nep-cba New Economics Papers
on Central Banking
Issue of 2020‒11‒02
23 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Disinflations and income distribution By Laura Gómez-Acevedo; Marc Hofstetter
  2. Bank Capital and Monetary Policy Transmission in India By Muduli, Silu; Behera, Harendra
  3. Thrift and Credit Cooperative Lending Channel under Prolonged Low Interest Rates: The Case of Thailand By Kovit Charnvitayapong
  4. Formation of inflation expectations: Does macroeconomic and policy environment matter? By Eda Gulsen; Hakan Kara
  5. The interaction between macroprudential policy and monetary policy: overview By Bussière, Matthieu; Cao, Jin; de Haan, Jakob; Hills, Robert; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Shina, Sonalika; Sowerbutts, Rhiannon; Styrin, Konstantin
  6. A note on regulatory responses to COVID-19 pandemic: Balancing banks' solvency and contribution to recovery By Mohammad Bitar; Amine Tarazi
  7. COVID-19 and the Future of Quantitative Easing in the Euro Area: Three Scenarios with a Trilemma By Luigi Bonatti; Andrea Fracasso; Roberto Tamborini
  8. Proxy SVAR identification of monetary policy shocks: MonteCarlo evidence and insights for the US By Herwartz, Helmut; Rohloff, Hannes; Wang, Shu
  9. Should Emerging Economies Embrace Quantitative Easing during the Pandemic? By Gianluca Benigno; Jonathan Hartley; Alicia Garcia Herrero; Alessandro Rebucci; Elina Ribakova
  10. The Corona Crisis - is this the time for Helicopter Money? By Marc C. Adam; Robert Gold
  11. Inflation, Output and Monetary Policy in South Africa By Harold Ngalawa; Coretha Komba
  12. A silent revolution: How central bank statistics have changed in the last 25 years By Riccardo De Bonis; Matteo Piazza
  13. Recapitalization, bailout, and long-run welfare in a dynamic model of banking By Modena, Andrea
  14. US shocks and the uncovered interest rate parity By Mengheng Li; Bowen Fu
  15. Asymmetric Interest Rate Transmission in an Inflation Targeting Framework: The Case of Colombia By Arturo J. Galindo; Roberto Steiner
  16. A Macroeconomic Theory of Banking Oligopoly By Dong, Mei; Huangfu, Stella; Sun, Hongfei
  17. The Prospect of the Proposed Currency Union on Intra-regional Trade: Southern African Customs Union By Abban, Stanley
  18. Effects of Banco de la Republica’s Communication on the Yield Curve By Luis Fernando Melo-Velandia; Juan J. Ospina-Tejeiro; Julian A. Parra-Polania
  19. Effects of eligibility for central bank purchases on corporate bond spreads By Taneli Mäkinen; Fan Li; Andrea Mercatanti; Andrea Silvestrini
  20. Global Flight-to-Safety Shocks By Ahmed, Rashad
  21. Measuring the Effect of Unconventional Policies on Stock Market Volatility By Demetrio Lacava; Giampiero M. Gallo; Edoardo Otranto
  22. Break-even inflation rates: the Italian case By Alberto Di Iorio; Marco Fanari
  23. Risky Mortgages and Bank Runs By Nurlan Turdaliev; Yahong Zhang

  1. By: Laura Gómez-Acevedo; Marc Hofstetter
    Abstract: Most countries in the world have brought inflation down to very low rates. While there is broad consensus regarding the fact that polices aimed at bringing down inflation have adverse consequences on aggregate output and unemployment, at least in the short run, we know little about the distributional impact of disinflations. We find that along with disinflation, the income distribution tends to worsen: the Gini increases and the income share of those at the top of the income distribution significantly increases. We discuss the implications of these findings for monetary policy.
    Keywords: Monetary Policy; Central Banks; Inflation; Disinflation; Income distribution
    JEL: E31 E32 E43 E52 E58 D31
    Date: 2020–10–15
  2. By: Muduli, Silu; Behera, Harendra
    Abstract: This paper examines the role of bank capital in monetary policy transmission in India during the post-global financial crisis period. Empirical results show that banks with higher capital to risk-weighted assets ratio (CRAR) raise funds at a lower cost. Additionally, banks with higher CRAR transmit monetary policy impulses smoothly, while stressed assets in the banking sector hinder transmission. Recapitalization to raise CRAR can improve transmission; however, CRAR above a certain threshold level may not help as the sensitivity of loan growth to monetary policy rate reduces for banks with CRAR above the threshold. Therefore, it can be concluded that monetary policy can influence credit supply of banks depending on their capital position.
    Keywords: Monetary policy transmission, bank capital and bank lending
    JEL: E44 E51 E52
    Date: 2020–10–16
  3. By: Kovit Charnvitayapong (Faculty of Economics, Thammasat University, Bangkok 10200, Thailand Author-2-Name: Author-2-Workplace-Name: Author-3-Name: Author-3-Workplace-Name: Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: Objective - Considerable research indicates that during times of prolonged low interest rates, commercial bank lending channels are less effective in conveying the impact of expansionary monetary policies. What is the impact of easy money policy through lending channels of non-banking financial institutions (NBFIs) such as thrift and credit cooperatives (TCCs) and why should this result occur? The objective of this study is to examine the effectiveness of monetary policy through TCC lending channels compared to bank lending channels from 2008 to 2017. Methodology/Technique - Annual data from 546 TCCs was used in this investigation. A fixed effects model for TCCs and random effect for banks were employed to examine the data. Two models of each institution, one with lagged interaction terms and the other with contemporaneous interaction terms, were tested and compared. The impact of institutional characteristics such as size, deposit, liquidity and equity, and macroeconomic variables such as GDP growth and yield spread, on lending channels were also examined. Findings - As expected, the results show that TCC lending channels respond positively to prolonged low interest rate policies, whilst bank lending channels respond negatively in one model. Thus, if monetary authorities wish to increase the effectiveness of expansionary monetary policy, TCCs should be allowed to develop under careful supervision. Novelty - This study concludes that incremental budgeting caused by regulation must be borne by TCCs. Type of Paper - Empirical.
    Keywords: Thrift and Credit Cooperatives (TCCs); Prolonged Low Interest Rates; Transmission Mechanism; Lending Channels; Fixed Effects.
    JEL: E44 E51 E52 E58
  4. By: Eda Gulsen (Central Bank of Turkey); Hakan Kara (Bilkent University)
    Abstract: This paper investigates the changing behavior of inflation expectations in response to the macroeconomic and policy environment. Using a panel of professional forecasters covering thirteen years of inflation targeting period from Turkey, we present evidence on the behavioral shifts in the inflation expectations associated with evolving macroeconomic and policy performance. We use a unique survey with the feature of including matched policy rate and fixed-horizon inflation expectations at the individual level, therefore enabling to estimate the impact of monetary policy surprises on inflation expectations without reliance on strong identifying assumptions. Moreover, we employ a novel technique where direct feedback from survey respondents is used to determine the baseline empirical model governing expectations dynamics. Interpretation of the empirical findings joint with the direct feedback results from the survey indicate that the anchoring power of inflation targets depend on the policy performance. The weights attached to inflation targets in forming expectations are strongly associated with the size of the inflation deviation from the targets. When the targets no longer serve as a strong anchor, the survey participants assign increasingly higher weight to past inflation and the relationship between exchange rates and inflation expectations becomes stronger. Overall, our results imply that expectations behavior display significant and rapid shifts with the underlying economic and policy performance.
    Keywords: Inflation expectations; Monetary policy; Inflation; Survey data.
    JEL: C51 C53 E31 E37 E58
    Date: 2020–10
  5. By: Bussière, Matthieu (Banque de France); Cao, Jin (Norges Bank); de Haan, Jakob (De Nederlandsche Bank, University of Groningen and CESifo); Hills, Robert (Bank of England); Lloyd, Simon (Bank of England); Meunier, Baptiste (Banque de France); Pedrono, Justine (Banque de France); Reinhardt, Dennis (Bank of England); Shina, Sonalika (Reserve Bank of India); Sowerbutts, Rhiannon (Bank of England); Styrin, Konstantin (Bank of Russia)
    Abstract: This paper presents the main findings of an International Banking Research Network initiative examining the interaction between monetary policy and macroprudential policy in determining international bank lending. We give an overview on the data, empirical specifications and results of the seven papers from the initiative. The papers are from a range of core and smaller advanced economies, and emerging markets. The main findings are as follows. First, there is evidence that macroprudential policy in recipient countries can partly offset the spillover effects of monetary policy conducted in core countries. Meanwhile, domestic macroprudential policy in core countries can also affect the cross‑border transmission of domestic monetary policy via lending abroad, by limiting the increase in lending by less strongly capitalised banks. Second, the findings highlight that studying heterogeneities across banks provides complementary insights to studies using more aggregate data and focusing on average effects. In particular, we find that individual bank characteristics such as bank size or G‑SIB status play a first‑order role in the transmission of these policies. Finally, the impacts differ considerably across prudential policy instruments, which also suggests the importance of more granular analysis.
    Keywords: Cross-border bank lending; financial intermediation; monetary policy; macroprudential policy; policy interactions; spillovers
    JEL: E52 F21 F30 F42 G21
    Date: 2020–10–09
  6. By: Mohammad Bitar (Nottingham University Business School, University of Nottingham, Jubilee Campus, Nottingham NG8 1BB, United Kingdom.); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)
    Abstract: We see spikes in unemployment rates and turbulence in the securities markets during the COVID-19 pandemic. Governments are responding with aggressive monetary expansions and large-scale economic relief plans. We discuss the implications on banks and the economy of prudential regulatory intervention to soften the treatment of non-performing loans and ease bank capital buffers. We apply these easing measures on a sample of Globally Systemically Important Banks (G-SIBs) and show that these banks can play a constructive role in sustaining economic growth during the COVID-19 pandemic. However, softening the treatment of non-performing loans along with easing capital buffers should not undermine banks' solvency in the recovery period. Banks should maintain usable buffer in the medium-term horizon to absorb future losses, as the effect of COVID-19 on the economy might take time to fully materialise.
    Keywords: COVID-19,non-performing loans,capital buffers,solvency,G-SIBs
    Date: 2020–10–12
  7. By: Luigi Bonatti; Andrea Fracasso; Roberto Tamborini
    Abstract: We present the set of measures that the ECB has undertaken to fight the pandemic crisis by outlining the deep impact that COVID-19 is having on economic structures, and by highlighting the differences between the current policy package and previous ECB’s programmes. Moreover, we discuss what are the challenges that await the ECB in the medium to long run, contingent on different post-COVID scenarios concerning economic growth and inflation, considering its peculiar multinational jurisdiction.
    Date: 2020
  8. By: Herwartz, Helmut; Rohloff, Hannes; Wang, Shu
    Abstract: In empirical macroeconomics, proxy structural vector autoregressive models (SVARs) have become a prominent path towards detecting monetary policy (MP) shocks. However, in practice, the merits of proxy SVARs depend on the relevance and exogeneity of the instrumental information employed. Our Monte Carlo analysis sheds light on the performance of proxy SVARs under realistic scenarios of low relative signal strength attached to MP shocks and alternative assumptions on instrument accuracy. In an empirical application with US data we argue in favor of the specific informational content of instruments based on the dynamic stochastic general equilibrium model of Smets andWouters (2007). A joint assessment of the benchmark proxy SVAR and the outcomes of a structural covariance change model imply that from 1973 until 1979 monetary policy contributed on average between 2.2 and 2.4 units of inflation in the GDP deflator. For the so-called Volcker disinflation starting in 1979Q4, the benchmark structural model shows that the Fed's policy measures effectively reduced the GDP deflator within three years (i.e. by -3.06 units until 1982Q3). While the empirical analysis largely conditions ona small-dimensional trinity SVAR, the benchmark proxy SVAR shocks remain remarkably robust within a six-dimensional factor-augmented model comprising rich information from Michael McCracken's database (FRED-QD).
    Keywords: structural vector autoregression,external instruments,proxy SVAR,heteroskedasticity,monetary policy shocks
    JEL: C15 C32 C36 E47
    Date: 2020
  9. By: Gianluca Benigno; Jonathan Hartley; Alicia Garcia Herrero; Alessandro Rebucci; Elina Ribakova
    Abstract: Emerging economies are fighting COVID-19 and the economic sudden stop imposed by lockdown policies. Even before COVID-19 took root in emerging economies, however, investors had already started to flee these markets–to a much greater extent than they had at the onset of the 2008 global financial crisis (IMF, 2020; World Bank, 2020). Such sudden stops in capital flows can cause significant drops in economic activity, with recoveries that can take several years to complete (Benigno et al., 2020). Unfortunately, austerity and currency depreciations as enacted during the global financial crisis will not mitigate this double whammy of capital outflows and policies to cope with the pandemic. We argue that purchases of local currency government bonds could be a viable option for credible emerging market central banks to support macroeconomic policy goals in these circumstances.
    Keywords: emerging markets; quantitative easing; COVID-19
    JEL: E52
    Date: 2020–10–02
  10. By: Marc C. Adam (Forum New Economy); Robert Gold
    Abstract: This paper first describes the basic idea of Helicopter Money and the context in which it evolved from Milton Friedman’s famous 1969 essay until today. We discuss the challenges facing advanced economies, to which Helicopter Money has been proclaimed a possible solution. The paper provides a review of the recent debate around Helicopter Money and discusses the effectiveness of this tool in the current and future crises.
    Keywords: Helicopter Money; central bank; fiscal policy
    JEL: B2 E4 E5 E6 H6
    Date: 2020–04
  11. By: Harold Ngalawa; Coretha Komba (University of KwaZulu Natal)
    Abstract: South Africa adopted inflation targeting as its monetary policy framework in February 2000. The country’s monetary authorities, however, have struggled to keep inflation within the targeted 3%-6% band. A review of the literature reveals that an understanding of the inflation-output trade-off is essential for the achievement of price stability. The effects of policy may be different depending on whether the inflation-output trade-off is symmetric or asymmetric; and when it is asymmetric, the outcome may vary contingent on whether the asymmetry is convex or concave. In South Africa, the nature of this relationship is not known. Estimation of the inflation-expectations augmented Phillips curve using the difference Generalized Method of Moments on quarterly time series data for the period 2000:3 to 2015:1 reveals that South Africa’s Phillips curve is concave asymmetric. These estimation results, however, may not be policy-invariant because they are obtained from “highly” aggregated historical data and the model parameters are not structural. Consistent with the Lucas Critique, we formulate a New Keynesian dynamic stochastic general equilibrium model calibrated on South African data. Simulation results of the model show that a negative demand shock reduces inflation and output while a positive demand shock of the same magnitude leads to a smaller increase in inflation and a larger increase in output, confirming the concave asymmetric inflation-output relationship found earlier. Concavity of the Phillip’s curve implies declining sensitivity of inflation to the strength of the economy, suggesting that any given change in inflation requires an increasingly larger adjustment in output.
    Date: 2020
  12. By: Riccardo De Bonis (Bank of Italy); Matteo Piazza (Bank of Italy)
    Abstract: This work provides a comprehensive overview of the giant leap made by European central bank statistics over the last quarter century. We illustrate, first, the work that led to a brand new set of central bank statistics for the implementation of the common monetary policy in the euro area. We then focus on the most significant developments brought up by the financial crisis and by the institutional changes that accompanied it. The final part look at challenges lying ahead for official statistics, namely how to deal with digitalization and globalization.
    Keywords: Central bank statistics, data harmonisation
    JEL: C82 E59
    Date: 2020–09
  13. By: Modena, Andrea
    Abstract: This paper studies the link between bank recapitalization and welfare in a dynamic production economy. The model features financial frictions because banks benefit of a cost advantage at monitoring firms and face costly equity issuance. The competitive equilibrium outcome is inecient because agents do not internalize the e↵ects banks' capitalization over the allocation of capital, its price and, in turn, firms investments. It follows, individual recapitalizations are sub-optimal and bailout policies may benefit social welfare in the long-run. Bailouts improve capital allocation in states where aggregate banks are poorly capitalized, therefore enhancing their market valuation, fostering investments, and stabilizing the economy recovery path.
    Keywords: banks,bailout,general equilibrium,financial frictions,recapitalization,welfare
    JEL: D51 G21
    Date: 2020
  14. By: Mengheng Li; Bowen Fu
    Abstract: The literature on uncovered interest rate parity (UIP) shows two empirical puzzles. One is the failure of UIP, and the other is the unstable coefficients in the UIP regression. We propose a time-varying coefficients model with stochastic volatility and US structural shocks (TVC-SVX) to study how US structural shocks affect time-variation in the bilateral UIP relation for twelve countries. An unconditional test and a conditional test for UIP are developed. The former tests if UIP coefficients mean-revert to their theoretical values, whereas the latter tests coefficients at each point in time. Our findings suggest that the failure of UIP results from omitted US factors, in particular US monetary policy, productivity and preference shocks, which are also found to Granger cause local movements of UIP coefficients.
    Keywords: Time-varying parameter, Stochastic volatility, Model uncertainty, Exchange rate, Uncovered interest rate parity
    JEL: C11 C32 F31 F37
    Date: 2020–10
  15. By: Arturo J. Galindo (Banco de la República de Colombia); Roberto Steiner (Banco de la República de Colombia)
    Abstract: After adopting an inflation targeting framework for monetary policy at the turn of the century, the Central Bank of Colombia started actively using the monetary policy interest rate as its key policy tool. In this regard, this paper examines the interest rate pass-through from the monetary policy rate to the retail rates in Colombia and explores asymmetries in the adjustment process within the framework of a nonlinear version of the ARDL (NARDL) model developed by Shin et al. (2014). Our findings show that the policy rate plays a key role in determining deposit and lending retail rates but the nature of the passthrough varies across different types of lending products. In the case of lending rates, the pass-through is usually a full one, and takes around 12 months to be nearly complete. Our results capture an asymmetric positive pass-through in deposit rates and an upward rigidity in the lending rates of consumer and ordinary corporate loans, key segments of the credit market. These findings imply that most retail lending rates respond more to policy rate cuts than to hikes, indicating that financial intermediaries are more reluctant to raise interest rates than to decrease them following policy adjustments.. **** RESUMEN: El uso de la tasa de referencia de la política monetaria se convirtió en un elemento central para la formulación de política monetaria por parte del Banco de la República al adoptar un esquema de inflación objetivo a comienzos del siglo. Este trabajo estudia el canal de transmisión de dicha tasa a las tasas que perciben los usuarios del sistema financiero y explora posibles asimetrías utilizando una versión no lineal de los modelos ARDL (NARDL) desarrollada por Shin et al. (2014). Nuestras estimaciones muestran que la tasa de política juega un papel central en la determinación de tasas de interés de depósitos y préstamos y que su transmisión varía entre productos financieros. En el caso de tasas de préstamos, la transmisión es usualmente completa y tarda alrededor de doce meses en completarse. Los resultados sugieren que la mayoría de las tasas de interés de préstamos responden más fuertemente a reducciones en la tasa de política que a incrementos, lo que indica que los intermediarios financieros son menos propensos a subir tasas que a bajarlas tras ajustes de política. Por el contrario, las tasas de interés de los depósitos responden más a las alzas que a las reducciones en la tasa de interés de política.
    Keywords: Monetary policy, Interest rate pass-through, Asymmetry, Nonlinear autoregressive distributed lag (NARDL), Colombia, Política monetaria, pass-through de tasas de interés, Asimetría, Rezago distribuido autorregresivo no-lineal (NARDL), Colombia
    JEL: E4 E5 G2
    Date: 2020–10
  16. By: Dong, Mei; Huangfu, Stella; Sun, Hongfei
    Abstract: We study the behavior and macroeconomic impact of oligopolistic banks in a tractable environment with micro-foundations for money and banking. Our model features oligopolistic banks, which resembles the structure of the banking sector observed in most advanced economies. Banks interact strategically where they compete against each other in terms of the volume of loans to make. We find that it is welfare-maximizing to have the banking sector as oligopolistic, i.e., to have a small number of large banks. In addition, moderate inflation improves welfare because it helps to ease congestion in the banking sector.
    Keywords: banking; oligopoly; liquidity; market frictions
    Date: 2020–10
  17. By: Abban, Stanley
    Abstract: Formal currency union with a common policy is welfare superlative to formal currency union due to relatively greater transparency. The study evaluates whether adopting a common currency will lead to trade. Additionally, the study estimates whether countries are under trading or overtrading to investigate whether there exists trade potential. The results show there exists greater trade potential due to geographic and economic fundamentals therefore adopting a common currency will lead to trade. Also, the study showed that the financial markets served as a buffer for the volatility of the currencies notably the Rand. The study concludes that a currency union with a common policy could serve as a panacea when the appropriate institutional policy framework is adopted to reduce trade and non-trade barriers.
    Keywords: Currency Union, Overtrading, under trading, trade potential, Southern Africa Customs Union (SACU).
    JEL: E2 E24 E26 E5 E52 E58 F1 F15
    Date: 2020–04–10
  18. By: Luis Fernando Melo-Velandia (Banco de la República de Colombia); Juan J. Ospina-Tejeiro (Banco de la República de Colombia); Julian A. Parra-Polania (Banco de la República de Colombia)
    Abstract: We analyze the effect on the yield curve of Banco de la Republica’s communication through two specific outlets, the minutes of the monetary policy meetings and the inflation reports during the period 2011-Q2 to 2018-Q4. We extract numeric information from the inflation reports’ fan charts, and narrative information -using Latent Dirichlet Allocation, a computational linguistics tool- from the text of both outlets. We use an event-study approach to analyze the impact on four specific maturities: one-year spot, three-year forward, five-year forward and five-year ahead five-year forward rates. We find no evidence that numeric information has any effect on market yields. Regarding narrative variables we find that (i) for the inflation report, there is a significant effect on just two yields (one-year spot and five-year forward), and (ii) for the minute, there is a significant effect on all yields. We believe that these results may be explained by the publication lag of the inflation report during the period of analysis.. **** RESUMEN: Analizamos el efecto, sobre la curva de rendimientos, de la comunicación del Banco de la República mediante dos tipos de documentos, las minutas de las reuniones de política monetaria y los informes de política monetaria (anteriormente informes sobre inflación) durante el periodo 2011-II a 2018-IV. Extraemos información numérica de los fan charts publicados en los informes de política monetaria e información narrativa –usando Latent Dirichlet Allocation, una herramienta de lingüística computacional- tanto de las minutas como de los informes. Mediante la metodología de estudio de eventos analizamos el impacto sobre cuatro diferentes tasas: spot a un año, forward a 3 años, forward a 5 años y forward a 5 años, dentro de 5 años. No encontramos evidencia de que la información numérica tenga algún efecto sobre estas tasas. Con respecto a las variables narrativas encontramos que (i) para los informes de política, hay un efecto significativo solo sobre dos de las tasas (spot a un año y forward a 5 años) y (ii) para las minutas hay un efecto significativo sobre las cuatro tasas. Creemos que estos resultados pueden explicarse por el rezago de publicación que tenía el informe de política monetaria durante el periodo analizado.
    Keywords: Communication, monetary policy, text mining, event study, yield curve, comunicación, política monetaria, minería de texto, estudio de eventos, curva de rendimientos.
    JEL: E52 E58 C40 G14
    Date: 2020–10
  19. By: Taneli Mäkinen; Fan Li; Andrea Mercatanti; Andrea Silvestrini
    Abstract: The causal effect of the European Central Bank's corporate bond purchase program on bond spreads in the primary market is evaluated,making use of a novel regression discontinuity design. The results indicate that the program did not, on average, permanently alter the yield spreads of eligible bonds relative to those of noneligible. Combined with evidence from previous studies, this finding suggests the effects of central bank asset purchase programs are in no way limited to the prices of the specific assets acquired.
    JEL: C21 G18
    Date: 2020–10
  20. By: Ahmed, Rashad
    Abstract: I develop a measure of changing tail risk perceptions based on global financial shocks reflecting 'flights-to-safety'. Large flight-to-safety shocks are defined as joint tail realizations of returns across major risky and safe asset classes. Flight-to-safety shocks are substantially distinct from VIX innovations, map to unexpected global events, inform future changes in world prices and interest rates, and reflect both risk sentiment and global demand. Estimating a multi-country structural VAR with country-specific heterogeneity, I show that global flight-to-safety shocks induce a sharp rise in sovereign risk and exchange market pressure, followed by a subsequent drop in economic activity in both emerging markets and the U.S. However, the macroeconomic effects of flight-to-safety shocks are far from uniform across emerging markets, with domestic financial factors moderating the transmission mechanism. Countries realizing larger sovereign risk adjustment or sharper currency depreciation from a flight-to-safety shock are subject to deeper subsequent economic contractions. The impact of flight-to-safety shocks on economic activity is four times larger for emerging markets with substantial presence in U.S. exchange traded funds. By contrast, leaning against the wind by aggressively expending international reserves limits the economic impact of global flight-to-safety shocks, with its effectiveness rising when the exchange rate is successfully stabilized.
    Keywords: Tail Risk, Risk-off, Risk Sentiment, Global Shocks, Contagion, International Spillovers, Sovereign Risk, Monetary Policy, Capital Flows, Emerging Markets
    JEL: E44 F30 F44 F60 G15
    Date: 2020–10–12
  21. By: Demetrio Lacava; Giampiero M. Gallo; Edoardo Otranto
    Abstract: As a response to the Great Recession, many central banks resorted to unconventional monetary policies, in the form of a balance sheet expansion. Our research aims at analyzing the impact of the ECB policies on stock market volatility in four Eurozone countries (France, Germany, Italy, and Spain) within the Multiplicative Error Model framework. We propose a model that allows us to quantify the part of market volatility depending directly on unconventional policies by distinguishing between the announcement effect and the implementation effect. While we observe an increase in volatility on announcement days, we find a negative implementation effect, which causes a remarkable reduction in volatility in the long term. A Model Confidence Set approach finds how the forecasting power of the proxy improves significantly after the policy announcement; a multi-step ahead forecasting exercise estimates the duration of the effect, and, by shocking the policy variable, we are able to quantify the reduction in volatility which is more marked for debt-troubled countries.
    Date: 2020–10
  22. By: Alberto Di Iorio (Bank of Italy); Marco Fanari (Bank of Italy)
    Abstract: This paper focuses on break-even inflation rates (BEIRs), a widely used market-based measure of expected inflation, computed from government bonds. In the first part of the paper, we regress the Italian BEIR on several financial variables to assess the contribution of inflation, credit and liquidity components. In the second, in order to disentangle market participants’ inflation expectations from risk premia, we estimate a term structure model for the joint pricing of the Italian nominal and real yield curves, considering also credit and liquidity factors. The results show that BEIRs could be a misleading measure of the expected inflation due to the importance of inflation risk premium and credit risk effect. According to our estimates, the decrease in market-based measures of inflation observed in the last part of the sample period seems to reflect a lowering of both inflation expectations and risk premia. Inflation premia co-move with a measure of tail risk of the long-term inflation distribution signalling that investors become more concerned with downside risks.
    Keywords: inflation-linked bonds, government yields, break-even inflation rate, expected inflation, inflation risk premium, term structure model
    JEL: C32 E43 G12 H63
    Date: 2020–09
  23. By: Nurlan Turdaliev (Department of Economics, University of Windsor); Yahong Zhang (Department of Economics, University of Windsor)
    Abstract: The collapse of housing prices in the aftermath of the U.S. subprime mortgage crisis of 2008 not only worsened the balance sheet positions of the banking sector but also led to a “bank run” in some cases such as the collapse of Lehman Brothers in September 2008. We develop a theoretical model featuring household debt (mortgages) and banking sector frictions. We show that mortgage risks can potentially lead to a bank run equilibrium. Such an equilibrium exists since mortgage risks reduce the liquidation prices of bank assets. We further show that mortgage market regulations such as loan-to-value requirements reduce the likelihood of bank runs.
    Keywords: bank run, mortgage risk, loan-to-value ratio
    JEL: E32 E44 G01 G21 G33
    Date: 2020–10

This nep-cba issue is ©2020 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.