nep-cba New Economics Papers
on Central Banking
Issue of 2021‒01‒04
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The market stabilization role of central bank asset purchases: high-frequency evidence from the COVID-19 crisis By Marco Bernardini; Annalisa De Nicola
  2. Mandates and Monetary Rules a New Keynesian Framework By Szabolcs Deak; Paul Levine; Son T. Pham
  3. High-frequency Identification of Unconventional Monetary Policy Shocks in Japan By Hiroyuki Kubota; Mototsugu Shintani
  4. The (in)stability of stock returns and monetary policy interdependence in the US By Emiliano A. Carlevaro; Leandro M. Magnusson
  5. Stablecoins: potential, risks and regulation By Douglas Arner; Raphael Auer; Jon Frost
  6. How Did Market Perceptions of the FOMC’s Reaction Function Change after the Fed’s Framework Review? By Ryan Bush; Haitham Jendoubi; Matthew Raskin; Giorgio Topa
  7. Dealing with bank distress: Insights from a comprehensive database By Konrad Adler; Frederic Boissay
  8. Monetary policy and inequality By Asger Lau Andersen; Niels Johannesen; Mia Jørgensen; José-Luis Peydró
  9. Capital flows during the pandemic: lessons for a more resilient international financial architecture By Fernando Eguren Martin; Mark Joy; Claudia Maurini; Alessandro Moro; Valerio Nispi Landi; Alessandro Schiavone; Carlos van Hombeeck
  10. Lower Bank Capital Requirements as a Policy Tool to Support Credit to SMEs: Evidence From a Policy Experiment? By Dietsch Michel; Fraisse Henri; Lé Mathias; Lecarpentier Sandrine
  11. Euro Area Monetary Communications: Excess Sensitivity and Perception Shocks By Valentin Jouvanceau; Ieva Mikaliunaite
  12. Two Illustrations of the Quantity Theory of Money Reloaded By ; Mariano Kulish; Juan Pablo Nicolini
  13. Monetary policy strategies in the New Normal: a model-based analysis for the euro area By Fabio Busetti; Stefano Neri; Alessandro Notarpietro; Massimiliano Pisani
  14. Banking Supervision: The Perspective from Economics By Beverly Hirtle
  15. Start Spreading the News: News Sentiment and Economic Activity in Australia By Kim Nguyen; Gianni La Cava
  16. Monetary policy and the term structure of Inflation expectations with information frictions By Jmaes McNeil
  17. Four years of the inflation targeting framework. By Patnaik, Ila; Pandey, Radhika
  18. Whatever it takes to save the planet? Central banks and unconventional green policy By Ferrari, Alessandro; Landi, Valerio Nispi
  19. On the negatives of negative interest rates and the positives of exemption thresholds By Aleksander Berentsen; Hugo van Buggenum; Romina Ruprecht
  20. Monetary Growth Rules in an Emerging Open Economy By Maryam Mirfatah; Vasco J. Gabriel; Paul Levine
  21. Digital Money as a Unit of Account and Monetary Policy in Open Economies By Daisuke Ikeda

  1. By: Marco Bernardini (Bank of Italy); Annalisa De Nicola (Bank of Italy)
    Abstract: This paper uses confidential high-frequency data to investigate the dynamic effects on the government bond market of the central bank asset purchases carried out in Italy during the COVID-19 pandemic crisis. We find that in response to an outright purchase of long-term bonds: (i) long-term yields drop by 4 to 5 basis points per billion euros on impact and tend to remain subdued over the trading day; (ii) short- and medium-term bond yields are also strongly affected; (iii) the yield curve shifts downwards and flattens owing to a reduction in the credit and liquidity risk premia embedded in sovereign spreads; (iv) market liquidity improves steadily. We also show that: (v) the yield impact of a purchase is substantially larger in times of heightened market stress; (vi) asset purchases operate similarly and effectively in quieter times as well. These results suggest that actual purchases affect market prices over and above purchase announcements, and that adjusting their pace and composition according to market conditions can boost the overall effectiveness of a programme.
    Keywords: monetary policy, asset purchases, high-frequency data, local projections
    JEL: C22 E43 E44 E52 E58
    Date: 2020–12
  2. By: Szabolcs Deak (University of Exeter and CIMS); Paul Levine (University of Surrey and CIMS); Son T. Pham (University of Surrey)
    Abstract: We develop a general mandate framework for delegating monetary policy to an instrument-independent, but goal-dependent central bank. The goal of the mandate consists of: (i) a simple quadratic loss function that penalizes deviations from target macroeconomic variables; (ii) a form of a Taylor-type nominal interest-rate rule that responds to the same target variables; (iii) a zero-lower-bound (ZLB) constraint on the nominal interest rate in the form of an unconditional probability of ZLB episodes and (iv) a long-run (steady-state) inflation target. The central bank remains free to choose the strength of its response to the targets specified by the mandate. An estimated standard New Keynesian model is used to compute household-welfare-optimal mandates with these features. We find two main results that are robust across a number of different mandates: first, the optimized rule takes the form of a Taylor simple rule close to a price-level rule. Second, the optimal level of inflation target, conditional on a quarterly frequency of the nominal interest hitting the ZLB of 0.025, is close to the typical target annual inflation of 2% and to achieve a lower probability of 0.01 requires an inflation target of 3.5%.
    JEL: E52 E58 E61
    Date: 2020–08
  3. By: Hiroyuki Kubota (The University of Tokyo); Mototsugu Shintani (The University of Tokyo)
    Abstract: In this paper, we consider the issue of identifying unconventional monetary policy shocks in Japan by using the market-based measure of policy surprises obtained from high-frequency data. First, we investigate the effects of the monetary policy surprises on asset prices changes as an event study, which is based on the date and time of the monetary policy announcement made by the Bank of Japan. Using the methodology developed by Gürkaynak, Sack, and Swanson (2005), we find that the contractionary monetary policy has negative effects on stock returns. Second, we estimate the effects of unconventional monetary policy on real economic activity and inflation. By combining the vector autoregressive approach of Gertler and Karadi (2015) who employ high-frequency policy surprises as external instruments to identify the structural shocks, and that of Debortoli, Galí, and Gambetti (2020), who employ the long rate as the policy indicator during the period when the short rate is constrained by the zero lower bound, we find that unconventional monetary policy has been effective in Japan over the last two decades.
    Date: 2020–12
  4. By: Emiliano A. Carlevaro (Economics Discipline, Business School, University of Western Australia); Leandro M. Magnusson (Economics Discipline, Business School, University of Western Australia)
    Abstract: We investigate the relationship between conventional monetary policy and stock market returns before, during, and after the zero lower bound (ZLB) period. Our inferential method, which exploits the exogenous changes in the variance of the structural shocks, allows us to recover both effects simultaneously without the need for restrictive identification assumptions. We find dramatic changes in the relationship between monetary policy and stock market returns over the period. Before the ZLB, policymakers reacted to stock returns. Their reaction has been muted since then. Regarding the stock market response, we find that, before the ZLB, a contractionary (expansionary) monetary policy reduces (increases) returns. Since the ZLB period, however, we cannot rule out a positive response of equity prices to monetary tightening.
    Keywords: Structural VAR, Identification, Instability, Monetary Policy
    JEL: C12 E44 G10
    Date: 2020
  5. By: Douglas Arner; Raphael Auer; Jon Frost
    Abstract: The technologies underlying money and payment systems are evolving rapidly. Both the emergence of distributed ledger technology (DLT) and rapid advances in traditional centralised systems are moving the technological horizon of money and payments. These trends are embodied in private "stablecoins": cryptocurrencies with values tied to fiat currencies or other assets. Stablecoins - in particular potential "global stablecoins" such as Facebook's Libra proposal - pose a range of challenges from the standpoint of financial authorities around the world. At the same time, regulatory responses to global stablecoins should take into account the potential of other stablecoin uses, such as embedding a robust monetary instrument into digital environments, especially in the context of decentralised systems. Looking forward, in such cases, one possible option from a regulatory standpoint is to embed supervisory requirements into stablecoin systems themselves, allowing for "embedded supervision". Yet it is an open question whether central bank digital currencies (CBDCs) and other initiatives could in fact provide more effective solutions to fulfil the functions that stablecoins are meant to address.
    Keywords: stablecoins, cryptocurrencies, crypto-assets, blockchain, distributed ledger technology, central bank digital currencies, fintech, central banks, regulation, supervision, money
    JEL: E42 E51 E58 F31 G28 L50 O32
    Date: 2020–11
  6. By: Ryan Bush; Haitham Jendoubi; Matthew Raskin; Giorgio Topa
    Abstract: In late August, as part of the Federal Reserve’s review of Monetary Policy Strategy, Tools, and Communications, the Federal Open Market Committee (FOMC) published a revised Statement on Longer-Run Goals and Monetary Policy Strategy. As observers have noted, the revised statement incorporated important changes to the Federal Reserve’s approach to monetary policy. This includes emphasizing maximum employment as a broad-based and inclusive goal and focusing on “shortfalls” rather than “deviations” of employment from its maximum level. The statement also noted that, in order to anchor longer-term inflation expectations at the FOMC’s longer-run goal, the Committee would seek to achieve inflation that averages 2 percent over time. In this post, we investigate the possible impact of these changes on financial market participants’ expectations for policy rate outcomes, based on responses to the Survey of Primary Dealers (SPD) and Survey of Market Participants (SMP) conducted by the New York Fed’s Open Market Trading Desk both shortly before and after the conclusion of the framework review. We find that the conclusion of the framework review coincided with a notable shift in market participants’ perceptions of the FOMC’s policy rate “reaction function,” in the direction of higher expected inflation and lower expected unemployment at the time of the next increase in the federal funds target range (or “liftoff”).
    Keywords: survey of primary dealers; survey of market participants
    JEL: E58 D53
    Date: 2020–12–18
  7. By: Konrad Adler; Frederic Boissay
    Abstract: We study the effectiveness of policy tools that deal with bank distress (i.e. central bank lending, asset purchases, bank liability guarantees, impaired asset segregation schemes). We present and draw on a novel database that tracks the use of such tools in 29 countries between 1980 and 2016. To keep "all else" equal, we test whether different policies explain differences in how countries fared through bank distress episodes that feature observationally similar initial macro–financial vulnerabilities. We find that, altogether, policy interventions help restore GDP growth and normalize the economy when bank distress follows a period of high cross–border exposures. Central bank lending and asset purchase schemes are especially effective in the first and second years of distress, respectively, and when bank distress follows low asset valuations, high bank leverage and weak bank performance. Overall, our results suggest that swift and broad–ranging policies can mitigate the adverse economic effects of bank distress.
    Keywords: bank distress, distress mitigation policy
    JEL: G01 G38 E60
    Date: 2020–12
  8. By: Asger Lau Andersen; Niels Johannesen; Mia Jørgensen; José-Luis Peydró
    Abstract: We analyze the distributional effects of monetary policy on income, wealth and consumption. For identification, we exploit administrative household-level data covering the entire population in Denmark over the period 1987-2014, including detailed information about income and wealth from tax returns, in conjunction with exogenous variation in the Danish monetary policy rate created by a long-standing currency peg. Our results consistently show that all income groups gain from a softer monetary policy, but that the gains are monotonically increasing in the ex-ante income level. Over a two-year horizon, a decrease in the policy rate of one percentage point raises disposable income by less than 0.5% at the bottom of the income distribution, by around 1.5% at the median income and by around 5% at the top. The effects on asset values through increases in house prices and stock prices are larger than the effects on disposable income by more than an order of magnitude and exhibit a similar monotonic income gradient. We show how all these distributional effects reflect systematic differences in the exposure to the direct and indirect channels of monetary policy. Consistent with the main results for disposable income and asset values, we also find that the effects on net wealth and consumption (car purchases) increase monotonically over the ex-ante income distribution. Our estimates imply that softer monetary policy increases income inequality by raising income shares at the top of the income distribution and reducing them at the bottom.
    Keywords: Monetary policy, inequality, household heterogeneity
    JEL: E2 E4 E5 G2 G1 G5
    Date: 2020–12
  9. By: Fernando Eguren Martin (Bank of England); Mark Joy (Bank of England); Claudia Maurini (Bank of Italy); Alessandro Moro (Bank of Italy); Valerio Nispi Landi (Bank of Italy); Alessandro Schiavone (Bank of Italy); Carlos van Hombeeck (Bank of England)
    Abstract: This paper studies the sudden stop in capital flows that emerging markets have experienced throughout the first months of the pandemic. First, we find that the sudden stop in capital flows has been strongly affected by lower portfolio investments of non-bank financial intermediaries: for many emerging markets, the magnitude of the sudden stop has exceeded that of the Global Financial Crisis. Second, we show that emerging markets have adopted expansionary fiscal and monetary policies to face the sudden stop and the resultant recession; moreover, the use of macroprudential measures and unconventional monetary policy document a wider policy toolkit, compared to other crises. Third, we estimate the adequacy of current IMF resources if emerging markets were hit by a further global sudden stop: we find that the IMF resources are adequate, in case of a moderate sudden stop; in case of a more severe scenario, financing needs of emerging markets could go beyond the IMF’s lending capacity, even after the other layers of the global financial safety net have been deployed.
    Keywords: International Finance, International Financial Data, Foreign Exchange Reserves, Capital Flow, IMF
    JEL: F31 F32 F33
    Date: 2020–12
  10. By: Dietsch Michel; Fraisse Henri; Lé Mathias; Lecarpentier Sandrine
    Abstract: Starting in 2014 with the implementation of the European Commission Capital Requirement Directive, banks operating in the Euro area were benefiting from a 25% reduction (the Supporting Factor or "SF" hereafter) in their own funds requirements against Small and Medium-sized enterprises ("SMEs" hereafter) loans. We investigate empirically whether this reduction has supported SME financing and to which extent it is consistent with SME credit risk. Economic capital computations based on multifactor models do confirm that capital requirements should be lower for SMEs. Taking into account the uncertainty surrounding their estimates and adopting a conservative approach, we show that the SF is consistent with the difference in economic capital between SMEs and large corporates. As for the impact on credit distribution, our difference-in-differences specification enables us to find a positive and significant impact of the SF on the credit supply.
    Keywords: SME finance, Credit supply, Basel III, Credit risk modelling, Capital requirement.
    JEL: C13 G21 G33
    Date: 2020
  11. By: Valentin Jouvanceau (Bank of Lithuania); Ieva Mikaliunaite (Bank of Lithuania)
    Abstract: We explore new dimensions of the ECB’s monetary communications using the Euro Area Monetary Policy Event-Study Database (EA-MPD) built by Altavilla et al. (2019). We find that three new factors are needed to capture an excess sensitivity of long-term sovereign yields around monetary announcements. "Duration" surprises cause variations in real long-term rates and are mainly transmitted by term premiums. The "Sovereign spread" and "Save the Euro" surprises greatly influence the long-term yields of the periphery countries. These effects are difficult to reconcile with classic monetary policy shocks. We therefore study their underlying nature and discover that they have the characteristics of "Information", or what we label "Perception" shocks.
    Keywords: Monetary surprises, Event-study, Excess sensitivity, Perception shocks, High-frequency Identification
    JEL: E43 E44 E52 E58 G12
    Date: 2020–10–08
  12. By: ; Mariano Kulish; Juan Pablo Nicolini
    Abstract: In this paper, we review the relationship between inflation rates, nominal interest rates, and rates of growth of monetary aggregates for a large group of OECD countries. We conclude that the low-frequency behavior of these series maintains a close relationship, as predicted by standard quantity theory models. In an estimated model, we show those relationships to be relatively invariant to alternative frictions that can deliver very different high-frequency dynamics. We argue that these relationships are useful for policy design aimed at controlling inflation.
    Keywords: Money demand; Monetary aggregates; Monetary policy
    JEL: E41 E51 E52
    Date: 2020–12–15
  13. By: Fabio Busetti; Stefano Neri (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: A New Keynesian model calibrated to the euro area is used to evaluate the stabilization properties of alternative monetary policy strategies when the natural interest rate is low (‘new normal’) and the probability of reaching the effective lower bound (ELB) is non-negligible. Price level targeting is the most effective strategy in terms of stabilizing inflation and output and of reducing the duration and frequency of ELB episodes. Temporary price level targeting is also effective in mitigating the ELB constraint, although its stabilization properties are inferior to those of price level targeting. Backward-looking average inflation targeting performs well and is preferable to inflation targeting. The effectiveness of these alternative strategies hinges upon the commitment of a central bank to keeping the policy rate ‘lower for longer’ and is influenced by the agents’ expectation formation mechanism.
    Keywords: monetary policy, natural interest rate, effective lower bound.
    JEL: E31 E32 E58
    Date: 2020–12
  14. By: Beverly Hirtle
    Abstract: Economists have extensively analyzed the regulation of banks and the banking industry, but have devoted considerably less attention to bank supervision as a distinct activity. Indeed, much of the banking literature has used the terms “supervision” and “regulation” interchangeably. This paper provides a heuristic review of the economics literature on microprudential bank supervision, highlighting broad findings and existing gaps, especially those related to work on supervision’s theoretical underpinnings. The theoretical literature examining the motivation for supervision (monitoring and oversight) as an activity distinct from regulation (rulemaking) is just now emerging and has considerable room to grow. Meanwhile, the empirical literature assessing the impact of supervision is more substantial. Initial results suggest that supervision reduces risk at banks without meaningfully reducing profitability. The evidence is more mixed about whether more intensive supervision reduces credit supply. The channels through which supervision achieves these results have yet to be fully explored, however. Finally, there is a body of work exploring how supervisory incentives—at both the individual and institutional levels—affect outcomes. Supervisory incentives are fundamentally entwined with the theoretical rationale for supervision as a distinct activity and with empirical assessments of its impact. Drawing these links more clearly is an additional area for fruitful future work.
    Keywords: banking; supervision; regulation
    JEL: G20 G21 G28
    Date: 2020–12–01
  15. By: Kim Nguyen (Reserve Bank of Australia); Gianni La Cava (Reserve Bank of Australia)
    Abstract: In times of crisis, real-time indicators of economic activity are a critical input to timely and well-targeted policy responses. The COVID-19 pandemic is the most recent example of a crisis where events with little historical precedent played out rapidly and unpredictably. To address this need for real-time indicators we develop a new indicator of 'news sentiment' based on a combination of text analysis, machine learning and newspaper articles. The news sentiment index complements other timely economic indicators and has the advantage of potentially being updated on a daily basis. It captures key macroeconomic events, such as economic downturns, and typically moves ahead of survey-based measures of sentiment. Changes in sentiment expressed in monetary policy-related news can also partly explain unexpected changes in monetary policy. This suggests that news captures important, but unobserved, information about the risks to the RBA's forecasts that the RBA responds to when setting interest rates. An event study in the days around monetary policy decisions suggests that an unexpected tightening in monetary policy is associated with weaker news sentiment, though the effects on sentiment are temporary and not particularly strong.
    Keywords: news media; sentiment; economic activity; text analysis; machine learning
    JEL: E32 E52
    Date: 2020–12
  16. By: Jmaes McNeil (Department of Economics, Dalhousie University)
    Date: 2020–12–16
  17. By: Patnaik, Ila (National Institute of Public Finance and Policy); Pandey, Radhika (National Institute of Public Finance and Policy)
    Abstract: In 2016, India adopted a flexible inflation targeting framework. A six member MPC,with three internal and three external members was set up to determine the policy rate to achieve the inflation target. The CPI based inflation target was set by the Government at 4 percent with a tolerance band of plus/minus 2 percent for the period from August, 2016 to March, 2021. The review of the target is due in a few months. The tenure of the first MPC came to an end with the August, 2020 meeting. In this backdrop, this paper presents a review of the inflation targeting framework in India.
    Date: 2020–11
  18. By: Ferrari, Alessandro; Landi, Valerio Nispi
    Abstract: We study the effects of a temporary Green QE, defined as a policy that temporarily tilts the central bank’s balance sheet toward green bonds, i.e. bonds issued by firms in non-polluting sectors. To this purpose, we merge a standard DSGE framework with an environmental model. In our model, detrimental emissions produced by the brown sector increase the stock of pollution. We find that the imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. Under the assumption of imperfect substitutability, we point out the following results. A temporary Green QE is an effective tool in mitigating detrimental emissions. However, Green QE has limited effects in reducing the stock of pollution, if pollutants are slow-moving variables such as atmospheric carbon. The welfare gains of Green QE are positive but small. Welfare gains increase if the flow of emissions negatively affects also the utility of households. JEL Classification: E52, E58, Q54
    Keywords: central bank, climate change, monetary policy, quantitative easing
    Date: 2020–12
  19. By: Aleksander Berentsen; Hugo van Buggenum; Romina Ruprecht
    Abstract: Major central banks remunerate reserves at negative interest rates and it is increasingly likely that they will keep rates negative for many more years. To study the long run implications of negative rates, we construct a dynamic general equilibrium model with commercial banks funding investment projects and a central bank issuing reserves. Negative rates distort investment decisions resulting in lower output and welfare. These findings sharply contrast the short-run expansionary effects ascribed to negative rate policies by most of the existing literature. Negative rates also reduce commercial bank profitability. Exempting a fraction of reserves from negative rates can resolve profitability concerns without affecting the central bank's ability to control the money market rate. However, exemption thresholds do no mitigate the investment distortions created by negative rates.
    Keywords: Negative interest rate, money market, monetary policy, interest rates
    JEL: E40 E42 E43 E50 E58
    Date: 2020–12
  20. By: Maryam Mirfatah (University of Surrey and CIMS); Vasco J. Gabriel (University of Surrey and CIMS); Paul Levine (University of Surrey and CIMS)
    Abstract: We develop a small open economy model interacting with a rest-of-the-world bloc, containing several emerging economies' features: Calvo-type nominal frictions in prices and wages, financial frictions in the form of limited asset markets participation (LAMP), as well as both formal and informal sectors. In addition, we introduce incomplete exchange rate pass-through via a combination of producer and local currency pricing for exports, as well commodity-dependence in the form of an oil export sector. We contrast the stability and determinacy properties of money growth and standard Taylor-type interest rate rules, showing that monetary rules are stable regardless of the level of asset market participation, i.e. they avoid the inversion of the Taylor principle. We estimate our 2-bloc model using data for Iran and the USA employing Bayesian methods and we study the empirical relevance of the frictions in our model. Our results reveal important propagation channels active in emerging economies and that taking these into account is essential for policymaking decisions. Indeed, shocks to the economy are amplified by the presence of LAMP, while trade autarky further intensifies the effects of financial frictions. On the other hand, the informal sector acts as buffer to several shocks, lowering the variability of aggregate and formal fluctuations.
    Date: 2020–09
  21. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Further progress in digital money, electronically stored monetary value, may enable pricing in units of any currency in any country. This paper studies monetary policy in such a world, using a two- country open economy model with nominal rigidities. The findings are three-fold. First, domestic monetary policy becomes less effective as digital dollarization - pricing using digital money, denominated in and pegged to a foreign currency - deepens. Second, digital dollarization is more likely to occur in a smaller country that is more open to trade and has a greater tradable sector and stronger input-output linkages. Third, monetary policy can facilitate or discourage digital dollarization depending on its stance on the stabilization of macroeconomic variables.
    Keywords: Digital money, monetary policy, dollarization
    JEL: E52 F41
    Date: 2020–12

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