nep-cba New Economics Papers
on Central Banking
Issue of 2020‒10‒26
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Surveying the survey: What can we learn about the effects of monetary policy on inflation expectations? By Michael Pedersen
  2. Macroprudential Policy, Monetary Policy and the Bank Interest Rate Margin By E Philip Davis; Dilruba Karim; Dennison Noel
  3. The Effects of Trend Inflation on Aggregate Dynamics and Monetary Stabilization By Andrey Alexandrov
  4. Macroprudential Policy in the Euro Area By Alvaro Fernandez-Gallardo; Ivan Paya
  5. Pandemic Recession Dynamics: The Role of Monetary Policy in Shifting a U-Shaped Recession to a V-Shaped Rebound By Michael T. Kiley
  6. Unconventional Monetary Policy, Leverage & Default Dynamics By Edoardo Palombo
  7. Allocating Losses: Bail-ins, Bailouts and Bank Regulation By Todd Keister; Yuliyan Mitkov
  8. Exchange Rates and the Information Channel of Monetary Policy By Oliver Holtemöller; Alexander Kriwoluzky; Boreum Kwak
  9. Fixed and Flexible Exchange-rates in Two Matching Models: Non-equivalence Results By Zhu, Tao; Wallace, Neil
  10. Central bank information effects and transatlantic spillovers By Jarociński, Marek
  11. Islamic Monetary Economics: Insights from the Literature By Uddin, Md Akther
  12. Can GDP Growth Linked Instrument Be Used For Islamic Monetary Policy? By Uddin, Md Akther; Ali, Md Hakim; Radwan, Maha
  13. Empirical Evidence of the Lending Channel of Monetary Policy under Negative Interest Rates By Whelsy BOUNGOU
  14. Implementing Monetary Policy in an "Ample-Reserves" Regime: When in Crisis (Note 3 of 3) By Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
  15. Monetary spillovers and real exchange rate misalignments in emerging markets By Krittika Banerjee; Ashima Goyal
  16. Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the early 1900s By Mark Carlson; Matthew S. Jaremski
  17. "The Trade-off between Inflation and Unemployment in an MMT World: An Open Economy Perspective" By Emilio Carnevali; Matteo Deleidi
  18. A Cost-Benefit Analysis of Capital Requirements Adjusted for Model Risk By Walter Farkas; Fulvia Fringuellotti; Radu Tunaru
  19. Banks, Non Banks, and Lending Standards By R. Matthew Darst; Ehraz Refayet; Alexandros Vardoulakis
  20. Cross-Border Regulatory Spillovers and Macroprudential Policy Coordination By Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
  21. Is There a Stable Relationship between Unemployment and Future Inflation? By Terry J. Fitzgerald; Callum Jones; Mariano Kulish; Juan Pablo Nicolini
  22. Central Bank Communication with a Financial Stability Objective By David M. Arseneau
  23. Unexpected Effects of Bank Bailouts:Depositors Need Not Apply and Need Not Run By Allen N. Berger; Martien Lamers; Raluca A. Roman; Koen Schoors
  24. The FOMC’s New Individual Economic Projections and Macroeconomic Theories By Natsuki Arai
  25. Mortgage Prepayment, Race, and Monetary Policy By Kristopher S. Gerardi; Paul S. Willen; David Hao Zhang
  26. Optimal Foreign Reserves and Central Bank Policy Under Financial Stress By Luis Felipe Céspedes; Roberto Chang
  27. Alternative Models of Interest Rate Pass-Through in Normal and Negative Territory By Mauricio Ulate

  1. By: Michael Pedersen
    Abstract: The replies to a questionnaire that was sent to the participants in the Chilean Financial Traders Survey (FTS) reveal heterogeneity in how they make their forecasts. There are also differences in how the traders understand questions regarding the future monetary policy rate (MPR); some of them answer what they think the central bank will do, while others what they think it should do. The FTS is distinctive from similar surveys in the sense that it is conducted immediately before and after the monetary policy meetings. This study employs a novel dataset that consists of FTS micro observations to assess the extent to which heterogeneity in the replies to the questionnaire affects how agents take into account MPR surprises when updating their inflation expectations. While the should-do traders incorporate MPR surprises in their one-year-ahead inflation expectations, it is not evident that will-do respondents do so. This could imply that the “model” traders have in mind includes an endogenous MPR path, which is not necessarily in accordance with what they think the central bank is going to do in the short run. The baseline estimates suggest that agents that merely base their forecasts on models do not seem to factor in MPR surprises in their inflation expectations updates, but small sample corrected standard errors indicate that the should-do traders might. On the other hand, for those that use information only from financial markets, only the will-do traders adjust inflation expectations in response to MPR surprises, which could be because asset prices incorporate what the market thinks the central bank is going to do. Two-years-ahead inflation expectations are not affected by MPR surprises. The results help to understand heterogeneity in forecasters’ inflation updates and stress the importance of understanding on what basis survey respondents answer the questions.
    Date: 2020–09
  2. By: E Philip Davis; Dilruba Karim; Dennison Noel
    Abstract: Against the background of the policy interest in the interaction of monetary policy and macroprudential policy, we present empirical estimates of effects of macroprudential policies alongside monetary policy on banks' interest rate margins (net interest income/average assets). This is an important determinant of banks' profitability and accordingly their ability to accumulate capital, as well as a key aspect of the transmission mechanism of monetary policy. To our knowledge, such an analysis has not been undertaken in the research literature to date. The empirical results for a sample of over 1,300 banks from 15 advanced countries over 2000-13 suggest that the level and difference of interest rates and the yield curve affect the margin, in line with existing work. Meanwhile a number of macroprudential policy measures have an effect on the margin, firstly when they are introduced, secondly in levels and thirdly when leveraged in combination with the level of the interest rate. Some differences are found in the response of small and large banks to macroprudential policy but less so for monetary policy. We contend that these results are of considerable relevance to policymakers and regulators, notably in gauging the overall stance of macroeconomic policy.
    Keywords: macroprudential policy, monetary policy, short term interest rate, yield curve, bank interest margin
    JEL: E44 E58 G17 G28
    Date: 2020–10
  3. By: Andrey Alexandrov
    Abstract: I derive a set of new analytic results for the effects of trend inflation on aggregate price and output dynamics in menu cost models. I find that positive trend inflation: (1) induces asymmetry in price and output responses to monetary shocks, (2) leads to price overshooting after large shocks, and (3) destroys the monetary neutrality result for large shocks. Under positive trend inflation, large expansionary monetary interventions lead to output contractions, and smaller expansionary interventions have substantially reduced potency. Using U.S. sectoral data, I provide supporting evidence for these model predictions. Calibrating a general equilibrium model to the U.S. economy, I find sizable effects of trend inflation on monetary stabilization policy. Raising the inflation target from 2% to 4% increases the economy's sensitivity to an adverse markup shock and worsens the stabilization trade-off.
    Keywords: trends, asymmetry, trend inflation, aggregate dynamics
    JEL: E32 E52
    Date: 2020–10
  4. By: Alvaro Fernandez-Gallardo; Ivan Paya
    Abstract: It is now widely accepted that monetary authorities should have a mandate to safeguard financial stability and that macroprudential policies should be an integral part of such a mandate. However, our understanding of the effectiveness of macroprudential policies and their impact on monetary policy target variables and, more broadly, on macroeconomic outcomes, is still limited. This paper addresses that gap and examines the development and impact of macroprudential policies in the euro area. The contribution of the paper is twofold. First, we construct a novel index that captures the stance of the macroprudential policy and we highlight its main stylised facts since the inception of the euro in 1999. Second, we employ a combination of a narrative approach and a structural VAR method to identify both unanticipated and anticipated exogenous variations in macroprudential policies. Our results show that unanticipated or surprise shocks and anticipated or news macroprudential policy shocks exhibit differentiated effects on macroeconomic variables and that they both contribute over the medium term to safeguard financial stability. We also nd significant linkages between monetary and macroprudential policies over a sample period that includes events such as the great financial crisis and the sovereign debt crisis.
    Keywords: macroprudential policy, financial stability, euro area, monetary policy
    JEL: E58 E61
    Date: 2020
  5. By: Michael T. Kiley
    Abstract: COVID-19 has depressed economic activity around the world. The initial contraction may be amplified by the limited space for conventional monetary policy actions to support recovery implied by the low level of nominal interest rates recently. Model simulations assuming an initial contraction in output of 10 percent suggest several policy lessons. Adverse effects of constrained monetary policy space are large, changing a V-shaped rebound into a deep U-shaped recession absent large-scale Quantitative Easing (QE). Additionally, the medium-term scarring on economic potential can be large, and mitigation of such effects involves persistently accommodative monetary policy to support investment and long-run productive capacity. The simulations also illustrate the importance of coordinating QE and interest rate policy. Finally, the simulations, conducted within a model developed prior to the pandemic, illustrate limitations in economists’ understanding of QE and the channels through which shocks like a pandemic affect medium-term economic performance.
    Keywords: Quantitative easing; Effective lower bound; Unconventional monetary policy;
    JEL: E52 E58 E44 E37
    Date: 2020–10–07
  6. By: Edoardo Palombo (Queen Mary University of London)
    Abstract: The objective of this paper is to investigate the effectiveness of credit easing policy in mitigating the economic fallout from a financial recession using a model that can account for the observed default and leverage dynamics during the financial crisis of 2007. A general equilibrium model is developed with a financial sector and endogenous asset defaults able to account for the observed default and leverage dynamics. Following an adverse aggregate shock, banks deleverage through two channels: (i) higher non-performing loans provisions, and (ii) lower the marginal return of assets. Credit policy is modelled as an expansion of the central bank’s balance sheet countering the disruption in private financial intermediation. Unconventional monetary policy, namely credit easing policy, is shown to be ineffective in mitigating the effects of a financial crisis due to its crowding out effect on the private asset market. Other non-monetary policy tools such as credit subsidies and their efficacy considered.
    Keywords: unconventional monetary policy, credit easing, credit subsidies, financial frictions, default, leverage, financial sector.
    JEL: E20 E32 E44 E52 E58
    Date: 2020–06–25
  7. By: Todd Keister; Yuliyan Mitkov
    Abstract: We study the interaction between a government’s bailout policy and banks’ willingness to impose losses on (or “bail in”) their investors. The government has limited commitment and may choose to bail out banks facing large losses. The anticipation of this bailout undermines a bank’s private incentive to impose a bail-in. In the resulting equilibrium, bail-ins are too small and bailouts are too large. Some banks may also face a run by informed investors, creating further distortions and leading to larger bailouts. We show how a regulator with limited information can raise welfare and improve financial stability by imposing a system-wide, mandatory bail-in at the onset of a crisis. In some situations, allowing banks to choose between meeting a minimum bail-in and opting out can raise welfare further.
    Keywords: Bank bailouts, moral hazard, financial stability, banking regulation
    JEL: E61 G18 G28
    Date: 2020–09
  8. By: Oliver Holtemöller; Alexander Kriwoluzky; Boreum Kwak
    Abstract: We disentangle the effects of monetary policy announcements on real economic variables into an interest rate shock component and a central bank information shock component. We identify both components using changes in interest rate futures and in exchange rates around monetary policy announcements. While the volatility of interest rate surprises declines around the Great Recession, the volatility of exchange rate changes increases. Making use of this heteroskedasticity, we estimate that a contractionary interest rate shock appreciates the dollar, increases the excess bond premium, and leads to a decline in prices and output, while a positive information shock appreciates the dollar, decreases prices and the excess bond premium, and increases output.
    Keywords: Monetary policy, central bank information shock, identification through heteroskedasticity, high-frequency identification, proxy SVAR
    JEL: C36 E52 E58
    Date: 2020
  9. By: Zhu, Tao; Wallace, Neil
    Abstract: There is a presumption that fixed and flexible (floating or market-determined) exchange-rate systems are equivalent if prices are flexible. We show that the presumption does not hold in two matching models of money. In both models, (i) currencies are the only assets and all trade is spot trade; (ii) the trades that directly determine welfare occur in pairwise meetings between buyers and sellers; and (iii) imperfect substitutability (including, as a special case, no substitutability) among currencies is a consequence of the trading protocol in those meetings. The two models are variants of the Lagos-Wright (2005) model and differ regarding the timing of the shock realizations relative to the centralized trade opportunities. One version has a speculative fringe. In it, the unique stationary (monetary) equilibrium under the fixed exchange-rate regime is one of a continuum of equilibria under a flexible exchange-rate regime. The other version has no speculative fringe. In it, there is a unique (monetary) stationary equilibrium under each exchange-rate regime and they differ.
    Keywords: Matching models of money; exchange-rate regimes
    JEL: E4 F3 F31
    Date: 2020–09–13
  10. By: Jarociński, Marek
    Abstract: The news about the economy contained in a central bank announcement can affect public expectations. This paper shows, using both event studies and vector autoregressions, that such central bank information effects are an important channel of the transatlantic spillover of monetary policy. They account for a part of the co-movement of German and US government bond yields around Fed policy announcements, for most of this co-movement around ECB policy announcements, and significantly affect a range of financial and macroeconomic quantities on both sides of the Atlantic. These findings shed new light on the nature of central bank information. JEL Classification: E52, F31, F42
    Keywords: high-frequency identification, international policy transmission, monetary policy shocks, structural VAR
    Date: 2020–10
  11. By: Uddin, Md Akther
    Abstract: This chapter reviews critical early literature of Islamic monetary economics. The prohibition of Riba has imposed challenges on Islamic economists to come up with the viable alternatives to achieve Islamic monetary policy goals. Our extensive review of theoretical and empirical literature indicates that equity based profit- and loss-sharing instruments have been proposed for conducting open market operations in an interest-free economy. Theoretically, the central bank can achieve desired goals by controlling money supply and profit-sharing ratios. The findings from empirical literature suggest that money demand tend to be more stable in an interest-free economy. Whether monetary transmission works through Islamic banking channel is controversial, but the literature is growing. These findings are not surprising as majority Muslim countries lack sustainable and equitable economic growth. Moreover, these countries suffer from higher inflation and unemployment with little or no monetary freedom due to fixed exchange rate regime, shallow financial markets and strict capital control.
    Keywords: Islamic monetary policy, interest-free economy, monetary policy instruments
    JEL: E42 E52 E58
    Date: 2019
  12. By: Uddin, Md Akther; Ali, Md Hakim; Radwan, Maha
    Abstract: In this paper, we investigate Islamic monetary policy and proposes an alternative monetary policy instrument, namely gross domestic products (GDP) growth link instrument. The modeling techniques applied are ordinary least square (OLS) and the method is applied to a dataset of 99 countries for the year 2012 and time series data for Malaysia over the period of 1983-2013. Moreover, six months (January – June 2014) daily data on Islamic and conventional interbank rates are used for the correlational study. The results tend to show that GDP growth rate adjusted for interest income and inflation can be set as a benchmark for money market instruments and reference rate for financial and capital market to set the cost of capital or rate of return. Also, we found that real interest rate is mostly not representative across 99 countries as most of the time policy rates are either determined in the money market which is usually disintegrated with the real sector of an economy, or it is fixed by the Central Bank. Islamic and conventional money market rates are found significantly correlated in the presence of dual banking system. Moreover, inflation and employment rate in the Organisation of Islamic Cooperation (OIC) countries are found higher than non-OIC countries. Therefore, the interest rate should be replaced with more representative policy rate like the GDP growth rate linked instrument which could provide a benchmark rate for pricing products in Islamic commercial banking, and an avenue for investment in the Islamic financial market.
    Keywords: Real Economy, Islamic Monetary Policy, Real Interest Rate, GDP Growth Rate, Inflation, Real Exchange Rate, Gross Savings
    JEL: E42 E52 E58
    Date: 2019–08–29
  13. By: Whelsy BOUNGOU
    Abstract: Does the lending channel of monetary policy operate under a negative interest rate policy (NIRP)? The purpose of this study is to shed light on the existence of a lending channel of monetary policy under NIRP. To do so, we aim to provide an in-depth analysis of the relationship between NIRP and bank-lending behavior. To achieve this, we employ a large panel dataset of 4072 banks operating in 54 countries over the period 2009-2018 and a Difference-in-Differences methodology. We find that banks located in countries affected by negative interest rates have adjusted their bank-lending behavior by increasing lending activities. Our findings suggest that in response to negative interest rates, banks have reduced their lending cost, and increased lending supply, especially for loans longer than 3 months. Finally, we also find that the transmission of monetary policy under negative interest rates to the real economy depends on banks' specific characteristics such as reliance on retail deposits and size.
    Keywords: Negative interest rates; Lending cost; Lending supply; Lending maturity; Difference-in-Differences estimation
    JEL: E43 E51 E52 F34 G21
    Date: 2020
  14. By: Jane E. Ihrig; Zeynep Senyuz; Gretchen C. Weinbach
    Abstract: Note 1 and Note 2 in this three-part series described how the Federal Reserve (or Fed) implements monetary policy in normal times, with an ample quantity of reserves in the banking system. In this third and final Note in our series, we take a detour in light of current circumstances and describe how the Fed operates amid a crisis—when facing severely strained economic or financial circumstances, or both.
    Date: 2020–10–02
  15. By: Krittika Banerjee (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: After the adoption of unconventional monetary policies (UMP) in advanced economies (AEs) there weremany studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extentof contribution of EMEs and AEs respectively in real exchange rate (RER) misalignments has not been addressed. Using fixed effects, pooled mean group and common correlated effects we address the gap ina cross-country panel set-up with country specific controls. Multi-way clustering is used to ensure robust statistical inferences. Robust evidence is found for significant monetary spillovers over 1998-2017 in the form of RER overvaluation of EMEs against AEs especially through the portfolio rebalancing channel. EME RER against US saw significantly more overvaluation in UMP years indicating greater role of US in monetary spillovers. However, in the long run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER. Export diversification reduces EME mercantilist motives against US. That AE monetary policy significantly appreciates EMERER should be kept in mind for future policy cooperation between EMEs and AEs.
    Keywords: Unconventional monetary policies, monetary spillovers, mercantilist, precautionary, pooled mean group, common correlated effects, cluster robust
    JEL: E4 E5 F3 F42
    Date: 2020–09
  16. By: Mark Carlson; Matthew S. Jaremski
    Abstract: Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.
    JEL: D40 G38 N21 N41
    Date: 2020–10
  17. By: Emilio Carnevali; Matteo Deleidi
    Abstract: This paper is focused on Modern Monetary Theory's (MMT) treatment of inflation from an open economy perspective. It analyzes how the inflation process is explained within the MMT framework and provides empirical evidence in support of this vision. However, it also makes use of a stock-flow consistent (open economy) model to underline some limits of the theory when it is applied in the context of a non-US (relatively) open economy with a flexible exchange rate regime. The model challenges the contention made by MMTers that measures such as the job guarantee program can achieve full employment without facing an inflation-unemployment trade-off.
    Keywords: Central Banking; Post-Keynesian; Open Economy Model; Modern Money Theory
    JEL: E51 E12 F41
    Date: 2020–10
  18. By: Walter Farkas (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; ETH Zürich); Fulvia Fringuellotti (Federal Reserve Banks - Federal Reserve Bank of New York); Radu Tunaru (University of Sussex)
    Abstract: Capital adequacy is the key microprudential and macroprudential tool of banking regulation. Financial models of capital adequacy are subject to errors, which may prevent from estimating a sufficient capital base to absorb bank losses during economic downturns. In this paper, we propose a general method to account for model risk in capital requirements calculus related to market risk. We then evaluate and compare our capital requirements values with those obtained under Basel 2.5 and the new Basel 4 regulation. Capital requirements adjusted for model risk perform well in containing losses generates in normal and stressed times. In addition, they are as conservative as Basel 4 capital requirements, but they exhibit less fluctuations over time.
    Keywords: Basel framework, capital requirements, cost-benefit analysis, model risk
    JEL: D81 G17 G18
    Date: 2020–10
  19. By: R. Matthew Darst; Ehraz Refayet; Alexandros Vardoulakis
    Abstract: We study how competition between banks and non-banks affects lending standards. Banks have private information about some borrowers and are subject to capital requirements to mitigate risk-taking incentives from deposit insurance. Non-banks are uninformed and market forces determine their capital structure. We show that lending standards monotonically increase in bank capital requirements. Intuitively, higher capital requirements raise banks’ skin in the game and screening out bad projects assures positive expected lending returns. Non-banks enter the market when capital requirements are sufficiently high, but do not cause a deterioration in lending standards. Optimal capital requirements trade-off inefficient lending to bad projects under loose standards with inefficient collateral liquidation under tight standards.
    Keywords: Lending standards; Credit cycles; Asymmetric information; Non-banks; Regulation
    JEL: G01 G21 G28
    Date: 2020–10–09
  20. By: Pierre-Richard Agénor; Timothy P. Jackson; Luiz Pereira da Silva
    Abstract: A two-region, core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks are subject to a risk-sensitive capital regulatory regime. An expansionary monetary policy in the core is used to illustrate how lending costs, countercyclical capital buffers (which respond to real credit growth), and regulatory arbitrage affect cross-border bank capital flows, under both economies and diseconomies of scope in domestic and foreign lending by the global bank. Welfare gains are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity–where capital ratios set in the core region are also imposed in the periphery. Coordination generates significant gains at the level of the world economy, and these gains increase with the degree of international financial integration. However, their distribution tends to be highly asymmetric. Under certain circumstances, reciprocity may generate higher gains than independent policies for the world economy, despite the reciprocating jurisdiction (the periphery) being invariably worse off.
    JEL: E58 F42 F62
    Date: 2020–09
  21. By: Terry J. Fitzgerald; Callum Jones; Mariano Kulish; Juan Pablo Nicolini
    Abstract: The empirical literature on the stability of the Phillips curve has largely ignored the bias that endogenous monetary policy imparts on estimated Phillips curve coefficients. We argue that this omission has important implications. When policy is endogenous, estimation based on aggregate data can be uninformative as to the existence of a stable relationship between unemployment and future inflation. But we also argue that regional data can be used to identify the structural relationship between unemployment and inflation. Using city-level and state-level data from 1977 to 2017, we show that both the reduced form and the structural parameters of the Phillips curve are, to a substantial degree, quite stable over time.
    Keywords: Endogenous monetary policy; Stability of the Phillips curve
    JEL: E52 E58
    Date: 2020–10–07
  22. By: David M. Arseneau
    Abstract: An endogenous financial crisis is introduced into the canonical model used to study central bank transparency. The central bank is endowed with private information about the real economy and credit conditions which jointly determine financial vulnerabilities. An optimal choice is made regarding whether to communicate this information to the public. A key finding is that the optimal communication strategy depends on the state of the credit cycle and the \ composition of shocks driving the cycle. From a policy perspective, this raises the possibility that central bank communication in the presence of a financial stability objective faces a time inconsistency problem.
    Keywords: Financial stability report; Information disclosure; Survey of economic projections; Time inconsistency problem; Transparency
    JEL: G18 E58 E61
    Date: 2020–10–13
  23. By: Allen N. Berger; Martien Lamers; Raluca A. Roman; Koen Schoors (-)
    Abstract: A key policy issue is whether bank bailouts weaken or strengthen market discipline. We address this by analyzing how bank bailouts influence deposit quantities and prices of recipients versus other banks. Using TARP bailouts, we find both deposit quantities and prices decline, consistent with substantially reduced demand for deposits by bailed-out banks that dominate market discipline supply effects. Main findings are robust to numerous checks and endogeneity tests. However, a deeper dive into depositor heterogeneity suggests nuance. Increases in uninsured deposits, transactions deposits, and deposits in banks that repaid bailout funds early suggest some limited support for weakened market discipline.
    Keywords: Bailouts, Banking, Depositor Behavior, Market Discipline, Bank Runs
    JEL: G18 G21 G28
    Date: 2020–10
  24. By: Natsuki Arai (National Chengchi University)
    Abstract: This paper examines whether the individual economic projections made by the Federal Open Market Committee’s (FOMC) policymakers are consistent with macroeconomic theories: Okun’s law, the Phillips curve, and the Taylor rule. By analyzing the FOMC’s individual economic projections between 2007 and 2014, I find that they are consistent with Okun’s law, revealing a significantly negative relationship between unemployment and output growth projections. On the other hand, the relationship between inflation and unemployment projections associated with the Phillips curve is much weaker and more dispersed. The results on the FOMC’s reaction function, the Taylor rule, are mixed: The response of the projections of the federal funds rate against the inflation gap projections—the deviation of inflation projections from the target—is significantly positive, whereas the response against the corresponding output gap projections varies depending on the specification.
    Keywords: FOMC, Individual Economic Projections, Okun’s law, Phillips Curve,Taylor rule
    JEL: C32 C53 E58
    Date: 2020–10
  25. By: Kristopher S. Gerardi; Paul S. Willen; David Hao Zhang
    Abstract: This paper documents large differences in mortgage prepayment behavior across racial and ethnic groups in the United States, which have significant implications for monetary policy, inequality, and pricing. Using a novel data set that combines administrative data on mortgage performance with information on race and ethnicity, we show that Black and Hispanic white borrowers have significantly lower prepayment rates compared with Non-Hispanic white borrowers, holding income, credit score, and equity constant. This gap is on the order of 50 percent and largely reflects different sensitivities to movements in market interest rates, and was particularly pronounced during QE1. Differences in prepayment speeds result in large disparities between white and minority borrowers in the distribution of rates paid on outstanding mortgages, which widens during periods of low mortgage rates and high refinance volumes. From 2010 to 2014, Black borrowers were paying 30 to 45 basis points more on average than Non-Hispanic whites despite only a small gap of about 5 basis points between the groups at the time of mortgage origination. The large differences in prepayment behavior have important pricing implications, as they suggest that minority borrowers are overpaying for their prepayment option. Our results show that inequality in mortgage markets is larger than previously realized and is exacerbated by expansionary monetary policy.
    Keywords: race; quantitative easing; monetary policy; mortgage rate; refinance; prepayment; default
    JEL: E52 G21
    Date: 2020–09–01
  26. By: Luis Felipe Céspedes; Roberto Chang
    Abstract: We study the interaction between optimal foreign reserves accumulation and central bank international liquidity provision in a small open economy under financial stress. Firms and households finance investment and consumption by borrowing from domestic financial intermediaries (banks), which in turn borrow from abroad. Binding financial constraints can cause the domestic rate of interest to rise above the world rate and the real exchange rate to depreciate, leading to inefficiently low investment and consumption. A role then emerges for a central bank that accumulates reserves in order to provide liquidity if financial frictions bind. The optimal level of international reserves in this context depends, among other variables, on the term premium, the depth of financial markets, ex ante financial uncertainty and the precise way the central bank intervenes. The model is consistent with both the increase in international reserves observed during the period 2004-2008 and with policy intervention after the Lehman bankruptcy.
    JEL: E5 F3 F4
    Date: 2020–10
  27. By: Mauricio Ulate
    Abstract: In the aftermath of the Great Recession, many countries used low or negative policy rates to stimulate the economy. These policies gave rise to a rapidly growing literature that seeks to understand and quantify their impact. A fundamental step when studying the effectiveness of low and negative policy rates is to understand their transmission to loan and deposit rates. This paper proposes two models of pass-through from policy rates to loan and deposit rates that can match important stylized facts while remaining parsimonious. These models can be used to study the transition between positive and negative policy rates and to quantify the impact of negative rates on banks.
    Keywords: Negative Interest Rates; ZLB; Monetary Policy; Bank Profitability
    JEL: E32 E44 E52 E58 G21
    Date: 2020–09–09

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