nep-cba New Economics Papers
on Central Banking
Issue of 2020‒10‒19
25 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy Cooperation/Coordination and Global Financial Crises in Historical Perspective By Michael D. Bordo
  2. Macroprudential policy, monetary policy and Eurozone bank risk By Elien Meuleman; Rudi Vander Vennet
  3. Do Women Matter in Monetary Policy Boards? By Donato Masciandaro; Paola Profeta; Davide Romelli
  4. Forward Guidance and Expectation Formation: A Narrative Approach By Christopher S. Sutherland
  5. A Theory of Foreign Exchange Interventions By Sebastián Fanelli; Ludwig Straub
  6. Foreign exchange intervention and financial stability By Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva
  7. The case for central bank independence: a review of key issues in the international debate By Dall’Orto Mas, Rodolfo; Vonessen, Benjamin; Fehlker, Christian; Arnold, Katrin
  8. The (unobservable) value of central bank’s refinancing operations By Albertazzi, Ugo; Burlon, Lorenzo; Pavanini, Nicola; Jankauskas, Tomas
  9. The rationale for a safe asset and fiscal capacity for the Eurozone By Lorenzo Codogno; Paul van den Noord
  10. Bank Coordination and Monetary Transmission: Evidence from India By Dixit, Shiv; Subramanian, Krishnamurthy
  11. Prudential Regulation in Financial Networks By Mohamed Belhaj; Renaud Bourlès; Frédéric Deroïan
  12. The Effects of QQE on Long-run Inflation Expectations in Japan By Mototsugu Shintani; Naoto Soma
  13. Why Does the Fed Move Markets so Much? A Model of Monetary Policy and Time-Varying Risk Aversion By Carolin Pflueger; Gianluca Rinaldi
  14. Classification of monetary and fiscal dominance regimes using machine learning techniques By Hinterlang, Natascha; Hollmayr, Josef
  15. Fifty Shades of QE: Conflicts of Interest in Economic Research By Brian Fabo; Martina Jančoková; Elisabeth Kempf; Ľuboš Pástor
  16. Effects of Monetary Policy News on Financial Assets: evidence from Brazil on a bivariate VAR-GARCH model (2006-17) By Tarciso Gouveia da Silva; Osmani Teixeira de Carvalho Guillén; George Augusto Noronha Morcerf; Andre de Melo Modenesi
  17. Asymmetric Effects of Monetary Policy Easing and Tightening By Davide Debortoli; Mario Forni; Luca Gambetti; Luca Sala
  18. The Contribution of Food Subsidy Policy to Monetary Policy By William Ginn; Marc Pourroy
  19. Sectoral output effects of monetary policy: do sticky prices matter? By Henkel, Lukas
  20. Security and convenience of a central bank digital currency By Charles M. Kahn; Francisco Rivadeneyra
  21. A Toolkit for Solving Models with a Lower Bound on Interest Rates of Stochastic Duration By Gauti B. Eggertsson; Sergey K. Egiev; Alessandro Lin; Josef Platzer; Luca Riva
  22. Liquidity Risk, Market Power and Reserve Accumulation By Grégory Claeys; Chara Papioti; Andreas Tryphonides
  23. Stock-bond Return Correlation, Bond Risk Premium Fundamental, and Fiscal-monetary Policy Regime By Erica X.N. Li; Tao Zha; Ji Zhang; Hao Zhou
  24. Prudential policies, credit supply and house prices: evidence from Italy By Pierluigi Bologna; Wanda Cornacchia; Maddalena Galardo
  25. Beyond financial repression and regulatory capture: the recomposition of European financial ecosystems after the crisis By Eric Monnet; Stefano Pagliari; Shahin Vallée

  1. By: Michael D. Bordo
    Abstract: The COVID-19 pandemic spawned a global liquidity crisis in March 2020. The global liquidity crisis was alleviated by the Federal Reserve and other advanced country central banks cooperating by extending the swap lines they developed in the Global Financial Crisis 2007-2008. Central bank cooperation in 2020 evolved from a two-century history across several monetary regimes that is surveyed in this paper. I find that in monetary regimes which are rules-based cooperation was most successful. International currency swaps developed to manage exchange rates during the Bretton Woods era have evolved into the leading tool to manage international liquidity crises. The swap network can be viewed as a step in the direction of a global financial safety net.
    JEL: E58 F33 N20
    Date: 2020–10
  2. By: Elien Meuleman; Rudi Vander Vennet (-)
    Abstract: We investigate the impact of macroprudential policy on the risk and return profile of Eurozone banks between 2008 and 2018, conditioning on the stance of monetary policy. Using local projections, we find that a tightening in macroprudential policy increases financial stability by curbing credit growth and increasing the resilience of the banks. With respect to the policy mix, we show that tight macroprudential and monetary policies reinforce each other. But even when monetary policy is accommodating, macroprudential policy is found to be effective in deterring excessive bank risk taking. However, we also document adverse consequences for bank franchise values.
    Keywords: Euro Area banks, macroprudential policy, monetary policy, inverse propensity score matching, local projections, bank risk profile
    JEL: C23 E52 E61 G21 G28
    Date: 2020–08
  3. By: Donato Masciandaro; Paola Profeta; Davide Romelli
    Abstract: We construct a new dataset on the presence of women on central bank monetary policy committees for a set of 103 countries, over the period 2002-2016. We document an increasing share of women in monetary policy committees, which is mainly associated with a higher overall presence of women in central banks and less so with other institutional factors or country characteristics. We then investigate the impact of this trend on monetary policymaking by estimating Taylor rules augmented to include the share of women on monetary policy committees. We show that central bank boards with a higher proportion of women set higher interest rates for the same level of inflation. This suggests that women board members have a more hawkish approach to monetary policy. We confirm this result by analysing the voting behaviour of members of the executive board of the Swedish Central Bank during the period 2000-2017.
    Keywords: Central banks; Monetary Policy Committees; Women on boards; Taylor rule
    JEL: E02 E52 E58 J16
    Date: 2020
  4. By: Christopher S. Sutherland
    Abstract: How forward guidance influences expectations is not yet fully understood. To study this issue, I construct central bank data that includes forward guidance and its attributes, central bank projections, and quantitative easing, which I combine with survey data. I find that, in response to a change in forward guidance, forecasters revise their interest rate forecasts in the intended direction by five basis points on average. The effect is not attributable to central bank information effects. Instead, when forming rate expectations, forecasters place full weight on their own inflation and growth forecasts and zero weight on those of the central bank.
    Keywords: Central bank research; Monetary policy; Monetary policy communications; Transmission of monetary policy
    JEL: D84 E58
    Date: 2020–09
  5. By: Sebastián Fanelli; Ludwig Straub
    Abstract: We study a real small open economy with two key ingredients: (i) partial segmentation of home and foreign bond markets and (ii) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry-trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (a) the optimal policy leans against the wind, stabilizing the exchange rate; (b) it involves smooth spreads but allows exchange rates to jump; (c) it partly relies on “forward guidance”, with non-zero interventions even after the shock has subsided; (d) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.
    JEL: F31 F32 F41 F42
    Date: 2020–09
  6. By: Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva
    Abstract: This paper studies the effects of sterilized foreign exchange market intervention in a model with financial frictions and imperfect capital mobility. The central bank operates a managed float regime and issues sterilization bonds that are imperfect substitutes (as a result of economies of scope) to investment loans in bank portfolios. The model is parameterized and used to study the macroeconomic effects of, and policy responses to, capital inflows associated with a transitory shock to world interest rates. The results show that sterilized intervention can be expansionary through a bank portfolio effect and may increase volatility and financial stability risks. Full sterilization is optimal only when the bank portfolio effect is absent. The optimal degree of intervention is more aggressive when the central bank can choose simultaneously the degree of sterilization; in that sense, the instruments are complements. When the central bank's objective function depends on the cost of sterilization, and concerns with that cost are sufficiently high, intervention and sterilization can be substitutes---independently of whether exchange rate and financial stability considerations also matter.
    JEL: E32 E58 F41
    Date: 2020–09
  7. By: Dall’Orto Mas, Rodolfo; Vonessen, Benjamin; Fehlker, Christian; Arnold, Katrin
    Abstract: This Occasional Paper analyses how significant expansions in central banks’ mandates, roles and instruments can result in challenges to the independence of monetary policy. The paper reviews, in particular, some of the key challenges to central bank independence brought about by the global financial crisis (GFC) of 2007 and assesses their impact on the de jure and de facto independence of selected central banks around the world in the past few years. It finds that although the level of de jure (legal) central bank independence did not deteriorate, the level of de facto (actual) independence of the central banks of some of the largest economies in the world may have weakened. The paper presents counterarguments to the key critiques raised against central banks due to their policy response during the GFC, and concludes that the case for central bank independence is as strong as ever. JEL Classification: B1, B2, C4, E3, E4, E5, E6, K3, N1, N2
    Keywords: central bank independence, central bank mandate, financial stability, global financial crisis, price stability
    Date: 2020–10
  8. By: Albertazzi, Ugo; Burlon, Lorenzo; Pavanini, Nicola; Jankauskas, Tomas
    Abstract: We quantify the impact that central bank refinancing operations and funding facilities had at reducing the banking sector’s intrinsic fragility in the euro area in 2014-2019. We do so by constructing, estimating and calibrating a micro-structural model of imperfect competition in the banking sector that allows for runs in the form of multiple equilibria, in the spirit of Diamond & Dybvig (1983), banks’ default and contagion, and central bank funding. Our framework incorporates demand and supply for insured and uninsured deposits, and for loans to firms and households, as well as borrowers’ default. The estimation and the calibration are based on confidential granular data for the euro area banking sector, including information on the amount of deposits covered by the deposit guarantee scheme and the borrowing from the European Central Bank (ECB). We document that the quantitative relevance of non-fundamental risk is potentially large in the euro area banking sector, as witnessed by the presence of alternative equilibria with run-type features, but also that central bank interventions exerted a crucial role in containing fundamental as well as non-fundamental risk. Our counterfactuals show that 1 percentage point reduction (increase) in the ECB lending rate of its refinancing operations reduces (increases) the median of banks’ default risk across equilibria by around 50%, with substantial heterogeneity of this pass-through across time, banks and countries. JEL Classification: E44, E52, E58, G01, G21, L13
    Keywords: bank runs, central bank policies, imperfect competition, multiple equilibria, structural estimation
    Date: 2020–10
  9. By: Lorenzo Codogno; Paul van den Noord
    Abstract: The only way to share common liabilities in the Eurozone is to achieve full fiscal and political union, i.e. unity of liability and control. In the pursuit of that goal, there is a need to smooth the transition, avoid unnecessary strains to macroeconomic and financial stability and lighten the burden of stabilisation policies from national sovereigns and the European Central Bank, while preserving market discipline and avoiding moral hazard. Both fiscal and monetary policy face constraints linked to the high legacy debt in some countries and the zero-lower-bound, respectively, and thus introducing Eurozone ‘safe assets’ and fiscal capacity at the centre would strengthen the transmission of monetary and fiscal policies. The paper introduces a standard Mundell-Fleming framework adapted to the features of a closed monetary union, with a two-country setting comprising a ‘core’ and a ‘periphery’ country, to evaluate the response of policy and the economy in case of symmetric and asymmetric demand and supply shocks in the current situation and following the introduction of safe bonds and fiscal capacity. Under the specified assumptions, it concludes that a safe asset and fiscal capacity, better if in combination, would remove the doom loop between banks and sovereigns, reduce the loss in output for both economies and improve the stabilisation properties of fiscal policy for both countries, and thus is welfare enhancing.
    Keywords: Fiscal policy, Business fluctuations, Safe sovereign assets, Fiscal capacity
    Date: 2019–05
  10. By: Dixit, Shiv; Subramanian, Krishnamurthy
    Abstract: We propose a new channel for the transmission of monetary policy shocks, the coordination channel. We develop a New Keynesian model in which bank lending is strategically complementary. Banks do not observe the distribution of loans but infer it using Gaussian signals. Under this paradigm, expectations of tighter credit conditions reduce banks’ lending response to monetary shocks. As a result, lack of coordination and information about other banks’ actions dampen monetary transmission. We test these predictions by constructing a dataset that links the evolution of interest rates to firms’ bank credit relationships in India. Consistent with our model, we find that the cross-sectional mean and dispersion of lending rates, which capture the expected value and the precision of the signals of credit extended by other banks, are significant predictors of monetary transmission. Our quantitative results suggest that lending complementarities reduce monetary transmission to inflation and output by about a third.
    Keywords: Monetary policy transmission, India, lending rates
    JEL: E43 E52 G21
    Date: 2020–08–10
  11. By: Mohamed Belhaj (IMF-Midle East Center for Economics and Finance); Renaud Bourlès (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université, IUF - Institut Universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche); Frédéric Deroïan (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique - AMU - Aix Marseille Université)
    Abstract: We analyze risk-taking regulation when financial institutions are linked through shareholdings. We model regulation as an upper bound on institutions' default probability, and pin down the corresponding limits on risk-taking as a function of the shareholding network. We show that these limits depend on an original centrality measure that relies on the cross-shareholding network twice: (i) through a risk-sharing effect coming from complementarities in risk-taking and (ii) through a resource effect that creates heterogeneity among institutions. When risk is large, we find that the risk-sharing effect relies on a simple centrality measure: the ratio between Bonacich and self-loop centralities. More generally, we show that an increase in cross-shareholding increases optimal risk-taking through the risk-sharing effect, but that resource effect can be detrimental to some banks. We show how optimal risk-taking levels can be implemented through cash or capital requirements, and analyze complementary interventions through key-player analyses. We finally illustrate our model using real-world financial data and discuss extensions toward including debt-network, correlated investment portfolios and endogenous networks.
    Keywords: prudential Regulation,financial Network,risk-Taking
    Date: 2020–09
  12. By: Mototsugu Shintani (Faculty of Economics, the University of Tokyo, Japan; and Institute for Monetary and Economic Studies, Bank of Japan); Naoto Soma (Department of Economics, Yokohama National University)
    Abstract: This paper investigates whether a series of unconventional monetary policies conducted by the Bank of Japan in 2013 contributed to an increase in long-run inflation expectations, which had been below 0 percent. Using a panel dataset of professional forecasts, we estimate the dynamic Nelson-Siegel model and extract long-run inflation expectations as a common factor. We find that the introduction of Quantitative and Qualitative Monetary Easing (QQE) in April 2013, rather than raising the inflation target from 1 percent to 2 percent in January 2013, significantly increased long-run inflation expectations in Japan. In addition to this outcome, we find that the correlation between short-run and long-run expectations has been reduced since the introduction of QQE. Overall, our results suggest that inflation expectations have been "re-anchored" to the level around 1 percent since the introduction of QQE, while the level is still short of the 2 percent target.
    Date: 2020–10
  13. By: Carolin Pflueger; Gianluca Rinaldi
    Abstract: We build a new model integrating a work-horse New Keynesian model with investor risk aversion that moves with the business cycle. We show that the same habit preferences that explain the equity volatility puzzle in quarterly data also naturally explain the large high-frequency stock response to Federal Funds rate surprises. In the model, a surprise increase in the short-term interest rate lowers output and consumption relative to habit, thereby raising risk aversion and amplifying the fall in stocks. The model explains the positive correlation between changes in breakeven inflation and stock returns around monetary policy announcements with long-term inflation news.
    JEL: E43 E44 E52 G12
    Date: 2020–09
  14. By: Hinterlang, Natascha; Hollmayr, Josef
    Abstract: This paper identifies U.S. monetary and fiscal dominance regimes using machine learning techniques. The algorithms are trained and verified by employing simulated data from Markov-switching DSGE models, before they classify regimes from 1968-2017 using actual U.S. data. All machine learning methods outperform a standard logistic regression concerning the simulated data. Among those the Boosted Ensemble Trees classifier yields the best results. We find clear evidence of fiscal dominance before Volcker. Monetary dominance is detected between 1984-1988, before a fiscally led regime turns up around the stock market crash lasting until 1994. Until the beginning of the new century, monetary dominance is established, while the more recent evidence following the financial crisis is mixed with a tendency towards fiscal dominance.
    Keywords: Monetary-fiscal interaction,Machine Learning,Classification,Markov-switching DSGE
    JEL: C38 E31 E63
    Date: 2020
  15. By: Brian Fabo; Martina Jančoková; Elisabeth Kempf; Ľuboš Pástor
    Abstract: Central banks sometimes evaluate their own policies. To assess the inherent conflict of interest, we compare the research findings of central bank researchers and academic economists regarding the macroeconomic effects of quantitative easing (QE). We find that central bank papers report larger effects of QE on output and inflation. Central bankers are also more likely to report significant effects of QE on output and to use more positive language in the abstract. Central bankers who report larger QE effects on output experience more favorable career outcomes. A survey of central banks reveals substantial involvement of bank management in research production.
    JEL: A11 E52 E58 G28
    Date: 2020–09
  16. By: Tarciso Gouveia da Silva; Osmani Teixeira de Carvalho Guillén; George Augusto Noronha Morcerf; Andre de Melo Modenesi
    Abstract: The impact of news related to the inflation targeting regime on the financial market is analyzed by estimating a bivariate VAR GARCH-BEKK-in-mean model. With daily data, from January 2006 to May 2017, of stock price index (IBOVESPA), exchange rate (BRL / USD) and interbank deposit rate (DI360), we have developed an index of positive and negative news to measure the impact of press releases based on Caporale et al. (2016) and Caporale et al. (2018). Although the literature on the subject is vast, this article fills relevant gaps in three ways (i) we investigate the two-way relationship between news releases related to monetary policy and the behavior of asset prices; (ii) we consider the relationship between the second moments of the variables of interest, using conditional volatility as a proxy for uncertainty; and (iii) we provide a time series approach to measure the effect of macroeconomic news releases on financial asset returns. The results indicate that there is an average spread effect of the news for the three variables used as proxies for asset prices in Brazil.
    Date: 2020–09
  17. By: Davide Debortoli; Mario Forni; Luca Gambetti; Luca Sala
    Abstract: Monetary policy easing and tightening have asymmetric effects: a policy easing has large effects on prices but small effects on real activity variables. The opposite is found for a policy tightening: large real effects but small effects on prices. Nonlinearities are estimated using a new and simple procedure based on linear Structural Vector Autoregressions with exogenous variables (SVARX). We rationalize the result through the lens of a simple model with downward nominal wage rigidities.
    Keywords: monetary policy shocks, nonlinear effects, structural VAR models
    JEL: C32 E32
    Date: 2020–09
  18. By: William Ginn (Université de Nuremberg); Marc Pourroy
    Abstract: Monetary policy is generally viewed in the literature as the only institution responsible for price stability. This approach overlooks the importance of food price stabilization policies, which are particularly important in low-and middle-income economies. We estimate a Bayesian DSGE model that incorporates fiscal and monetary policy tailored to India. Fiscal policy is based on a consumer food price subsidy. The empirical evidence suggests that food subsidies create a policy-induced form of food price-stickiness that operates in parallel with, yet is different to, the classic Calvo monopolistic competition framework. We find that the food price subsidy reduces CPI volatility and monetary policy reaction: following a world food price shock, interest rate volatility would be 10% higher absent food subsidies. Putting this effect aside would lead to overestimate the effectiveness of inflation targeting in EMEs. A main finding is the subsidy policy reduces aggregate welfare, albeit we find heterogeneous distributional effects by households.
    Keywords: DSGE Model,Price stabilisation,Food prices,Commodities,Monetary Policy
    Date: 2020–09–21
  19. By: Henkel, Lukas
    Abstract: This paper studies the role of sticky prices for the monetary transmission mechanism, using disaggregated industry-level data from 205 US industries. There is substantial heterogeneity in the output responses of industries to monetary policy surprises. I show that an industry's response to monetary policy surprises is systematically related to an industry's degree of price stickiness as measured by the average frequency of price adjustment. The size of the differential reaction is economically large and statistically significant. The results suggest that sticky prices play an important role in the transmission of monetary policy, consistent with New Keynesian macroeconomic models. This result is robust to the inclusion of further industry-level control variables. JEL Classification: E31, E32
    Keywords: monetary transmission mechanism, sticky prices
    Date: 2020–10
  20. By: Charles M. Kahn; Francisco Rivadeneyra
    Abstract: An anonymous token-based central bank digital currency (CBDC) would pose certain security risks to users. These risks arise from how balances are aggregated, from their transactional use and from the competition between suppliers of aggregation solutions. The central bank could mitigate these risks in the design of the CBDC by limiting balances or transfers, modifying liability rules or imposing security protocols on storage providers.
    Keywords: Central bank research; Digital currencies and fintech; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: E42 G21
    Date: 2020–10
  21. By: Gauti B. Eggertsson; Sergey K. Egiev; Alessandro Lin; Josef Platzer; Luca Riva
    Abstract: This paper presents a toolkit to solve for equilibrium in economies with the effective lower bound (ELB) on the nominal interest rate in a computationally efficient way under a special assumption about the underlying shock process, a two-state Markov process with an absorbing state. We illustrate the algorithm in the canonical New Keynesian model, replicating the optimal monetary policy in Eggertsson and Woodford (2003), as well as showing how the toolkit can be used to analyse the medium-scale DSGE model developed by the Federal Reserve Bank of New York. As an application, we show how various policy rules perform relative to the optimal commitment equilibrium. A key conclusion is that previously suggested policy rules – such as price level targeting and nominal GDP targeting – do not perform well when there is a small drop in the price level, as observed during the Great Recession, because they do not imply sufficiently strong commitment to low future interest rates (“make-up strategy”). We propose two new policy rules, Cumulative Nominal GDP Targeting Rule and Symmetric Dual-Objective Targeting Rule that are more robust. Had these policies been in place in 2008, they would have reduced the output contraction by approximately 80 percent. If the Federal Reserve had followed Average Inflation Targeting – which can arguably approximate the new policy framework announced in August 2020 – the output contraction would have been roughly 25 percent smaller.
    JEL: E31 E40 E50 E60
    Date: 2020–10
  22. By: Grégory Claeys; Chara Papioti; Andreas Tryphonides
    Abstract: Using a multi-unit uniform auction model, we combine bidding data from open market operations as well as macroeconomic information to recover the latent distribution of liquidity risk across banks and how it is affected by policy in Chile. We find that unanticipated shocks to foreign reserve accumulation and interest rates have significant effects on aggregate beliefs about a liquidity shock in the near future, while news about reserve accumulation are not effective. These results suggest the presence of a novel informational channel for macroeconomic policy, while we demonstrate that accounting for market power is important for uncovering these effects.
    Keywords: multi-unit auction, liquidity risk, reserve accumulation, signaling
    JEL: C57 D44 E50 G20
    Date: 2020–10
  23. By: Erica X.N. Li; Tao Zha; Ji Zhang; Hao Zhou
    Abstract: We incorporate regime switching between monetary and fiscal policies in a general equilibrium model to explain three stylized facts: (1) the positive stock-bond return correlation from 1971 to 2000 and the negative one after 2000, (2) the negative correlation between consumption and inflation from 1971 to 2000 and the positive one after 2000, and (3) the coexistence of positive bond risk premiums and the negative stock-bond return correlation. We show that two distinctive shocks---the technology and investment shocks---drive positive and negative stock-bond return correlations under two policy regimes, but positive bond risk premiums are driven by the same technology shock.
    JEL: E52 E62 G12 G18
    Date: 2020–09
  24. By: Pierluigi Bologna (Bank of Italy); Wanda Cornacchia (Bank of Italy); Maddalena Galardo (Bank of Italy)
    Abstract: We estimate the causal effect of a mortgage supply expansion on house prices by using an exogenous change in prudential regulation: the abolition in 2006 of a banks' maturity transformation limit. After the repeal of the prudential rule, credit increased only for the banks that were previously constrained by the regulation, while it remained unchanged for the other banks. Such differential response rules out demand-based explanations and fully identify the rule abolition as an exogenous shock that we exploit as an instrument for mortgage supply expansion. We estimate the elasticity of house price growth to new mortgage credit to be close to 5 percent. Our results also show that the effect of a mortgage supply expansion on house prices significantly differs across municipalities' and borrowers' characteristics.
    Keywords: prudential policy, credit supply, house prices, financial constraints
    JEL: G21 G28 R21 R31
    Date: 2020–09
  25. By: Eric Monnet; Stefano Pagliari; Shahin Vallée
    Abstract: The financial crisis has radically changed the political economy of the European financial system. The evolution of relations between European states and their respective financial systems has given rise to two competing narratives. On the one hand, government agencies are often described as being at the mercy of the financial sector, regularly hijacking political, regulatory and supervisory processes. This trend is often referred to as "regulatory capture" and would explain the "soft touch" regulation and bank bailout. On the other hand, governments are portrayed as subverting markets and abusing the financial system for their benefit, mainly to obtain better financing conditions and allocate credit to the economy on preferential terms, a trend called "financial repression" that is considered corrosive to the proper functioning of free markets and a source of capital misallocation. This paper takes a critical look at this debate and argues that the relationship between governments and financial systems in Europe cannot be reduced to the polar notions of "capture" and "repression", but that the channels of pressure and influence between governments and their financial systems have often been bi-directional and mutually reinforcing.
    Keywords: European financial systems, Financial repression, Regulatory capture
    Date: 2019–09

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