nep-cba New Economics Papers
on Central Banking
Issue of 2020‒10‒12
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. International Spillover Effects of Unconventional Monetary Policies of Major Central Banks By Tomoo Inoue; Tatsuyoshi Okimoto
  2. A Dynamic Evaluation of Central Bank Credibility By Cem Cakmakli; Selva Demiralp
  3. Do CDS markets care about the G-SIB status? By Bellia, Mario; Heynderickx, Wouter; Maccaferri, Sara; Schich, Sebastian
  4. Did the absence of a central bank backstop in the sovereign bond markets exacerbate spillovers during the euro-area crisis? By Heather D. Gibson; Stephen G. Hall; Deborah Gefang; Pavlos Petroulas; George S. Tavlas
  5. Time-varying Effect of Monetary Policy on Capital Flows in Korea By Joonyoung Hur; Kyunghun Kim
  6. Fed Communication on Financial Stability Concerns and Monetary Policy Decisions: Revelations from Speeches By Istrefi Klodiana; Odendahl Florens; Sestieri Giulia
  7. Did Too-Big-To-Fail Reforms Work Globally? By Asani Sarkar
  8. An Empirical Assessment of Monetary Policy Channels on Income and Wealth Disparities By José Alves; Tomás Silva
  9. Debt holder monitoring and implicit guarantees: did the BRRD improve market discipline? By Cutura, Jannic Alexander
  10. Banks' bail-in and the new banking regulation: an EU event study By Bellia, Mario; Maccaferri, Sara
  11. The Role of Information and Experience for Households' Inflation Expectations By Christian Conrad; Zeno Enders; Alexander Glas
  12. Effect of Monetary Policy on Government Spending Multiplier By Joonyoung Hur; Jong-Suk Han
  13. Negative interest rates may be more psychologically acceptable than assumed: Implications for savings By Efendic, Emir; D'Hondt, Catherine; De Winne, Rudy; Corneille, Olivier
  14. Predicting Payment Migration in Canada By Anneke Kosse; Zhentong Lu; Gabriel Xerri
  15. Effects of interest rate caps on microcredit: evidence from a natural experiment in Bolivia By María José Roa; Alejandra Villegas; Ignacio Garrón
  16. Equity Premium and Monetary Policy in a Model with Limited Asset Market Participation By Roman Horvath; Lorant Kaszab; Ales Marsal

  1. By: Tomoo Inoue (Seikei University); Tatsuyoshi Okimoto (ANU - Australian National University)
    Abstract: This study examines the effects of unconventional monetary policies (UMPs) by the major central banks, namely the Bank of England (BOE), Bank of Japan (BOJ), European Central Bank (ECB) and the Federal Reserve (Fed) on the international financial markets, taking global spillovers into account. To this end, we apply the Global Vector Autoregressive (GVAR) model to 35 countries and one region for the period from March 2009 to July 2019. Our results indicate that the effects vary across four asset classes and central banks. For example, the UMPs of the Fed and the BOJ have signicant impacts on the regional sovereign bond markets, while the ECB UMPs show relatively stronger and broader effects on global bond markets. The global equity markets were also considerably affected by UMPs of the Fed, ECB, and BOJ. Furthermore, we found some evidence of monetary policy interactions amongst the four major central banks. This resulted in the effects being less persistent on the global bond markets for the Fed and the ECB, but more persistent on equity and foreign exchange markets for the Fed and the BOJ.
    Keywords: Unconventional Monetary policy,Financial linkage,International spillover,Global VAR
    Date: 2020–09
  2. By: Cem Cakmakli (Department of Economics, Koc University); Selva Demiralp (Department of Economics, Koc University)
    Abstract: Central bank credibility is critical for the effectiveness of monetary policy. The measures of credibility that are based on the changes in actual inflation rate do not perform very well in environments of chronic inflation. We design an alternative measure that allows us to track the evolution of credibility in an inflationary environment. Credibility is defined as the central bank’s ability to lower inflation expectations towards its inflation target via current interest rate decisions. We adopt a Bayesian set up to exploit this definition and document how credibility changes over time. Our measure differs from the existing measures that are based on the deviation of inflation expectations from the inflation target. We show that the latter tests may be too blunt in the EM context and either overlook marginal improvements in credibility or incorrectly attribute the temporary reductions in the inflation rate to improvements in credibility. Utilizing a time varying parameters modeling structure, we show that the credibility of the Central Bank of the Republic of Turkey (CBRT) has declined significantly over time. Potential reasons for this deterioration could be the CBRT’s disappointing performance in hitting the inflation target and its exposure to political pressures. We apply our methodology to Brazil as well to highlight its advantages and draw a comparison to the existing literature.
    Keywords: Credibility, inflation expectations, Central Bank of the Republic of Turkey, Unobserved component models, TVP-VAR, Central Bank of Brazil.
    JEL: E52 E58 C32
    Date: 2020–10
  3. By: Bellia, Mario (European Commission); Heynderickx, Wouter (European Commission Single Resolution Board); Maccaferri, Sara (European Commission); Schich, Sebastian (OECD)
    Abstract: "Ending too big to fail" is a declared policy aim and a key element of the globally coordinated financial regulatory reform. An official list of banks considered to be global systemically important (G-SIBs) is published on an annual basis since 2011. The goal of the present paper is to assess to what extent equity and CDS markets care about the official releases of the G-SIB lists and, in particular, whether the inclusion of a bank in the G-SIB list is good or bad news for bank debt and equity holders. The analysis applies both event-studies and panel regressions and relies upon European banks' CDS senior and subordinated quotes and equity prices to evaluate their reactions to the publications of the G-SIB lists. The analysis spans from the first leaked G-SIB list by the Financial Times as of 2009 to the 2017 official publication of the list. Results show that equity and senior/subordinated CDS spreads react differently to the events considered and that reactions evolve over time. During the rst events considered in the analysis, CDS of banks classified as G-SIBs react less than those of other banks. Results for more recent events are more mixed, potentially reflecting that recent releases of G-SIBs lists entail less information. The analysis also devotes special attention to a subset of "intermediate" banks that in principle are eligible to enter in the G-SIBs list, as compared to other banks that will obviously be included/excluded in the list given their size and footprint. This narrowed focus allows us to obtain more efficient results.
    Keywords: Credit Default Swap (CDS), G-SIB, Too Big to Fail, Event Study
    JEL: G18 G28 G32
    Date: 2020–06
  4. By: Heather D. Gibson (Bank of Greece); Stephen G. Hall (University of Leicester, Bank of Greece and University of Pretoria); Deborah Gefang (University of Leicester); Pavlos Petroulas (Bank of Greece); George S. Tavlas (Bank of Greece)
    Abstract: The euro-area sovereign debt crisis was characterized by feedback loops between (1) sovereign bond ratings and sovereign spreads in single jurisdictions and (2) sovereign spreads and ratings among jurisdictions. One explanation of this circumstance is that the ECB was unable to perform the role of lender of last resort in the sovereign bond markets during the crisis. We provide a spatial framework that allows us to distinguish among European countries whose central banks were permitted to function as lender of last resort in those markets and countries whose central banks were not permitted to do so. Our results are consistent with the view that the absence of a central bank backstop in the sovereign bond markets exacerbated feedback loops.
    Keywords: euro-area crisis, simultaneous spatial model, European banks, spreads, sovereign ratings
    JEL: E3 G01 G14 G21
    Date: 2020–07
  5. By: Joonyoung Hur (Department of Economics, Sogang University, Seoul); Kyunghun Kim (School of Economics, Hongik University)
    Abstract: This paper examines the effect of domestic monetary policy on capital flows after controlling for the effect of conventional push factors (global factors). We conduct a time-varying coefficient vector autoregressive (TVC-VAR) model analysis using monthly data (January 2010−July 2019) from Korea, a representative small open economy with monetary autonomy. Our empirical results show that an expansionary monetary policy shock has a short-run (1- and 3-month) negative impact on gross inflows to the equity market, which is the main driver of gross capital inflows to Korea. This negative effect increases throughout the sample period. Monetary policy easing is also associated with a decrease in outflows of equity, representing a reversal of Korean residents’ foreign equity investment as the domestic policy rate decreases. This effect dampens the negative impact on gross capital inflows, which leads to mild responses of net capital inflows in the short run. We also find a clear relationship between the level of the policy rate and its impact on gross capital inflows. The lower the policy rate, the greater the negative impact of the expansionary monetary policy shock on gross capital inflows. This time-varying effect reflects difficulties that many emerging market economies including Korea face in setting monetary policy when policy rates are low.
    Keywords: Monetary policy, Capital flows, Push factors, Time-varying effect
    JEL: F3 F4 E5
    Date: 2020
  6. By: Istrefi Klodiana; Odendahl Florens; Sestieri Giulia
    Abstract: This paper studies the informational content of publicly given speeches of FOMC members with a focus on financial stability, from 1997 to 2018. We document that presidents of Federal Reserve Banks spoke more than Board members around and after the financial crisis, and exhibit more variation in the topics of their speeches. Our speech-based indicators of financial stability-related topics show that, when added to a standard forward-looking Taylor rule, a higher speech intensity on these topics relates to a more accommodative monetary policy. This result is driven by the information in speeches of Fed presidents, not the Board or the Fed Chair. We discuss several channels that can rationalize this finding.
    Keywords: Monetary Policy, Federal Reserve, Financial Stability, Communication.
    JEL: E03 E50 E61
    Date: 2020
  7. By: Asani Sarkar
    Abstract: Once a bank grows beyond a certain size or becomes too complex and interconnected, investors often perceive that it is “too big to fail” (TBTF), meaning that if the bank were to fail, the government would likely bail it out. Following the global financial crisis (GFC) of 2008, the G20 countries agreed on a set of reforms to eliminate the perception of TBTF, as part of a broader package to enhance financial stability. In June 2020, the Financial Stability Board (FSB), a sixty-eight-member international advisory body set up in 2009, published the results of a year-long evaluation of the effectiveness of TBTF reforms. In this post, we discuss the main conclusions of the report—in particular, the finding that implicit funding subsidies to global banks have decreased since the implementation of reforms but remain at levels comparable to the pre-crisis period.
    Keywords: too-big-to-fail; global banks; systemic risk; Financial Stability Board
    JEL: G32 G21
    Date: 2020–09–30
  8. By: José Alves; Tomás Silva
    Abstract: Our paperaims at analysing the relation between monetary policy andits transmission channels on both income and wealthinequality for the Euro Area.We analysed three different channels identified by the literature (Income, Portfolio and Earnings Heterogeneity) that might explainhow monetary policy decisions may affect wealth and income distribution.In this empirical researchwe also set up a fourth regression combining all our selected explanatory variableswith the goal of studyingthe impact of the aforementionedchannels combined. For income inequality we analysed four different measures, namely Gini of disposable income(GDI), Gini of market income(GMI), share of income held by the top 1% and theshare of income of thetop 10%of society. In what regards to wealth inequality due to lack of data we had to createan alternative measure that can both translate the unequal savings rate of the Euro Area countries and evaluate the pace of capital accumulation in order to shed a lighton the gap between high-income and low-income household’sannual savings.So that our study could be conducted we developedan unbalancedpanel data analysis for the Eurozonecountriesbetween 1999 and 2017.The results we reached led us to conclude that the increase in asset prices, mainly equity, seems to be relevant to explain an increase in income inequality. However, it seems that the positive impact that MP had on unemployment by reducing it, contributed to avoid a higher increase on income inequality in the Euro Area.
    Keywords: Income inequalities; Wealth inequalities; Monetary Policy; Transmission Channels
    JEL: C23 D31 E25 E52 E58
    Date: 2020–09
  9. By: Cutura, Jannic Alexander
    Abstract: This paper argues that the European Unions Banking Recovery and Resolution Directive (BRRD) improved market discipline in the European bank market for unsecured debt. The different impact of the BRRD on bank bonds provides a quasi-natural experiment that allows to study the effect of the BRRD within banks using a difference-in-difference approach. Identification is based on the fact that (otherwise identical) bonds of a given bank maturing before 2016 are explicitly protected from BRRD bail-in. The empirical results are consistent with the hypothesis that debt holders actively monitor banks and that the BRRD diminished bail-out expectations. Bank bonds subject to BRRD bail-in carry a 10 basis points bail-in premium in terms of the yield spread. While there is some evidence that the bail-in premium is more pronounced for non-GSIB banks and banks domiciled in peripheral European countries, weak capitalization is the main driver. JEL Classification: G18, G21, H81
    Keywords: bail-in, banking regulation, BRRD, moral hazard
    Date: 2020–10
  10. By: Bellia, Mario (European Commission); Maccaferri, Sara (European Commission)
    Abstract: The purpose of the study is to estimate the short term reaction of equity and CDS prices of a sample of European banks to various events and announcements, such as bail-ins, recapitalisations, and the proposal and final agreement of the EU reform package of prudential and resolution rules in banking (“banking package†). This study replicates and expand Schafer et al. (2017) to include more recent EU events, such as the resolution of Banco Popular and the further tightening of EU prudential and resolution rules in 2019. Overall, our analysis shows the most recent events did not seem to trigger abnormal reactions in bank funding markets after bank prudential and resolution reforms were implemented in the EU in 2016. An exception is the 2018 Council agreement on its general approach to the proposed banking package. While the 2016 and 2019 reforms of EU prudential and resolution rules seem to have increased perceived probabilities of
    Keywords: Too-Big-To-Fail, Bail-in, FSB, event study, Credit Default Swap, CDS
    JEL: G21 G28
    Date: 2020–09
  11. By: Christian Conrad; Zeno Enders; Alexander Glas
    Abstract: Based on a new survey of German households, we investigate the role of information channels and lifetime experience for households’ inflation expectations. We show that the types of information channels that households use to inform themselves about monetary policy are closely related to their socio-economic characteristics. These information channels, in turn, have an important influence on the level of perceived past and expected future inflation, as well as uncertainty thereof. The expected future change of inflation and the unemployment rate, however, is strongly influenced by individual experience of these variables. Similarly, the expected response of inflation to a change in the interest rate is also shaped by experience. We propose the interpretation that households obtain inflation numbers from the media, but their ‘economic model’ is shaped by experience.
    Keywords: household expectations, inflation expectations, information channels, experience, Bundesbank household survey
    JEL: E31 D84
    Date: 2020
  12. By: Joonyoung Hur (Department of Economics, Sogang University, Seoul); Jong-Suk Han (Department of Tax Policy Research, Korea Institute of Public Finance,)
    Abstract: This paper empirically examines the effect of the monetary policy stance toward inflation on the government spending multiplier when the nominal interest rate is not bound to zero. We estimate a time-varying coefficient vector autoregressive (TVC-VAR) model using 2000:Q1 to 2019:Q3 quarterly data of Korea, whose policy rate is distant from zero. We find that the medium-run government spending multiplier is dampened as the anti-inflationary stance of the central bank becomes more aggressive. The TVC-VAR estimate shows that Korea’s monetary policy became more hawkish until 2009 and attenuated afterward, which is consistent with the narrative evidence from the Bank of Korea. Meanwhile, the medium-run government spending multiplier declined until 2009, after which it started to increase. Our empirical result supports existing theoretical work such as Christiano et al. (2011) that posits a negative relationship between the degree of the monetary authority’s anti-inflationary stance and the size of government spending multipliers.
    Keywords: Government spending multiplier; Monetary policy; Time-varying coefficient VAR
    JEL: C11 E32 E62 E52
    Date: 2020
  13. By: Efendic, Emir; D'Hondt, Catherine; De Winne, Rudy; Corneille, Olivier
    Keywords: saving ; negative interest rates ; financial desition making ; loss-aversion
    Date: 2019–01–01
  14. By: Anneke Kosse; Zhentong Lu; Gabriel Xerri
    Abstract: Canada currently has two core payment systems for processing funds transfers between financial institutions: the Large Value Transfer System (LVTS) and the Automated Clearing Settlement System (ACSS). These systems will be replaced over the next years by three new systems: Lynx, the Settlement Optimization Engine (SOE) and the Real-Time Rail (RTR). We employ historical LVTS and ACSS data to predict the demand for the future systems. The results show that small-value LVTS payments will likely migrate to SOE. Also, in the short run, about CAD 10,000 billion of LVTS and ACSS payments (per year) is anticipated to migrate to the RTR if not subject to maximum transaction values. These migration patterns raise important policy questions, such as whether the future systems should be subject to value caps and/or higher collateral requirements.
    Keywords: Financial institutions; Financial services; Financial stability; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: C3 E4 E42 G1 G2 G28
    Date: 2020–09
  15. By: María José Roa (Investigadora del Instituto de Investigaciones Económicas y Sociales Francisco de Vitoria); Alejandra Villegas (Investigadora de Universidad Iberoamericana Ciudad de México); Ignacio Garrón (Consultor indpendiente)
    Abstract: This paper evaluates the imposition of caps on microcredit lending rates through directed credit policies for productive sectors. This financial inclusion intervention provides a unique quasi-experiment, allowing to estimate its causal effect following a difference-in-differences analysis. Our results suggest that the imposition of interest rate ceilings negatively affected the portfolio balance of new microcredits and loans to SMEs granted by MFIs. Particularly, we find robust results indicating that the balance of the microcredit and SME loans portfolio granted by MFIs, relative to the company portfolio granted by banks, decreased by 26.1% for an average MFI for the period 2011-2018.
    Keywords: Interest rate ceilings, financial inclusion, credit access, microcredit loans, small and medium enterprises loans .
    JEL: G18 G28 G38
    Date: 2020–09
  16. By: Roman Horvath (Charles University in Prague); Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Ales Marsal (Vienna University of Economics and Business)
    Abstract: We develop a dynamic stochastic general equilibrium model calibrated to US data to examine how monetary policy shocks affect income inequality and the equity premium. The model features Ricardian and non-Ricardian households and shows that a monetary policy tightening causes an endogenous redistribution of income from non-Ricardians to Ricardians. Ricardians' consumption comoves more strongly with asset returns, giving rise to high equity premia. We extend our model with several frictions and estimate it with generalized method of moments using US macroeconomic and financial data from 1960-2007. We find that the estimated model jointly matches the bond and equity premia. We complement our theoretical model with vector autoregression estimations and show that a tightening of US monetary policy increases equity premia.
    Keywords: Limited Asset Market Participation, Monetary Policy, DSGE, Equity Premium
    JEL: E32 E44 G12
    Date: 2020

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