nep-cba New Economics Papers
on Central Banking
Issue of 2021‒01‒11
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The central bank balance sheet as a policy tool: past, present and future By Bailey, Andrew; Bridges, Jonathan; Harrison, Richard; Jones, Josh; Mankodi, Aakash
  2. Macroprudential Policy and the Inward Transmission of Monetary Policy: the case of Chile, Mexico, and Russia By Georgia Bush; Tomás Gómez; Alejandro Jara; David Moreno; Konstantin Styrin; Yulia Ushakova
  3. Supranational Rules, National Discretion: Increasing versus Inflating Regulatory Bank Capital? By Reint Gropp; Thomas C. Mosk; Steven Ongena; Carlo Wix; Ines Simac
  4. Inflation-Linked Bonds, Nominal Bonds, and Countercyclical Monetary Policies By Westerhout, Ed
  5. Effects of Emerging Market Asset Purchase Program Announcements on Financial Markets During the COVID-19 Pandemic By Can Sever; Rohit Goel; Dimitris Drakopoulos; Evan Papageorgiou
  6. Rare disasters, the natural interest rate and monetary policy. By Alessandro Cantelmo
  7. Implementation and Effectiveness of Extended Monetary Policy Tools: Lessons from the Literature By Grahame Johnson; Sharon Kozicki; Romanos Priftis; Lena Suchanek; Jonathan Witmer; Jing Yang
  8. Managing External Volatility: Policy Frameworks in Non-Reserve Issuing Economies By Helene Poirson Ward; Nathan Porter; Itai Agur; Jiaqian Chen; Johannes Eugster; Stefan Laseen; Jeta Menkulasi; Kenji Moriyama; Celine Rochon; Katsiaryna Svirydzenka; Camilo E Tovar Mora; Zhongxia Zhang; Aleksandra Zdzienicka
  9. Money Velocity and the Natural Rate of Interest By Luca Benati
  10. On the effectiveness of the European Central Bank's conventional and unconventional policies under uncertainty By Niko Hauzenberger; Michael Pfarrhofer; Anna Stelzer
  11. Uncertainty and voting on the Bank of England’s Monetary Policy Committee By Firrell, Alastair; Reinold, Kate
  12. Systemic Risk in Financial Networks: A Survey By Matthew O. Jackson; Agathe Pernoud
  13. House Prices and Macroprudential Policies: Evidence from City-level Data in India By Bhupal Singh
  14. The International Spillover of U.S. Monetary Policy via Global Production Linkages By Julian di Giovanni
  15. Shock Propagation in the Banking System with Real Economy Feedback By Andras Borsos; Bence Mero
  16. Monetary policy and the top one percent: Evidence from a century of modern economic history By Mehdi El Herradi; Aurélien Leroy
  17. Money, Human Capital and Endogenous Market Structure in a Schumpeterian Economy By He, Qichun; Wang, Xilin
  18. Real exchange rate misalignment in developing countries: the role of exchange rate flexibility and capital account openness By Wishnu Mahraddika

  1. By: Bailey, Andrew (Bank of England); Bridges, Jonathan (Bank of England); Harrison, Richard (Bank of England); Jones, Josh (Bank of England); Mankodi, Aakash (Bank of England)
    Abstract: This paper focuses on what has been learned from the past decade of previously unconventional monetary policy measures and the emerging lessons from the effects of monetary policy responses to the Covid shock. The paper explores two observations from recent quantitative easing (QE) policies in detail. First, large QE programmes implemented quickly may be particularly effective in times of market dysfunction. Second, a rapid pace of asset purchases may also enhance QE effectiveness during these periods. These observations suggest a particular form of ‘state contingency’ for the impact of QE. The paper analyses the potential implications of such state contingency for the appropriate conduct of QE policies and the choice of policy instruments in more normal times. The paper also outlines some potential implications for future central bank balance sheet policies and the operational framework to support them.
    Keywords: Monetary policy; financial stability; central bank balance sheet; quantitative easing; reserves
    JEL: E52 E58
    Date: 2020–12–18
  2. By: Georgia Bush; Tomás Gómez; Alejandro Jara; David Moreno; Konstantin Styrin; Yulia Ushakova
    Abstract: This paper studies whether domestic macroprudential policy may attenuate the inward transmission of monetary-policy shocks from the U.S. to domestic banks' lending growth in three emergingmarket economies -Chile, Mexico, and Russia. Identification relies on banks' heterogeneous exposure to the prudential policies and the fact that foreign monetary policy shocks are exogenous from the perspective of these economies. After analyzing the effects of the aggregate domestic prudential policy stance, we focus on specific prudential policies targeting mortgage and consumer loans, as well as foreign-currency deposits. Although our overall results are mixed, we find evidence that the strength of international monetary policy spillovers varies depending on the stance of the domestic macroprudential policy. In particular, a tighter reserve requirement stance over foreigncurrency deposits in Chile dampens the effect of an international monetary policy shock on domestic local-currency lending, but reinforces that on foreign-currency lending, whereas in Russia, it dampens the effect on both local currency and foreign currency lending, although to different degrees. Prudential policies targeting the asset side of banks' balance sheets, such as mortgage loans or consumer credit, are found to amplify international monetary policy spillovers in some cases and attenuate in others, depending on the country context.
    Date: 2020–12
  3. By: Reint Gropp (Halle Institute for Economic Research); Thomas C. Mosk (University of Zurich, Research Center SAFE); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Carlo Wix (Board of Governors of the Federal Reserve System); Ines Simac (KU Leuven)
    Abstract: We study how higher capital requirements introduced at the supranational level affect the regulatory capital of banks across countries. Using the 2011 EBA capital exercise as a quasi-natural experiment, we find that treated banks exploit discretion in the calculation of regulatory capital to inflate their capital ratios without a commensurate increase in their book equity and without a reduction in bank risk. Regulatory capital inflation is more pronounced in countries where credit supply is expected to tighten, suggesting that national authorities forbear their domestic banks to meet supranational requirements, with a focus on short-term economic considerations.
    Keywords: Bank capital requirements, regulatory forbearance
    JEL: G21 G28
    Date: 2020–12
  4. By: Westerhout, Ed (Tilburg University, Center For Economic Research)
    Keywords: Inflation-indexed Bonds; Time-Consistent Discretionary Monetary Policies; Stabilization Properties of Monetary Policies; Inflation Risk Premium
    Date: 2021
  5. By: Can Sever; Rohit Goel; Dimitris Drakopoulos; Evan Papageorgiou
    Abstract: The COVID-19 pandemic led many emerging market central banks to adopt, for the first time, unconventional policies in the form of asset purchase programs. In this study, we analyze the effects of these announcements on domestic financial markets using both event studies and local projections methodology. We find that these asset purchase announcements lowered bond yields, did not lead to a depreciation of domestic currencies, and did not have much effect on equities. While the immediate effect of asset purchases appears positive, further consideration of the risks and longer-term effects of unconventional monetary policies is needed. We highlight the trade-offs involved with the implementation of these measures, and discuss their risks. This working paper adds to the debate on how asset purchase programs should be a regular part of the emerging market policy toolkit.
    Date: 2020–12–18
  6. By: Alessandro Cantelmo (Bank of Italy)
    Abstract: This paper evaluates the impact of rare disasters on the natural interest rate and macroeconomic conditions by simulating a nonlinear New-Keynesian model. The model is calibrated using data on natural disasters in OECD countries. From an ex-ante perspective, disaster risk behaves as a negative demand shock and lowers the natural rate and inflation, even if disasters hit only the supply side of the economy. These effects become larger and nonlinear if extreme natural disasters become more frequent, a scenario compatible with climate change projections. From an ex-post perspective, a disaster realization leads to temporarily higher natural rate and inflation if supply-side effects prevail. If agents' risk aversion increases temporarily, disasters may generate larger demand effects and lead to a lower natural rate and inflation. If supply-side effects dominate, the central bank could mitigate output losses at the cost of temporarily higher inflation in the short run. Conversely, under strict inflation targeting, inflation is stabilized at the cost of larger output losses.
    Keywords: rare disasters, natural disasters, natural interest rate, climate change, DSGE, monetary policy
    JEL: E4 E5
    Date: 2020–12
  7. By: Grahame Johnson; Sharon Kozicki; Romanos Priftis; Lena Suchanek; Jonathan Witmer; Jing Yang
    Abstract: This paper summarizes the literature on the performance of various extended monetary policy tools when conventional policy rates are constrained by the effective lower bound. We highlight issues that may arise when these tools are used by central banks of small open economies. Tools that have already been used by various central banks include forward guidance and balance sheet policies—such as quantitative easing, yield curve targeting, credit easing, funding-for-lending and purchases of other assets. The paper also touches on the use of negative interest rates. The evidence to date suggests that such tools have allowed central banks to ease financial conditions and thereby stimulate aggregate demand. The article also considers overt monetary financing (often referred to as “helicopter money†) as an additional tool if conditions require even more aggressive easing. We review the sequencing and pacing of the use of such tools, as well as spillover effects and financial stability concerns, as important aspects of implementation strategies.
    Keywords: Monetary policy; Monetary policy implementation; Monetary policy transmission
    JEL: E63
    Date: 2020–12
  8. By: Helene Poirson Ward; Nathan Porter; Itai Agur; Jiaqian Chen; Johannes Eugster; Stefan Laseen; Jeta Menkulasi; Kenji Moriyama; Celine Rochon; Katsiaryna Svirydzenka; Camilo E Tovar Mora; Zhongxia Zhang; Aleksandra Zdzienicka
    Abstract: Since the global financial crisis, non-reserve-issuing economies (NREs) have been highly sensitive to episodes of external pressures. With monetary policy independence constrained by this sensitivity, many NREs have utilized other policy instruments. This paper confirms the vulnerability of NREs to external shocks and finds that in some circumstances managing such shocks with multiple instruments can both lessen the policy response required from any one policy tool to financial and external shocks and increase the effectiveness of policies in stabilizing macro-financial conditions. Effectiveness however does not always imply appropriateness, which rests on an evaluation of potential trade-offs and unintended consequences.
    Date: 2020–12–18
  9. By: Luca Benati
    Abstract: M1 velocity is, approximately, the permanent component of the short-term rate. This implies that agents–in deciding how much wealth to allocate to non interest bearing M1, as opposed to interest-bearing assets–almost uniquely react to permanent shocks to the opportunity cost, essentially ignoring transitory shocks. This suggests that money-demand models must be modified to allow for such distinct reaction to permanent and transitory variation in the opportunity cost of holding M1. Under monetary regimes making inflation stationary, permanent fluctuations in M1 velocity uniquely reflect, to a close approximation, permanent shifts in the natural rate of interest.
    Keywords: Money demand; unit roots; cointegration; structural VARs; natural rate of interest.
    JEL: E30 E32
    Date: 2020–12
  10. By: Niko Hauzenberger; Michael Pfarrhofer; Anna Stelzer
    Abstract: In this paper, we investigate the effectiveness of conventional and unconventional monetary policy measures by the European Central Bank (ECB) conditional on the prevailing level of uncertainty. To obtain exogenous variation in central bank policy, we rely on high-frequency surprises in financial market data for the euro area (EA) around policy announcement dates. We trace the dynamic effects of shocks to the short-term policy rate, forward guidance and quantitative easing on several key macroeconomic and financial quantities alongside survey-based measures of expectations. For this purpose, we propose a Bayesian smooth-transition vector autoregression (ST-VAR). Our results suggest that transmission channels are impaired when uncertainty is elevated. While conventional monetary policy is less effective during such periods, and sometimes also forward guidance, quantitative easing measures seem to work comparatively well in uncertain times.
    Date: 2020–11
  11. By: Firrell, Alastair (Bank of England); Reinold, Kate (Bank of England)
    Abstract: Differences of opinion are a natural and vital part of monetary policy making by committee. With the appropriate stance for monetary policy both unobservable and uncertain, individual policymakers need to synthesise a wide range of information, including the views of other committee members. Using a novel measure of views that we construct from text analysis of the Bank of England Monetary Policy Committee’s minutes and speeches, we show that both individual economic assessments and broader committee views are important in explaining individual voting. But in periods of high uncertainty both become more volatile and carry less weight in votes, consistent with the predictions of a simple voting model embedding a signal extraction problem. There is no increase in the dispersion of economic assessments in periods of uncertainty, nor in the mean dissent rate. Thus we show that interpreting the voting record as a reflection of policy uncertainty is unreliable, and highlight the value of individual committee members’ communications — such as speeches — for conveying differences in view.
    Keywords: Central bank communication; committees; monetary policy; uncertainty
    JEL: D71 D81 E52 E58
    Date: 2020–12–18
  12. By: Matthew O. Jackson; Agathe Pernoud
    Abstract: We provide an overview of the relationship between financial networks and systemic risk. We present a taxonomy of different types of systemic risk, differentiating between direct externalities between financial organizations (e.g., defaults, correlated portfolios and firesales), and perceptions and feedback effects (e.g., bank runs, credit freezes). We also discuss optimal regulation and bailouts, measurements of systemic risk and financial centrality, choices by banks' regarding their portfolios and partnerships, and the changing nature of financial networks.
    Date: 2020–12
  13. By: Bhupal Singh
    Abstract: This paper examines the efficacy of macroprudential policies in addressing housing prices in a developing country while underscoring the importance of fundamental factors. The estimated models using city-level data for India suggest a strong influence of fundamental factors in driving housing prices. There is compelling evidence of the effectiveness of macroprudential tools viz., Loan-to-value (LTV) ratio, risk weights, and provisioning requirements, in influencing housing price movements. A granular analysis suggests an even stronger impact on housing prices of a change in the regulatory LTV ratio for large-sized vis-à-vis small-sized mortgages, which buttresses their potency in fighting house price speculations. A tightening of the risk weights on the housing assets of banks causes significant downward pressure on house prices. Similarly, regulatory changes in standard asset provisioning on housing loans also influence house prices.
    Date: 2020–12–18
  14. By: Julian di Giovanni
    Abstract: The recent era of globalization has witnessed growing cross-country trade integration as firms’ production chains have spread across the world, and with stock market returns becoming more correlated across countries. While research has predominantly focused on how financial integration impacts the propagation of shocks across international financial markets, trade also influences these cross-border spillovers. In particular, one important aspect, highlighted by the recent work of di Giovanni and Hale (2020), is how the global production network influences the transmission of U.S. monetary policy to world stock markets.
    Keywords: global production network; asset prices; monetary policy shocks
    JEL: F0 G1
    Date: 2021–01–06
  15. By: Andras Borsos (Magyar Nemzeti Bank (Central Bank of Hungary)); Bence Mero (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: In this paper we develop a model of shock propagation in the banking system with feedback channels towards the real economy. Our framework incorporates the interactions between the network of banks (exhibiting contagion mechanisms among them) and the network of firms (transmitting shocks to each other along the supply chain) which systems are linked together via loan-contracts. Our hypothesis was, that the feedback mechanisms in these coupled networks could amplify the losses in the economy beyond the shortfalls expected when we consider the subsystems in isolation. As a test for this, we embedded the model into a liquidity stress testing framework of the Central Bank of Hungary, and our results proved the importance of the real economy feedback channel, which almost doubled the system-wide losses. To illustrate the versatility of our modeling framework, we presented two further applications for different policy purposes: (i) We elaborated a way to use the model for SIFI identification, (ii) and we showed an example of assessing the impact of shocks originated in the real economy.
    Keywords: systemic risk,financial network, production network, contagion
    JEL: G01 G21 G28 C63
    Date: 2020
  16. By: Mehdi El Herradi (; Aurélien Leroy (LAREFI, University of Bordeaux, Pessac, France)
    Abstract: This paper examines the distributional e ects of monetary policy in 12 OECD economies between 1920 and 2016. We exploit the implications of the macroeconomic policy trilemma with an external instrument approach to analyse how top income shares respond to monetary policy shocks. The results indicate that monetary tightening strongly decreases the share of national income held by the top one percent and vice versa for a monetary expansion, irrespective of the position of the economy. This e ect (i) holds for the top percentile and the ultra-rich (top 0.1% and 0.01% income shares), while (ii) it does not necessarily induce a decrease in income inequality when considering the entire income distribution. Our ndings also suggest that the e ect of monetary policy on top income shares is likely to be channeled via real asset returns.
    Keywords: monetary policy, top incomes, macroeconomic policy trilemma, external instrument
    JEL: E25 E42 E52
    Date: 2020–12
  17. By: He, Qichun; Wang, Xilin
    Abstract: We incorporate endogenous human capital accumulation into a scale-invariant Schumpeterian growth model with endogenous market structure. Endogenous human capital accumulation leads to continuous entry of firms. Therefore, continuous horizontal innovation is sustained by human capital accumulation in the absence of population growth and becomes a twin engine of long-run growth (together with vertical innovation). We then study monetary policy by considering a cash-in-advance constraint on consumption. We find that when the capital share in final good production is low (high), the effect of inflation on growth is positive (negative). We then use cross-country panel regressions to test the theoretical prediction and find that inflation and capital share have a significant, negative interaction effect on growth, which provides support for our theory.
    Keywords: Monetary policy; Human capital; Endogenous market structure; Economic growth
    JEL: E41 I15 O30 O40
    Date: 2020–12
  18. By: Wishnu Mahraddika
    Abstract: This paper examines the association between the real exchange rate (RER) misalignment, exchange rate flexibility, and capital account openness using a panel dataset for 60 developing countries over the period 1980 – 2014. The analysis is based on an alternative measure of RER that is more consistent with the theoretical concept of RER than the commonly used index, and misalignment estimates that account for country-specific underlying factors. The results suggest that the exchange rate regime and capital account policy are significantly related to the degree of persistence and the magnitude of RER misalignment.
    Keywords: Real exchange rate; exchange rate regime; capital account openness
    JEL: F31 F38 F41 O24
    Date: 2020

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