementation record. We find evidence that this cooperative behaviour may be driven by the self-interest of global players as the positive record is particularly strong in countries where large banking sectors and big banks are both present, and where regulation only applies to large players. Sectoral concentration, bank health and the share of foreign ownership yield more mixed results as regards their impact on implementation. |
| Keywords: | policy coordination, international public goods, financial regulation, rent seeking |
| JEL: | D70 F55 G15 H26 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_8509&r=all |
| By: | Hua Cheng (Nankai University - School of Finance; University of Texas at Austin); Kishore Gawande (University of Texas at Austin); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Shusen Qi (Xiamen University - School of Management) |
| Abstract: | Although policy uncertainty has drawn regulators’ attention in the aftermath of the global financial crisis, little is known on how to alleviate its adverse effects. In this paper, we examine the role of political connections in mitigating the detrimental impact of policy uncertainty on banks. Our estimates show that banks are more cautious when facing policy uncertainty, but that the effect is partially alleviated when banks are politically connected. For an increase of one standard deviation in policy uncertainty, connected banks maintain a loss provision to loan volume ratio that is almost seven percent lower compared to their unconnected peers. These findings are robust to a geographical regression discontinuity setting, as well as to a placebo test. Lastly, the mitigating role of political connections is driven mainly by smaller banks and periods of stricter banking regulations. |
| Keywords: | Policy uncertainty; Political connections; Bank risk-taking |
| JEL: | G21 G28 H70 |
| Date: | 2020–05 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2077&r=all |
| By: | Joao Rafael Cunha (University of St Andrews) |
| Abstract: | This paper presents the idea of the financial regulatory cycle in the United States. I show that there have been three long cycles of financial regulation since the independence of the country in 1776. Moreover, there are also smaller cycles within these long regulatory cycles. Contingent capital may be a way to curb the impact of the regulatory cycle. |
| Keywords: | Financial Regulation; United States Banks; Law and Economics; Financial History |
| JEL: | G21 G28 K2 N22 N42 |
| Date: | 2020–09–07 |
| URL: | http://d.repec.org/n?u=RePEc:san:wpecon:2006&r=all |