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

  1. Persistence and Long Memory in Monetary Policy Spreads By Guglielmo Maria Caporale; Luis A. Gil-Alana
  2. COVID-Induced Sovereign Risk in the Euro Area: When Did the ECB Stop the Contagion? By Aymeric Ortmans; Fabien Tripier
  3. Macroeconomic Surprises and the Demand for Information about Monetary Policy By Tillmann, Peter
  4. Beyond LIBOR: Money Markets and the Illusion of Representativeness By Lilian Muchimba; Alexis Stenfors
  5. Optimal Monetary Policy with Heterogeneous Agents By Galo Nuño; Carlos Thomas
  6. The Micro-level Price Response to Monetary Policy By Balleer, Almut; Zorn, Peter
  7. Carbon Policies and Climate Financial Regulation By Frédéric CHERBONNIER; Ulrich HEGE
  8. Negative Interest Rates on Central Bank Digital Currency By Jia, Pengfei
  9. Sudden Stops and Reserve Accumulation in the Presence of International Liquidity Risk By Lutz, Flora; Zessner-Spitzenberg, Leopold
  10. Monetary Policy and Firm Dynamics By Matthew Read
  11. Banking Crises under a Central Bank Digital Currency (CBDC) By Bitter, Lea
  12. Investment funds, monetary policy, and the global financial cycle By Kaufmann, Christoph
  13. Forward Guidance and Durable Goods Demand By Alisdair McKay; Johannes F. Wieland
  14. “The Initiated”: Aaron Director and the Chicago Monetary Tradition By Tavlas, George S.; Assistant, JHET
  15. Loss Averse Depositors and Monetary Policy around Zero By Christian Stettler
  16. Twelve Years after the Financial Crisis – Too-big-to-fail is still with us. Comments on the Financial Stability Board’s Consultation Report ‘Evaluation of the Effects of Too-big-to-fail reforms’ By Martin F. Hellwig

  1. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: The overnight money market rate is a key monetary policy tool. In recent years, central banks worldwide have developed new monetary policy strategies aimed at keeping its deviations from the policy rate small and short-lived. This paper describes the main instruments used for this purpose by the US Fed, the ECB and the BoE and also their policy responses to the Great Financial Crisis (GFC). Fractional integration and long-memory methods are then applied to investigate how those affected the persistence of policy spreads (i.e., the difference between overnight rates and policy rates) during different sub-periods. It is found that this increased sharply during the GFC but has fallen back in recent years. In the case of the ECB the introduction of the new €-STR benchmark in particular appears to have made monetary policy more effective.
    Keywords: interest rates, persistence, central banks, long memory, fractional integration
    JEL: C22 E52
    Date: 2020
  2. By: Aymeric Ortmans; Fabien Tripier
    Abstract: This paper studies how the announcement of ECB’s monetary policies has stopped the contagion of the COVID-19 pandemic in the European sovereign debt markets. We show that up to March 9, the occurence of new cases in euro area countries has a sizeable and persistent effect on 10-years sovereign bond spreads relative to Germany: the occurrence of 1000 new cases is accompanied by an immediate increase in the spread which lasts 5 days after, reaching an increase of 0.54 percentage point. Afterwards, the effect is close to zero and not significant. We interpret this change as a successful outcome of the ECB’s press conference on March 12 despite the ”we are not here to close spreads” controversy. Indeed, a counterfactual shows that without this shift in the sensitivity of sovereign bond markets to COVID-19, spreads would have surged to 4.4% in France, 9.6% in Spain, and 19.2% in Italy as early as March 18, when the ECB’s Pandemic Emergency Purchase Programme has finally been announced.
    Keywords: COVID-19;European Central Bank;Sovereign debt;Monetary policy;Local projections
    JEL: E52 E58 E65 H63
    Date: 2020–10
  3. By: Tillmann, Peter
    Abstract: This paper studies the demand for information about monetary policy, while the literature on central bank transparency and communication typically studies the supply of information by the central bank or the reception of the information provided. We use a new data set on the number of views of the Federal Reserve's website to measure the demand for information. We show that exogenous news about the state of the economy as re ected in U.S. macroeconomic news surprises raise the demand for information about monetary policy. Surprises trigger an increase in the number of views of the policy-relevant sections of the website, but not the other sections. Hence, market participants do not only revise their policy expectations after a surprise, but actively acquire new information. We also show that attention to the Fed matters: a high number of views on the day before the news release weakens the high-frequency response of interest rates to macroeconomic surprises.
    Keywords: website traffic,nonfarm payroll,attention,event study,central bank communication
    JEL: E5
    Date: 2020
  4. By: Lilian Muchimba (University of Portsmouth); Alexis Stenfors (University of Portsmouth)
    Abstract: Money market benchmarks are important indicators for economic agents. They are also crucial for central banks in assessing the functioning of the interest rate channel of the monetary transmission mechanism. However, whereas the unsecured interbank money market conventionally has been seen as encompassing instruments with maturities up to one year, it appears as if it consists of two markets. The ultra-short-term money market (typically just one day) is large, liquid and traded regularly. The term money market (one, three or six months), by contrast, is small, illiquid and rarely traded. This paper explores the feasibility of creating and maintaining a money market benchmark which does not represent an underlying liquid market. From a sociological perspective, it addresses two critical aspects of financial benchmarks: i) that they are related to but separate and distinct from the objects determining them and ii) that they are measurements and as such cannot be bought or sold (Stenfors and Lindo 2018). By doing so, the paper also reflects upon the desire by financial regulators following the LIBOR manipulation scandal to replace estimation-based by transaction-based benchmarks, as well as some challenges and contradictions in conventional central banking theory.
    Keywords: Bank of Zambia, banks, benchmarks, Eurodollar market, LIBOR, monetary transmission mechanism, reference rates
    JEL: B52 E43 E52 G15 G28
    Date: 2020–11–08
  5. By: Galo Nuño; Carlos Thomas
    Abstract: We analyze optimal monetary policy under commitment in an economy with uninsurable idiosyncratic risk, long-term nominal bonds and costly inflation. Our model features two transmission channels of monetary policy: a Fisher channel, arising from the impact of inflation on the initial price of long-term bonds, and a liquidity channel. The Fisher channel gives the central bank a reason to inflate for redistributive purposes, because debtors have a higher marginal utility than creditors. This inflationary motive fades over time as bonds mature and the central bank pursues a deflationary path to raise bond prices and thus relax borrowing limits. The result is optimal inflation front-loading. Numerically, we find that optimal policy achieves first-order consumption and welfare redistribution vis-à-vis a zero inflation policy.
    Keywords: optimal monetary policy, incomplete markets, Gâteau derivative, nominal debt, inflation, redistributive effects, continuous time
    JEL: E50 E62 F34
    Date: 2020
  6. By: Balleer, Almut; Zorn, Peter
    Abstract: We estimate the effects of monetary policy on price-setting behavior in administrative micro data underlying the German producer price index. After expansionary monetary policy, the increase in the frequency of price change is economically small, the average absolute size across all price changes falls, and the aggregate price level hardly adjusts as a result. These estimates imply a strong degree of monetary non-neutrality because they rule out quantitative structural models that generate small and transient effects of monetary policy through selection on large price adjustments.
    Keywords: price setting,extensive margin,intensive margin,monetary policy,local projections,menu cost
    JEL: E30 E31 E32 E52
    Date: 2020
  7. By: Frédéric CHERBONNIER; Ulrich HEGE
    Abstract: We analyze optimal climate financial regulation to address the question when capital requirements should be differentiated in order to encourage climate related investments. We distinguish between two key dimensions of climate policies: carbon emissions (mitigation) and investment in climate resilience (adaptation), and consider two scenarios according to the efficient and inefficient carbon policies. We show that for financial regulators, the prospect of extreme climate shocks creates a rationale for differential capital requirements even when carbon prices are efficient. When extreme climate-related events occur, monetary and fiscal policies and financial regulators will optimally react with accommodating policies. The anticipation of such regulatory accommodation leads to distortions in private investment incentives. The optimal ex ante policy of regulators will attempt to correct for such biases. We also show that regulators should differentiate capital requirements when private agents insufficiently internalize the effects of investments in resilience. Finally, regulators should differentiate capital requirements that encourage both abatement and resilience investments when carbon policies are inefficient.This Research Paper is published in the framework of the International Research Initiative on Public Development Banks working groups and released for the occasion of the 14th AFD International Research Conference on Development. It is part of the pilot research program “Realizing the Potential of Public Development Banks for Achieving Sustainable Development Goals”. This program was launched, along with the International Research Initiative on Public Development Banks (PDBs), by the Institute of New Structural Economics (INSE) at Peking University, and sponsored by the Agence française de développement (AFD), Ford Foundation and International Development Finance Club (IDFC).Have a look on the key findings for a quick overview of the research resultsSee the video pitch
    JEL: Q
    Date: 2020–11–02
  8. By: Jia, Pengfei
    Abstract: Paying negative interest rates on central bank digital currency (CBDC) becomes increasingly relevant to monetary operations, since several major central banks have been actively exploring both negative interest rate policy and CBDC after the Great Recession. This paper provides a formal analysis to evaluate the macroeconomic impact of negative interest rates on CBDC through the lens of a neoclassical general equilibrium model with monetary aggregates. In the benchmark model, agents have access to two types of assets: CBDC and productive capital. The demand for digital currency is motivated by a liquidity constraint. I show that paying negative interest on CBDC induces agents to save less and consume more via a substitution effect. A drop in savings in turn causes a fall in capital investment, subsequent output, and real money balances. To clear the money market, the price level increases. I then extend the model to include government bonds which deliver a positive return. This allows me to study a non-trivial portfolio effect: when the government pays a negative interest rate on CBDC, the tax on agents' capital spending increases, inducing a decrease in capital investment and an increase in government bonds in agents' portfolio. Such a policy causes a drop in investment and output. However, there is a transitory decline in the price level due to a "flight to quality".
    Keywords: CBDC, Negative interest rates, Monetary policy, Public money.
    JEL: E21 E22 E31 E42 E52 E63
    Date: 2020–10–26
  9. By: Lutz, Flora; Zessner-Spitzenberg, Leopold
    Abstract: We propose a small open economy model where agents borrow internationally and invest in liquid foreign assets to insure against liquidity shocks, which temporarily shut out the economy of short-term credit markets. Due to the presence of a pecuniary externality individual agents borrow too much and hold too little liquid assets relative to a social planner. This inefficiency rationalizes macroprudential policy interventions in the form of reserve accumulation at the central bank coupled with a tax on foreign borrowing. Unless combined with other measures, a tax on foreign borrowing is detrimental to welfare; it reduces agents' incentives to invest in liquid assets and thereby increases financial instability. Our model can quantitatively match the simultaneous depreciation of the exchange rate and contractions in output, gross trade ows, foreign liabilities and foreign reserves during sudden stop episodes.
    Keywords: international reserves,sudden stops,liquidity,macroprudential policy,pecuniary externalities
    JEL: D62 E44 F32 F34 F41
    Date: 2020
  10. By: Matthew Read
    Abstract: Do firm dynamics matter for the transmission of monetary policy? Empirically, the startup rate declines following a monetary contraction, while the exit rate increases, both of which reduce aggregate employment. I present a model that combines firm dynamics in the spirit of Hopenhayn (1992) with New-Keynesian frictions and calibrate it to match cross-sectional evidence. The model can qualitatively account for the responses of entry and exit rates to a monetary policy shock. However, the responses of macroeconomic variables closely resemble those in a representative-firm model. I discuss the equilibrium forces underlying this approximate equivalence, and what may overturn this result.
    Date: 2020–11
  11. By: Bitter, Lea
    Abstract: One of the main concerns when considering Central Bank Digital Currency (CBDC) is the disintermediating effect on the banking sector in normal times, and even more the risk of a bank run in times of crisis. This paper extends the bank run model of Gertler and Kiyotaki (2015) by analyzing the impact of a CBDC. A CBDC is an additional type of liability to the central bank which, by accounting identity, must be accompanied by respective accommodations on the asset side. The model compares the effects of two different asset side policies with each other and to the economy without a CBDC. I find that a CBDC reduces net worth in the banking sector in normal times but mitigates the risk of a bank run in times of crisis. The prevailing concerns about the risk of a bank run turn out to be partial equilibrium considerations disregarding the asset side effects of a CBDC.
    Keywords: Central Bank Digital Currency (CBDC),Digital Currency,Central Banking,Financial Intermediation,Bank Runs,Lender of Last Resort
    JEL: E42 E58 G01 G21
    Date: 2020
  12. By: Kaufmann, Christoph
    Abstract: This paper studies the role of international investment funds in the transmission of global financial conditions to the euro area using structural Bayesian vector auto regressions. While cross-border banking sector capital ows receded significantly in the aftermath of the global financial crisis, portfolio ows of investors actively searching for yield on financial markets world-wide gained importance during the post-crisis "second phase of global liquidity" (Shin, 2013). The analysis presented in this paper shows that a loosening of US monetary policy leads to higher global investment fund in ows to euro area equities and debt. These in ows do not only imply elevated asset prices, but also coincide with increased debt and equity issuance in the euro area. The findings demonstrate the growing importance of non-bank financial intermediation over the last decade and have important policy implications for monetary and financial stability.
    Keywords: Monetary policy,international spillovers,capital ows,investment funds
    JEL: F32 F42 G11 G15
    Date: 2020
  13. By: Alisdair McKay; Johannes F. Wieland
    Abstract: Durable goods attenuate the power of forward guidance. The extensive and intensive margins of durable goods demand are both more sensitive to the contemporaneous user cost than to future user costs. Changes in the contemporaneous real interest rate directly affect the contemporaneous user cost and durable demand, whereas promises of low future real interest rates have weaker effects through equilibrium price changes. Quantitatively, reducing the real interest rate one year from now increases output by only forty percent as much as reducing the real interest rate today. Our results are little affected by the maturity of financial assets that finance durable purchases.
    JEL: E21 E22 E43 E52 E58
    Date: 2020–11
  14. By: Tavlas, George S.; Assistant, JHET
    Abstract: Aaron Director taught at the University of Chicago from 1930 to 1934 and from 1946 to 1967. Both periods corresponded to crucial stages in the development of Chicago monetary economics under the leaderships of Henry Simons and Milton Friedman, respectively. Any impact that Director may have played in the development of those stages and to the relationship between the views of Simons and Friedman has been frustrated by Director’s lack of publications. I provide evidence, much of it for the first time, showing the important role played by Director in the development of Chicago monetary economics, including his role as a transmitor of Simons’s ideas to Friedman.
    Date: 2020–11–03
  15. By: Christian Stettler (KOF Swiss Economic Institute, ETH Zurich, Switzerland)
    Abstract: Recent experience from Europe and Japan shows that commercial banks generally pass negative short-term policy rates on to wholesale depositors, such as insurances and pension funds. Yet, they refrain from charging negative rates to ordinary retail customers. This paper asks whether the existing evidence on the inverse relationship between market experience and the degree of loss aversion can explain this transmission pattern. To this end, I allow for loss averse depositors within a simple two-period di erentiated products duopoly with switching costs. It turns out that if depositors are especially averse to negative deposit rates, banks keep deposit rates at zero as policy rates decline, while accepting squeezed and possibly negative deposit margins. The lowest current policy rate at which the bankingsystem is willing to shield depositors from a negative deposit rate decreases with increasing i) degrees of loss aversion; ii) levels of switching costs; and iii) market expectations about the future policy rate. A calibration of the model indicates how low central banks could e ectively go without taking steps to make paper currency more costly.
    Keywords: Deposits, effective lower bound, loss aversion, negative interest rates
    JEL: D43 E43 E52 E58 G21 L13
    Date: 2020–04
  16. By: Martin F. Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: The paper contains comments made on the Financial Stability Board’s (FSB) Consultation Report concerning the success of regulatory reforms since the global financial crisis of 2007-2009. According to these comments, the FSB’s assessment of the role of equity is too narrow, being phrased in terms of bankruptcy avoidance and risk taking incentives, without attention to debt overhang creating distortions in funding choices, as well as the systemic impact of ample equity reducing deleveraging needs after losses and equity contributing to smoothing of lending and asset purchases over time. The FSB’s treatment of systemic risk pays too little attention to mutual interdependence of different parts of the system that is not well captured by linear causal relationships. Finally, the comments point out that bank resolution of systemically important institutions is still not viable, for lack of political acceptance of single-point-of-entry procedures, for lack of funding of banks in resolution (in the EI), for lack of fiscal backstops (in the EU), and for lack of political acceptance of bank resolution with bail-in.
    Keywords: Financial Stability Board, too-big-to-fail, systemic risk, banking regulation, bank resolution
    JEL: G01 G18 G21 G28 K23
    Date: 2020–10

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