nep-cba New Economics Papers
on Central Banking
Issue of 2020‒11‒30
thirty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. INSTITUTIONAL DESIGN AND CREDIBILITY By Jyotsana Kala; Naveen Srinivasan
  2. Inflation Targeting in the United Kingdom: Is there evidence for Asymmetric Preferences? By Parthajit Kayal; Naveen Srinivasan
  3. APP vs PEPP: Similar, But With Different Rationales By Christophe Blot; Jérôme Creel; Paul Hubert
  4. Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange By Jonathan Chiu; Miguel Molico
  5. Fiscal And Monetary Policy Interactions In A Liquidity Trap When Government Debt Matters By Charles de Beauffort
  6. Monetary Policy Rule and Taylor Principle by GMM and DSGE Approaches: The Case of Mongolia By Taguchi, Hiroyuki
  7. Income inequality and monetary policy in the Euro Area By Jérôme Creel; Mehdi El Herradi
  8. Above, but close to two percent. Evidence on the ECB’s inflation target using text mining By Johannes Zahner
  9. The role of long-term inflation expectations for the transmission of monetary policy shocks By Diegel, Max; Nautz, Dieter
  10. Sudden Stops and Optimal Foreign Exchange Intervention By J. Scott Davis; Michael B. Devereux; Changhua Yu
  11. Central bank digital currency in an open economy By Ferrari, Massimo Minesso; Mehl, Arnaud; Stracca, Livio
  12. Refinancing, Monetary Policy, and the Credit Cycle By Gene Amromin; Neil Bhutta; Benjamin J. Keys
  13. Monetary policy transmission and income inequality in Sub-Saharan Africa By Ahiadorme, Johnson Worlanyo
  14. Reversal interest rate and macroprudential policy By Darracq Pariès, Matthieu; Kok, Christoffer; Rottner, Matthias
  15. Liquidity in resolution: estimating possible liquidity gaps for specific banks in resolution and in a systemic crisis By Parisi, Laura; Chalamandaris, Dimitrios; Amamou, Raschid; Torstensson, Pär; Baumann, Andreas
  16. Masters of Illusion: Bank and Regulatory Accounting for Losses in Distressed Banks By Edward J. Kane
  17. Price Level Risk and Some Long-Run Implications of Alternative Monetary Policy Strategies By James A. Clouse
  18. Oil Price Shock and Fiscal-Monetary Policy Variables in Nigeria: A Structural VAR Approach By Okunoye, Ismaila; Hammed, Sabuur
  19. MMT: Modern Monetary Theory or Magical Monetary Thinking? The Empirical Evidence By Emilio Ocampo
  20. Bank capital: excess credit and crisis incidence By Ray Barrell; Karim Dilruba
  23. (When) do banks react to anticipated capital reliefs? By Arnould, Guillaume; Guin, Benjamin; Ongena, Steven; Siciliani, Paolo
  24. Monetary policy inertia and the paradox of flexibility By Bonciani, Dario; Oh, Joonseok
  25. "A Note Concerning Government Bond Yields" By Tanweer Akram
  26. Preference Heterogeneity and Optimal Monetary Policy By Uras, Burak; van Buggenum, Hugo
  27. Which Firms Benefit from Corporate QE during the COVID-19 Crisis? : The Case of the ECB’s Pandemic Emergency Purchase Program By Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry
  28. Monetary Policy with Reserves and CBDC: Optimality, Equivalence, and Politics By Dirk Niepelt
  29. Econ 101: Currency Manipulation By Coats, Warren
  30. An early stablecoin? The Bank of Amsterdam and the governance of money By Jon Frost; Hyun Song Shin; Peter Wierts
  31. Effective Policy Communication: Targets versus Instruments By D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
  32. Monetary Capacity By Adam Brzezinski; Roberto Bonfatti; K. KıvançKaraman; Nuno Palma

  1. By: Jyotsana Kala (JPMorgan Chase and Co.); Naveen Srinivasan (Professor, Madras School of Economics, Chennai, India)
    Abstract: The optimal design of a monetary institution to achieve policy effectiveness has been of utmost importance to policy-makers. This paper presents an empirical analysis of the link between the structure of a monetary institution and inflation persistence in an economy. It is well established in literature that governance structure of a monetary institution affects the stability of an economy. But the mechanism by which it operates remains unclear. In this paper, we claim this mechanism to be the credibility of the monetary institution. A Central Bank with an autonomous and transparent governance structure is deemed to be more credible by agents, which in turn leads to higher inflation stability in the economy. We investigate this hypothesis using data for the UK. Our results suggest that credibility is the missing link. The institutional design of the Central Bank contributes to its credibility, which subsequently affects the degree of inflation persistence in the economy.
    Keywords: central bank; central bank independence; inflation persistence;monetary policy credibility; policy making; time-inconsistency
    JEL: E52 E58 E31 E61 C32
  2. By: Parthajit Kayal (Madras School of Economics, Chennai, India); Naveen Srinivasan (Professor, Madras School of Economics, Chennai, India)
    Abstract: In recent times, inflation targeting has been one of the most successful monetary frameworks in advanced economics. However, critics claim that policy rates have been kept higher than necessary. They claim that central banks did not pursue a symmetric inflation target. If a central bank pursues symmetric inflation and output targets, the optimal monetary policy response is a linear forward-looking Taylor rule (Clarida et,. al 1999). We use the Linex Loss function as outlined in Nobay and Peel (2003) to relax the assumption of symmetric preferences. The presence of asymmetric preferences implies that monetary policy reacts not only to the conditional expectation of inflation and output gap but also to their conditional variances. Non-linear Taylor rules are estimated on UK data from 1995: Q2 and 2003: Q3. The results support the critics. Inflation targeting was indeed pursued with asymmetric preferences. The findings are robust to the Bank of England‘s ex-ante forecasts, ‗real-time‘ estimates of the output gap, non-linearities in the supply curve, and alternative forecast horizons. Policy rates have been about 30 basis points higher than necessary due to asymmetric preferences
    Keywords: Phillips curve; Taylor Rules; Asymmetric Preferences;Deflationary Bias; GMM estimation; Linex Loss Function; Rational Expectations; Monetary Policy
    JEL: E31 E52 E6
  3. By: Christophe Blot (Observatoire français des conjonctures économiques); Jérôme Creel (Observatoire français des conjonctures économiques); Paul Hubert (Observatoire français des conjonctures économiques)
    Abstract: ECB’s asset purchase programmes have been implemented at different times in different economic environments and may pursue different objectives. From the point of view of removing financial fragmentation and taming sovereign stress in the euro area, the PEPP has been successful so far. Moreover, this outcome was obtained without fully using its potential resources. To date and contingent on the available set of information, the current monetary stance has not gone too far and it retains some ammunitions. This document was provided by Policy Department A at the request of the Committee on Economic and Monetary Affairs (ECON).
    Keywords: APP; PEPP; ECB’s asset purchase programmes
    Date: 2020–09
  4. By: Jonathan Chiu; Miguel Molico
    Abstract: We study the short-run effects of monetary policy in a search-theoretic monetary model in which agents are subject to idiosyncratic liquidity shocks as well as aggregate monetary shocks. Namely, we analyze the role of the endogenous non-degenerate distribution of liquidity, liquidity constraints, and decentralized trade in the transmission and propagation of monetary policy shocks. Money is injected through lump-sum transfers, which have redistributive and persistent effects on output and prices. We propose a new numerical algorithm in the spirit of Algan, Allais and Den Hann. (2008) to solve the model. We find that a one-time expansionary monetary policy shock has persistent positive effects on output, prices, and welfare, even in the absence of nominal rigidities. Furthermore, the effects of positive and negative monetary shocks are typically asymmetric. Negative (contractionary) shocks have bigger effects than positive (expansionary) shocks. In addition, in an economy with larger shocks, the responses tend to be disproportionately larger than those in an economy with smaller shocks. Finally, the effectiveness of monetary shocks depends on the steady-state level of inflation. The higher the average level of inflation (money growth), the bigger the impact effect of a shock of a given size but the smaller its cumulative effect. These results are consistent with existing empirical evidence.
    Keywords: Inflation and prices; Monetary policy; Monetary policy transmission
    JEL: E50
    Date: 2020–11
  5. By: Charles de Beauffort (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: What does central bank independence imply for the optimal conduct of time-consistent fiscal and monetary policy in a liquidity trap? To provide an answer, I consider a stochastic noncooperative game in which the lower bound on nominal rates is an occasionally binding constraint and in which government debt serves as a tool to influence future policy trade-offs. I show that a transitory consolidation of debt in the liquidity trap optimally reduces expected real rates and stimulates current consumption and inflation via an expectation channel. The reaction function of the independent central bank outside the lower bound is pivotal in obtaining this result - considering instead coordinated policy produces the opposite effect of an optimal increase in debt. Lengthening the debt maturity allows to mitigate issues related to lack of coordination.
    Keywords: Optimal Time-Consistent Policy, Distortionary Taxation, Liquidity Trap, Fiscal and Monetary Policy Interactions
    Date: 2020–11–10
  6. By: Taguchi, Hiroyuki
    Abstract: This article aims to examine the monetary policy rule under inflation targeting in Mongolia with a focus on its conformity to the Taylor principle, through the two kinds of approaches: a monetary policy reaction function by the generalized-method-of-moments (GMM) estimation and the New Keynesian dynamic stochastic general equilibrium (DSGE) model with a small open economy version by the Bayesian estimation. The main findings are summarized as follows. First, the GMM estimation identified the inflation-responsive rule fulfilling the Taylor principle in the recent phase of the Mongolian inflation targeting. Second, the DSGE-model estimation endorsed the GMM estimation by producing a consistent outcome on the Mongolian monetary policy rule. Third, the Mongolian rule was estimated to have a weaker response to inflation than the rules of the other emerging Asian adopters of inflation targeting.
    Keywords: Monetary policy rule, Taylor Principle, Mongolia, Inflation targeting, monetary policy reaction function, GMM, the New Keynesian DSGE model
    JEL: E52 E58 O53
    Date: 2020–11
  7. By: Jérôme Creel (Observatoire français des conjonctures économiques); Mehdi El Herradi (Université Bordeaux Montaigne)
    Abstract: This paper examines the distributional implications of monetary policy, either standard, non-standard or both, on income inequality in 10 Euro Area countries over the period 2000-2015. We use three different indicators of income inequality in a Panel VAR setting in order to estimate IRFs of inequality to a monetary policy shock. The identification of monetary shocks follows a one-step procedure and relies only on country-specific determinants of income distribution. Results suggest that: (i) the distributional effects of ECB’s monetary policy have been modest and (ii) mainly driven in times of conventional monetary policy measures, especially in countries with a high level of market inequalities, while, overall, (iii) standard and non-standard monetary policies do not significantly differ in terms of impact on income inequality. Results are robust to alternative data sources either for income distribution or for non-standard monetary policies.
    Keywords: Euro Area; Monetary policy; Income distribution; Panel VAR
    JEL: E62 E64 D63
    Date: 2020–06
  8. By: Johannes Zahner (Philipps University Marburg)
    Abstract: Due to its official mandate, the European Central Bank (ECB) is assumed to maximize an implied objective function that leads it to pursue inflation with a subordinate focus on supporting the general economic policy of the European Union. This objective is – by its very nature – difficult to quantify. My paper tries to decipher information regarding the ECB’s objective through the use of text mining on all public speeches between 2002 and 2020. The estimation of a sentiment index through a ’bag-of-words’-approach yields the following results. First, the findings of my analysis suggest a concave objective regarding the inflation rate. The implied inflation target is best summarized as an inflation rate of ’above, but close to 2%’. Deviations from this target lead to a reduction in the sentiment of the institutions’ communication. Second, my findings suggest a convex objective towards output growth and a linear objective towards the unemployment rate, with a preference for higher GDP growth and employent independently of the current level. Furthermore, the hierarchical order in the the European Central Bank (ECB)’s mandate does not always appear to be consistent with my findings. Deviations from its primary objective, the inflation rate, appear to be of no greater concern than deviations in its subordinate objective. Third, in periods of heightened uncertainty, there is an additional decrease in the sentiment of speech. Last, over the last two decades, speeches have become more pessimistic, even when controlling for macroeconomic conditions.
    Keywords: Sentiment Analysis, ECB, Monetary Policy, Public Perception
    JEL: E53 E58 E61
    Date: 2020
  9. By: Diegel, Max; Nautz, Dieter
    Abstract: This paper empirically investigates the role of long-term inflation expectations for the monetary transmission mechanism. In contrast to earlier studies, we confirm that U.S. long-term inflation expectations respond significantly to a monetary policy shock. In line with a re-anchoring channel of monetary policy, we find that long-term inflation expectations play an important role for the transmission of monetary policy shocks to the rate of inflation. Our results are robust with respect to the identification strategy and alternative monetary policy indicators applied during the zero lower bound period.
    Keywords: Long-Term Inflation Expectations,Monetary Policy,Structural Vector Autoregression,Sign and Zero Restrictions
    JEL: E31 E52 C32
    Date: 2020
  10. By: J. Scott Davis; Michael B. Devereux; Changhua Yu
    Abstract: This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through foreign exchange intervention. Intervention is effective due to frictions in private international financial intermediation. Reserve accumulation has ex ante benefits by reducing the risk of a sudden stop, while intervention has ex-post benefits by limiting inefficient deleveraging. But intervention itself faces constraints. When the central bank's stock of reserves is low, even foreign exchange intervention cannot prevent a sudden stop.
    Keywords: Central bank; sudden stops; foreign exchange reserves; capital controls
    JEL: E50 E30 F40
    Date: 2020–11–10
  11. By: Ferrari, Massimo Minesso; Mehl, Arnaud; Stracca, Livio
    Abstract: We examine the open-economy implications of the introduction of a central bank digital currency (CBDC).We add a CBDC to the menu of monetary assets available in a standard two-country DSGE model with financial frictions and consider a broad set of alternative technical features in CBDC design. We analyse the international transmission of standard monetary policy and technology shocks in the presence and absence of a CDBC and the implications for optimal monetary policy and welfare. The presence of a CBDC amplifies the international spillovers of shocks to a significant extent, thereby increasing international linkages. But the magnitude of these effects depends crucially on CBDC design and can be significantly dampened if the CBDC possesses specific technical features. We also show that domestic issuance of a CBDC increases asymmetries in the international monetary system by reducing monetary policy autonomy in foreign economies. JEL Classification: E50, F30
    Keywords: central bank digital currency, DSGE model, international monetary system, open-economy, optimal monetary policy
    Date: 2020–11
  12. By: Gene Amromin; Neil Bhutta; Benjamin J. Keys
    Abstract: We assess the complicated reality of monetary policy transmission through mortgage markets by synthesizing the existing literature on the role of refinancing in policy implementation. After briefly reviewing mortgage market institutions in the U.S. and documenting refinance activity over time, we summarize the links between refinancing and consumption, and describe the frictions impeding the refinancing channel. The paper draws heavily on research emerging from the experience of the financial crisis of 2008-09, as it highlights a combination of market, institutional, and policy-making factors that dulled the transmission mechanism. We conclude with a discussion of potential mortgage market innovations, and the applicability of lessons learned to the ongoing stresses induced by the COVID-19 pandemic.
    JEL: D12 D14 E50 G21 R31
    Date: 2020–10
  13. By: Ahiadorme, Johnson Worlanyo
    Abstract: This paper evaluates the monetary policy transmission and income inequality in Sub-Saharan Africa (SSA) countries. We find procyclical response of income inequality to unanticipated monetary easing in the last two decades. Countercyclical monetary measures may have been efficient, but they have been dis-equalising as well. Taking cognisance of the explanations of the earnings heterogeneity channel, this evidence signals high concentration of assets and resources, limited employment of labour and limited distributive capacity of the state in SSA countries. Economic outturns may have favoured chiefly, the top of the distribution - entrepreneurs and their profit margin. Three main channels distinguish the transmission of standard and non-standard monetary measures: the reaction in the stock market, the response of the exchange rate and the fiscal response. Unconventional monetary policies appear to rely more on wealth effects than conventional policy measures. Unexpected non-standard monetary easing depreciates the exchange rate while unanticipated conventional accommodative monetary action appreciates the currency. Fiscal transfers increase in reaction to expansionary unconventional monetary policy shock. In contrast, a surprised standard monetary expansion decreases fiscal distributions, an effect that appears to underscore the limited fiscal space and tax revenues in most developing and emerging economies. The evidence demonstrates that the fiscal reaction to monetary policy action is important to the overall transmission of monetary policy to macroeconomic aggregates. Instructively, we find that the inflation cost of countercyclical monetary measures is comparatively less severe for standard monetary measures than non-standard monetary actions.
    Keywords: Monetary policy, Income inequality, Distributive channels
    JEL: D30 D31 D63 E50 E52 E58
    Date: 2020–08–20
  14. By: Darracq Pariès, Matthieu; Kok, Christoffer; Rottner, Matthias
    Abstract: Could a monetary policy loosening entail the opposite effect than the intended expansionary impact in a low interest rate environment? We demonstrate that the risk of hitting the rate at which the effect reverses depends on the capitalization of the banking sector by using a non-linear macroeconomic model calibrated to the euro area economy. The framework suggests that the reversal interest rate is located in negative territory of around −1% per annum. The possibility of the reversal interest rate creates a novel motive for macroprudential policy. We show that macroprudential policy in the form of a countercyclical capital buffer, which prescribes the build-up of buffers in good times, can mitigate substantially the probability of encountering the reversal rate, improves welfare and reduces economic fluctuations. This new motive emphasizes also the strategic complementarities between monetary policy and macroprudential policy. JEL Classification: E32, E44, E52, E58, G21
    Keywords: macroprudential policy, monetary policy, negative interest rates, reversal interest rate, ZLB
    Date: 2020–11
  15. By: Parisi, Laura; Chalamandaris, Dimitrios; Amamou, Raschid; Torstensson, Pär; Baumann, Andreas
    Abstract: This paper contributes to the debate on liquidity in resolution by providing a quantitative assessment of liquidity gaps of banks in resolution in the euro area. It estimates possible ranges of liquidity gaps for significant banks under different assumptions and scenarios. The findings suggest that, while the average liquidity gaps in resolution are limited, the averages hide significant outliers. The paper thus shows that, under adverse circumstances, the instruments currently available to provide liquidity support to financial institutions in the euro area would be insufficient JEL Classification: G01, G21, G28, G33, C63
    Keywords: bank runs, contagion, Liquidity, Monte Carlo simulations, resolution, systemic crisis
    Date: 2020–11
  16. By: Edward J. Kane (Boston College)
    Abstract: This essay is part of a larger work on the history of Federal Reserve policymaking entitled Banking on Bull. The study seeks to explain why the instruments of central banking inevitably break down over time. A big part of the explanation is that policymakers want accounting measures of bank net worth to be flexible enough to allow bankers and regulators to slow the release of adverse information about distressed banks, particularly very large ones. Modern regulatory frameworks focus on maintaining what can be described as the adequacy of accounting capital. But this framework is bull, because in tough times, bank accountants know how to make losses disappear.
    Keywords: capital requirements, too big to fail, loss recognition, income-distribution effects
    JEL: E58 G21 G32
    Date: 2020–08–27
  17. By: James A. Clouse
    Abstract: This note focuses on the longer-run implications of alternative monetary policy strategies for the evolution of the price level. The analysis compares the properties of optimal policy in regimes ranging from pure inflation targeting (IT), to a form of weighted-average inflation targeting (WAIT), to pure price level targeting (PLT). Strategies such as WAIT and PLT tend to limit the downward drift in the path of the price level and also mitigate the uncertainty surrounding the expected path of the price level. The influence of alternative monetary policy strategies on the evolution of the price level may have some important long-run implications for entities or groups that rely heavily on long-term nominal debt. Some simple empirical estimates suggest the real value of existing Treasury debt could be boosted significantly in moving from a world in which the ZLB constraint rarely binds to one in which it regularly binds. Similarly, data from the Survey of Consumer Finances indicate that households at lower income levels, and particularly those with mortgage or educational loans outstanding, are exposed to significant price level risk. As a result, such households can experience a significant reduction in their real wealth, on average, in the transition to a world with frequently binding ZLB constraints. The WAIT and PLT regimes significantly mitigate these potential costs for these groups.
    Keywords: Household debt; Inflation; Monetary policy; Wealth distribution
    JEL: E31 E52 E58
    Date: 2020–11–09
  18. By: Okunoye, Ismaila; Hammed, Sabuur
    Abstract: The study employed structural vector auto regressive model in a disaggregated analysis to measure the relative response of monetary and fiscal policy variables to the structural Oil price shocks in a small open and oil-dependent economy and identify sequence of appropriate policy response. Data utilized cover annual time series from 1981 to 2019. The study considers SVAR model with better and efficient tool to combine both short run and long run restrictions. Some empirical striking findings are discernible from our analyses. First, we establish that significant variation in monetary policy rate, exchange rate and money supply are explained by oil price shock. Second, we found that oil price shock have a significant impact on inflation rate, oil revenue and government expenditure. Lastly, we found that government expenditure has less innovations (less error term), compared to oil revenue and interest rate, and this indicates the direct policy of the government and not under the influence of monetary policy in Nigeria. Moreso, the result found more importantly, large reaction of inflation rate comes from oil price shock than the independent monetary policy rate and oil price shock caused large variation and reaction in monetary policy variable than fiscal policy variables. It is recommended there should be complementarity of fiscal policy and monetary policy carefully and appropriately, in order to avoid distortion in monetary policies implementation of the CBN in stabilizing the economy; government expenditure should be tailored to internal generated revenue, not oil-generating revenue; and government deposit in the financial sector is reduced as well as strengthen of treasury single account (TSA)policy to track government generated revenue may be a right policy for Nigeria financial sector.
    Keywords: fiscal policy, monetary policy, structural VAR
    JEL: E6 E63
    Date: 2020–07–27
  19. By: Emilio Ocampo
    Abstract: This article presents a summary of the main theoretical arguments and policy recommendations of Modern Monetary Theory (MMT) and traces back its intellectual origins to the writings on money of Georg F. Knapp and on fiscal policy of Abba P. Lerner. It also presents evidence on two countries that followed MMT like policies: Germany between 1939 and 1945 and Argentina with brief interruptions since 1946. The main conclusion of the article is that any country that consistently follows the policy prescriptions of MMT will inevitably experience high inflation and lower (and even negative) economic growth.
    Keywords: Monetary Theory, MMT, Argentina
    JEL: B00 N14 N16 P40 P47
    Date: 2020–11
  20. By: Ray Barrell (Research Centre of the National Institute of Economic and Social Research); Karim Dilruba
    Abstract: There are large and long-lasting negative effects on output from recurrent financial crises in market economies. Policy makers need to know if these financial crises are endogenous and subject to policy interventions or are exogenous events like earthquakes. We survey the literature about the links between credit growth and crises over the last 130 years. We then go on to look at the determinants of financial crises both narrowly and broadly defined in market economies, stressing the roles of bank capital, available on book liquidity, property price bubbles and current account deficits. We look at the role of credit growth, which is often seen as the main link between the macroeconomy and crises, and stress that it is largely absent. We look at the role of the core factors discussed above in market economies from 1980 to 2017. We suggest that crises are largely unrelated to credit developments but are influenced by banking sector behaviour. We conclude that policy makers need to contain banking excesses, not constrain the macroeconomy by directly reducing bank lending.
    Keywords: Financial stability; Banking crises; Macroprudential policy
    Date: 2020–09
  21. By: Nguyen, Huong (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Susilo, Jonathan (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Varier, Dominique (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Information collected from all reachable founding laws (constitutions) of past currency boards— more than 50 in all—is used to better observe changes in features and characteristics implemented in currency boards over time. The founding laws of many currency boards have been highly general, allowing, in principle, for discretionary monetary policy even though, in practice, many currency boards did not implement it. Only a minority of currency boards had founding laws that clearly specified the most important features of currency board orthodoxy: (1) a fixed exchange rate with an anchor currency, (2) full, two-way convertibility into and out of the anchor currency, (3) a ratio of 100% net foreign reserves to monetary liabilities, (4) the board cannot be a lender of last resort to the domestic financial system, and (5) the board must generate its own profits via seigniorage. Additionally, the authors identified five other properties that, although not necessary for a functioning currency board, proved to be beneficial and thus became widely adopted. They are: (1) transparency measures, (2) an upper limit on net foreign reserves, (3) policies for liabilities exceeding assets, (4) escape clauses, and (5) minimum limits on currency exchanges. Comparing constitutions shows that these systems have been adaptable in many different political and economic environments, thus explaining their longstanding success in multiple countries over the last 170 years.
    Keywords: Currency board; constitution; orthodox; exchange rates; anchor currency; foreign reserves; seigniorage
    JEL: E59 N10
    Date: 2020–11
  22. By: Atashbar, Tohid (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In this study, we classify the unconventional monetary views found in the modern Middle East economic literature into five main categories. These five categories include 1) Full reserve-like approach to the banking system, 2) Commodity/Asset-backed monetary systems or Currency board-like frameworks, 3) Interest-free approach to the banking system, 4) Bank-free approach to the banking industry, and finally 5) Public money or monetary guidance approach to the monetary system. Additionally, we identify a collection of ideas as hybrids or combinations, some of which are in their developmental stage and are receiving significant attention and support. Our review of these approaches summarizes their theoretical foundations, historical and current advocates, and relevant policy recommendations.
    Keywords: Monetary Economics; Unconventional theories; Middle Eastern schools
    Date: 2019–07
  23. By: Arnould, Guillaume (Bank of England); Guin, Benjamin (Bank of England); Ongena, Steven (University of Zurich); Siciliani, Paolo (Bank of England)
    Abstract: We study how banks react to policy announcements during a representative policy cycle involving consultation and publication using a novel dataset on the population of all mortgage transactions and regulatory risk assessments of banks. We demonstrate that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low risk assets after the publication of the policy. In contrast, there is no evidence that they already reacted to the early step of the development of the policy, the publication of the consultation paper. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain.
    Keywords: Bank regulation; mortgage lending; supervisory review process; capital requirements
    JEL: G21
    Date: 2020–11–13
  24. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: This paper revisits the paradox of flexibility, ie, the result that, in a liquidity trap, greater price flexibility amplifies output volatility in response to negative demand shocks. We argue this paradox is the consequence of a failure of standard models to correctly characterise monetary policy and that allowing for a smooth adjustment of the shadow policy rate eliminates the paradox and produces output responses to a negative demand shock that are in line with those under optimal monetary policy. The reason is that, under an inertial policy, a decline in the shadow rate implies that the future actual policy rate will remain relatively low, which increases expectations about the economic outlook and inflation. The rise in inflation expectations reduces the real rate, thereby sustaining real activity. As we raise the degree of price flexibility, a negative demand shock causes a sharper fall in the shadow rate and increase in inflation expectations, which leads to a more significant drop in the real rate and, hence, a milder decline in the output gap.
    Keywords: Interest rate smoothing; liquidity trap; zero lower bound; paradox of flexibility
    JEL: E32 E52 E61
    Date: 2020–11–06
  25. By: Tanweer Akram
    Abstract: This paper relates Keynes's discussions of money, the state theory of money, financial markets, investors' expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Investors psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank's monetary policy actions on the long-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields substantiate the Keynesian perspective that the long-term interest rate responds markedly to the short-term interest rate. These empirical studies not only vindicate the Keynesian perspective but also have relevance for macroeconomic theory and policy.
    Keywords: Money; State Theory of Money; Chartalism; Monetary Theory; Central Bank; Government Bond Yields; Interest Rate; John Maynard Keynes
    JEL: E12 E40 E43 E50 E58 E60 F30 G10 G12 H62 H63
    Date: 2020–11
  26. By: Uras, Burak (Tilburg University, Center For Economic Research); van Buggenum, Hugo (Tilburg University, Center For Economic Research)
    Keywords: Heterogeneous Consumption Preferences; Optimal Policy; Zero Lower Bound; Negative Interest Rates
    Date: 2020
  27. By: Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry (Tilburg University, Center For Economic Research)
    Keywords: quantitative easing; equity returns; Pandemic
    Date: 2020
  28. By: Dirk Niepelt (Study Center Gerzensee, University of Bern, CEPR, CESifo)
    Abstract: We analyze policy in a two-tiered monetary system. Noncompetitive banks issue deposits while the central bank issues reserves and a retail CBDC. Monies differ with respect to operating costs and liquidity. We map the framework into a baseline business cycle model with "pseudo wedges" and derive optimal policy rules: Spreads satisfy modified Friedman rules and deposits must be taxed or subsidized. We generalize the Brunnermeier and Niepelt (2019) result on the macro irrelevance of CBDC but show that a deposit based payment system requires higher taxes. The model implies annual implicit subsidies to U.S. banks of up to 0.8 percent of GDP during the period 1999-2017.
    Date: 2020–11
  29. By: Coats, Warren (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: Currency manipulation refers to a country’s interfering with the market’s determination of the exchange rate of its currency in order to influence its trade balance, usually to favor its exports over its imports. In a world in which people and firms trade and invest across borders, i.e. our world, anything a country does (monetary policy, fiscal policy, industrial policy, trade policy) will potentially affect the exchange rate of its currency for other currencies (real and/or nominal exchange rates). This makes it difficult to define what currency manipulation might mean, but it generally refers to a government’s intervention in the foreign exchange market by buying dollars or other foreign currencies thus depreciating its own currency’s exchange rate. This makes its exports cheaper to foreign buyers and its imports more expensive domestically resulting in a trade surplus (or smaller deficit). In the following I compare policy reactions to shocks under three types of exchange rate/monetary policy regimes with an eye on the currency manipulation question. The broad categories of shocks are a) a globally shared recession and b) a single country shock to imports or exports such as from an oil price shock or tariffs, or from changes in capital inflows or out flows such as from a change in the political environment. The three policy regimes are: 1) freely floating exchange rates with no restrictions on capital flows, 2) an adjustable exchange rate peg, and 3) a gold standard with currency board rules. Regimes 1 and 3 are the opposite ends of the range of policy regime options. A strict gold standard (or other hard anchor) with currency board rules removes any question of currency manipulation as it is not possible in such a regime.
    Date: 2019–09
  30. By: Jon Frost; Hyun Song Shin; Peter Wierts
    Abstract: This paper draws lessons on the central bank underpinnings of money from the rise and fall of the Bank of Amsterdam (1609-1820). The Bank started out as a "stablecoin": it issued deposits backed by silver and gold coins, and settled payments by transfers across deposits. Over time, it performed functions of a modern central bank and its deposits took on attributes of fiat money. The economic shocks of the 1780s, large-scale lending and lack of fiscal support led to its failure. Using monthly balance sheet data, we show how confidence in Bank money gave way to a run equilibrium, where the fall of the premium on deposits over coins ("agio") into negative territory was swift and precipitous. This holds lessons for the governance of digital money.
    Keywords: stablecoins; crypto-assets; central banks; money
    JEL: E42 E58 N13
    Date: 2020–11
  31. By: D'Acunto, Francesco; Hoang, Daniel; Paloviita, Maritta; Weber, Michael
    Abstract: Communication targeting households and firms has become a stand-alone policy tool of many central banks. But which forms of communication, if any, can reach ordinary people and manage their economic expectations effectively? In a large-scale randomized control trial, we show that communication manages expectations when it focuses on policy targets and objectives rather than on the instruments designed to reach such objectives. It is especially the least sophisticated demographic groups, whom central banks typically struggle to reach, who react more to target-based communication. When exposed to target-based communication, these groups are also more likely to believe that policies will benefit households and the economy. Target-based communication enhances policy effectiveness and contributes to strengthen the public’s trust in central banks, which is crucial to ensure the effectiveness of their policies.
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2020–11–10
  32. By: Adam Brzezinski; Roberto Bonfatti; K. KıvançKaraman; Nuno Palma
    Abstract: Monetary capacity refers to a state’s capacity to circulate money that is accepted by the public, while fiscal capacity refers to its capacity to tax. We argue that monetary and fiscal capacity, and by extension, markets and states are complements. The long-run European evidence since antiquity shows money stocks and tax revenues moving in close synch. History also offers a natural experiment to estimate the causal effect of monetary capacity on fiscal capacity. The discovery of silver in the New World increased money stocks followed by tax revenues, a finding that is robust to controlling for economic growth.
    Keywords: monetary capacity, fiscal capacity, monetization, inflation, taxation, quantity theory of money, monetary non-neutrality
    JEL: E50 E60 H21 N10 O11
    Date: 2020–11–16

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