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on Central Banking |
| By: | Boris Chafwehé; Rigas Oikonomou; Romanos Priftis; Lukas Vogel |
| Abstract: | We propose a framework of optimal monetary policy where debt sustainability may, or may not, be a relevant constraint for the central bank. We show analytically that in each environment the optimal interest rate path consists of a Taylor rule augmented with forward guidance terms. These terms arise either i) from “twisting interest rates†when the central bank ensures debt sustainability, or ii) under no debt concerns, from committing to keep interest rates low at the exit of the liquidity trap. The optimal policy is isomorphic to Leeper’s (1991) “passive monetary/active fiscal policy†regime in the first instance, or “active monetary/passive fiscal policy†regime in the second. We insert our framework into a standard medium scale DSGE model calibrated to the US. Optimal passive monetary policy with debt concerns is ineffective in stabilizing inflation, whereas under no debt concerns, monetary policy is very effective in stabilizing the macroeconomy. |
| Keywords: | Economic models; Fiscal policy; Monetary policy; Monetary policy framework |
| JEL: | C11 E31 E52 E58 E62 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-5&r=all |
| By: | Kedan, Danielle; Veghazy, Alexia Ventula |
| Abstract: | We analyse the impact of the Liquidity Coverage Ratio (LCR) on the demand for central bank reserves in the euro area with difference-in-differences estimation techniques. Using a novel dataset and an identification strategy that exploits the cross-country heterogeneity in the regulatory treatment of reserves for LCR purposes prior to the announcement of a harmonised euro area standard as a quasi-natural experiment, we find evidence that points to LCR-induced demand for reserves. Specifically, our results suggest that banks with low LCRs relative to peers increased their central bank reserve holdings as a result of the LCR regulation. Our findings have economically meaningful implications for the operational framework of monetary policy and imply that the Eurosystem’s balance sheet may need to remain larger than it was prior to the financial crisis and the associated introduction of new liquidity regulation. JEL Classification: C23, E52, G28 |
| Keywords: | Basel III, central bank operational framework, ECB, liquidity coverage ratio, monetary policy |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212515&r=all |
| By: | Simona Malovana; Josef Bajzik; Dominika Ehrenbergerova; Jan Janku |
| Abstract: | We examine the potential adverse effects of a prolonged period of low interest rates on financial stability from multiple perspectives. First, we provide a unique comparison of natural rates of interest estimated using two approaches - with and without financial factors - for six large European countries inside and outside the euro area. The results indicate that the need for monetary policy easing or tightening may differ across economies and over time. Financial factors and macro-financial linkages further amplify these differences, implying that business and financial cycles may not be well synchronized across countries, with the financial cycle being more desynchronized. We then provide a comprehensive review of the empirical literature, allowing us to identify and categorize financial vulnerabilities which may be created and fueled by low interest rates. We discuss a situation in which a prolonged period of low interest rates may lead to a point of no return by contributing to higher indebtedness, overvalued asset prices and underpriced risks, resource and credit misallocation, and lower productivity. With respect to all of that, we offer a few monetary policy considerations, including a short discussion of the role of macroprudential policy. Specifically, we suggest that (i) monetary policy should act symmetrically over the medium to long term, (ii) both the short-term and long-term costs and benefits of pursuing accommodative or restrictive monetary policy should be accounted for, and (iii) monetary and macroprudential policies need to be coordinated, and their interactions should be accounted for in order to find the best policy mix for the economy. |
| Keywords: | Financial stability, financial vulnerabilities, low interest rates, monetary policy, natural rate of interest |
| JEL: | E52 E58 G2 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2020/02&r=all |
| By: | Karau, Sören |
| Abstract: | I study whether monetary gold hoarding was the main cause of the Great Depression in a structural VAR analysis. The notion that monetary forces played an important role in bringing about the depression is well established in the narrative literature, but has more recently met some skepticism by formal macroeconometric work. In deliberate contrast to the existing macroeconometric literature, the paper i) uses a newly-assembled monthly data set of the interwar world economy, and ii) models monetary disturbances as shocks to central bank gold demand. Based on a monetary DSGE model, the world gold reserve ratio (the ratio of central bank gold holdings to monetary liabilities) is used to describe monetary conditions. This permits the use of narrative information to sharpen shock identification in a structural VAR analysis based on sign restrictions. Monetary shocks are found to have real effects and to account for a substantial part of the collapse in prices and output during the initial slide into the Great Depression. |
| Keywords: | Great Depression,Gold Standard,Monetary Policy,Narrative Sign Restrictions |
| JEL: | E32 E42 E58 N12 N14 |
| Date: | 2020 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:632020&r=all |
| By: | Donato Masciandaro |
| Abstract: | The aim of the paper is to shed light on how two factors – central bank's design and central bankers' preferences – progressively assumed a crucial role in the evolution of monetary policy economics in the last four decades. The two factors jointly identify the importance of central bank governance in influencing monetary policy decisions through their interactions with the monetary policy rules, given the assumptions about how macroeconomic systems work. |
| Keywords: | monetary policy, central bank independence, central banker conservatism, monetary policy committees, political economics, behavioural economics |
| JEL: | E50 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp20153&r=all |
| By: | André, Marine-Charlotte; Traficante, Guido |
| Abstract: | We examine forward guidance in a small open economy New Keynesian model. In a setup where forward guidance duration is known with certainty, we show that the elasticity of in ation with respect to the real exchange rate is a key variable in attenuating the forward guidance puzzle. Then we consider a credible forward guidance regime which is adopted stochastically, in normal times or under a liquidity trap. Compared to closed economy, forward guidance turns out to be more expansionary in open economy and the real exchange rate is a key variable driving this result. In particular, the response of output and inflation is amplifi�ed when aggregate supply is negatively related to the real exchange rate. |
| Keywords: | Monetary policy, small open economy, forward guidance. |
| JEL: | E31 E52 |
| Date: | 2020–12–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:104600&r=all |
| By: | Maximilian Böck (Department of Economics, Vienna University of Economics and Business); Martin Feldkircher (Vienna School of International Studies) |
| Abstract: | This article investigates how market participants adjust their expectations of interest rates at different maturities in response to a monetary policy and a central bank information shock for the US economy. The results show that market participants adjust their expectations faster to changes in interest rates compared to new releases of information by the central bank. This finding could imply that central bank information shocks are more opaque whereas a change in interest rates provides a stronger signal to the markets. Moreover, financial market agents respond with an initial underreaction to both shocks, potentially resembling inattention or overconfidence. Last, we find that the adjustment of expectations for yields with higher maturities takes considerably longer than for short-term yields. This finding is especially important for central banks since in the current low-interest rate environment monetary policy actions mainly consist of policies aimed at the long-end of the yield curve. |
| Keywords: | monetary policy, expectation formation, belief bias |
| JEL: | C32 D83 D84 E52 E70 G40 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wiwwuw:wuwp306&r=all |
| By: | Ling Jin (Inha University) |
| Abstract: | This paper examines how monetary policy affected the borrowing cost of listed firms in Korea before and after the Global Financial Crisis (GFC). I find that the effects of credit channel of monetary transmission are different by the assets size and debt-equity ratio levels of firms. Also, I find that the relationship between monetary policy and the borrowing spread of firms has changed before and after the GFC. The relationship is only significantly positive after the GFC. A statistically significant positive value implies that credit channel works in Korea. As for firm asset size partition, the relationship is significantly positive only after the GFC. As for firm debt-to-equity ratio partition, the coefficient of monetary policy for the low debt-to-equity ratio firms is significant of before and after the GFC. In contrast, the coefficient for the high debt-to-equity ratio firms is significant only before the GFC. Also, the U.S monetary policy has a significant impact on domestic firm’s borrowing spreads after the GFC. These relationships work through international banking channels. |
| Keywords: | Monetary policy Transmission, Credit channel, Borrowing spread, Firm-level data, International banking |
| JEL: | E44 E51 E52 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:inh:wpaper:2021-1&r=all |
| By: | Reinsberg, Bernhard; Kern, Andreas; Rau-Goehring, Matthias |
| Abstract: | International organizations (IOs) often drive policy change in member countries. Given IOs’ limited political leverage over a member country, previous research argues that IOs rely on a combination of hard pressures (i.e., conditionality) and soft pressures (i.e., socialization) to attain their political goals. Expanding this literature, we hypothesize that IOs can enhance their political leverage through loan conditions aimed at politically empowering ‘sympathetic interlocutors’. Studying this mechanism in the context of the International Monetary Fund (IMF), we argue that through prescribing structural loan conditions on central banks (CBI conditionality), the IMF empowers monetary authorities that can serve as a veto player to the government. Relying on a dataset including up to 124 countries between 1980 and 2012, we find that the IMF’s CBI conditionality correlates to countries with fewer checks and balances, a less independent central bank, and where the government relies more heavily on the monetization of public debt. JEL Classification: E52, E58, F5 |
| Keywords: | central bank independence, conditionality, International Monetary Fund, international political economy |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212518&r=all |
| By: | Andrew Lee Smith; Victor J. Valcarcel |
| Abstract: | For the second time in the brief 12-year period between 2008 and 2020, central banks have once again turned to asset purchase programs to combat a global economic downturn. While balance sheet expansions have become familiar, balance sheet normalization has proven more elusive. Nevertheless, an understanding of the consequences of unwinding asset purchases is necessary for well-informed decisions over the deployment of these unconventional policy tools. This paper provides a first analysis of the financial market effects of balance sheet normalization based on the U.S. experience between 2017 and 2019. We find evidence that balance sheet normalization tightens financial conditions. Importantly, we show these effects cannot be merely characterized as quantitative easing in reverse. In particular, we find that balance sheet normalization was associated with larger liquidity effects than were evident during various phases of balance sheet expansion. |
| Keywords: | Monetary Policy; Balance Sheet; Liquidity Effect; Structural VAR; Financial Conditions |
| JEL: | E3 E4 E5 |
| Date: | 2021–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:89535&r=all |
| By: | Lemoine Matthieu; Lindé Jesper |
| Abstract: | Recent influential work argue that a gradual increase in sales tax stimulates economic activity in a liquidity trap by boosting inflation expectations. Higher public infrastructure investment should also be more expansive in a liquidity trap than in normal times by raising the potential interest rate and increasing aggregate demand. We analyze the relative merits of these policies in New Keynesian models with and without endogenous private capital formation and heterogeneity when monetary policy does not respond by raising policy rates. Our key finding is that the effectiveness of sales tax hikes differs notably across various model specifications, whereas the benefits of higher public infrastructure investment are more robust in alternative model environments. We therefore conclude that fiscal policy should consider public investment opportunities and not merely rely on tax policies to stimulate growth during the COVID-19 crisis. |
| Keywords: | Monetary Policy, Sales Tax, Public Investment, Liquidity Trap, Zero Lower Bound Constraint, DSGE Morel |
| JEL: | E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:799&r=all |
| By: | Annette Vissing-Jorgensen |
| Abstract: | Starting from a set of facts on the timing of stock returns relative to Federal Reserve decision-making, I argue that informal communication – including unattributed communication -- plays a central role in monetary policy communication. This contrasts with the standard communications framework in which communication should be public and on-the-record because it serves to ensure accountability and policy effectiveness. I lay out possible benefits of using unattributed communication as an institution, but these should be weighed against substantial costs: It runs counter to accountability to use unattributed communication, causes frustration among those trying to understand central bank intensions, and enables use of such communication by individual policymakers. Unattributed communication driven by policymaker disagreements is unambiguously welfare reducing, because it reduces policy flexibility and harms the central bank’s credibility and decision-making process. Central banks may benefit from resisting unattributed communication via expensive newsletters and increasing consensus-building efforts to reduce disagreement-driven unattributed communication. |
| JEL: | E5 G12 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28276&r=all |
| By: | Hilde Christiane Bjørnland; Ragna Alstadheim; Junior Maih |
| Abstract: | We analyse whether central banks in small open commodity exporting and importing countries respond to exchange rate movements, taking into consideration that there may be structural changes in parameters and volatility throughout the sample. Using a Markov Switching Rational Expectations framework, we estimate the model for Australia, Canada, New Zealand, Norway, Sweden and the UK. We find that the size of policy responses, and the volatility of structural shocks, have not stayed constant during the sample. Furthermore, monetary policy has responded strongly to the exchange rate in many commodity exporters, most notably in Norway. This has had a stabilizing effect on the exchange rate. In particular, although the terms of trade are highly volatile among commodity exporters, the exchange rate has about the same volatility across all importers and exporters in the recent period. |
| Keywords: | Monetary policy, exchange rates, commodity exporters, markov switching |
| URL: | http://d.repec.org/n?u=RePEc:bny:wpaper:0095&r=all |
| By: | Ling Jin (Inha University) |
| Abstract: | This paper studies whether the degree of interest rate adjustability can affect the heterogeneous effects of monetary policy. I use a dynamic panel model based on the GMM method with a panel of 16 countries, which leads to interesting findings. Overall, monetary policy easing decreased the household sector debt service ratio (DSR). Especially, monetary policy easing decreased the DSR in countries that mainly use ARMs (adjustable-rate mortgages). Conversely, the DSR increased in countries that mostly rely on FRMs (fixed-rate mortgages). Therefore, I find that monetary easing has the policy effect of decreasing household debt servicing burdens only in countries that mainly use ARMs. I also found that the DSR is increased during monetary policy easing in Korea, even though Korea is classified as ARM-dominated country. These results imply the inexistence of a household debt service channel of monetary easing in Korea. |
| Keywords: | Monetary policy Transmission, Household debt, Adjustable-rate |
| JEL: | E44 E51 E52 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:inh:wpaper:2021-2&r=all |
| By: | Raouf Boucekkine (Aix-Marseille Univ, CNRS, AMSE, Marseille, France.); Mohammed Laksaci (Ecole Supérieure de Banque, Alger, Algeria); Mohamed Touati-Tliba (Ecole Supérieure de Commerce d’Alger, Algeria) |
| Abstract: | We estimate the demand for money for monetary aggregates M1 and M2, and cash in Algeria over the period 1979-2019, and study its long-run stability. We show that the transaction motive is significant for all three aggregates, especially for the demand for cash, reflecting the weight of informal economy “practices”. The elasticity of the scale variable is very close to unity for M2 and M1, and even equal to unity for cash demand (1.006). The elasticity of inflation is also significant for all three aggregates, although its level is higher in the case of cash demand (-6.474). Despite the persistence of certain financial repression mechanisms, interest rate elasticity is significant for all three aggregates, but higher for M1 and cash. The same observation is made for elasticity of the exchange rate, reflecting the effect of monetary substitution, especially for M1 and cash. Finally, our study concludes that the demand for money in terms of M1 remains stable, the same observation being confirmed for the M2 aggregate. However, the demand for fiat currency proves not to be stable. The consequences for the optimal design of monetary policy in Algeria are clearly stated. |
| Keywords: | monetary policy, money demand, long-run stability, resource-rich countries, Algeria, co-integration |
| JEL: | E41 E42 E52 C13 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:aim:wpaimx:2104&r=all |
| By: | William Roberds; Eugene White |
| Abstract: | During late 1920, the president (then called "governor") and board of directors of the Federal Reserve Bank of Atlanta were confronted with an unexpected, devastating collapse in the price of a commodity whose global production was concentrated in their district—cotton. Their judgment was that the fall in cotton prices was temporary and that its effects could be lessened with generous credit policies that did not conflict with the Federal Reserve Act. Other officials within the Federal Reserve System did not agree with this judgment, however, leading to a contentious policy debate and an eventual rollback of the Bank's policy accommodation. |
| Keywords: | Federal Reserve; emergency lending; 13(3) |
| JEL: | E58 N12 |
| Date: | 2020–12–18 |
| URL: | http://d.repec.org/n?u=RePEc:fip:a00001:89439&r=all |
| By: | Giancarlo Corsetti (Cambridge University and CEPR); Keith Kuester (University of Bonn and CEPR); Gernot J. Müller (University of Tübingen and CEPR); Sebastian Schmidt (European Central Bank and CEPR) |
| Abstract: | The notion that flexible exchange rates insulate a country from foreign shocks is well grounded in theory, from the classics (Meade, 1951; Friedman 1953), to the more recent open economy literature (Obstfeld and Rogo, 2000). We confront it with new evidence from Europe. Specifically, we study how shocks that originate in the euro area spill over to its neighboring countries. We exploit the variation of the exchange rate regime across time and countries to assess whether the regime alters the spillovers: it does not-flexible exchange rates fail to provide insulation against euro area shocks. This result is robust across a number of specifications and holds up once we control for global financial conditions. We show that the workhorse open-economy model can account for the lack of insulation under a float, assuming that central banks respond to headline consumer price inflation. However, it remains puzzling that policy makers are ready to forego stabilization of economic activity to the extent we found in the data. |
| Keywords: | External shock, International spillovers, Exchange rate, Insulation, Monetary Policy, Dominant currency pricing, Effective lower bound |
| JEL: | F41 F42 E31 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:060&r=all |
| By: | Cosimo Petracchi |
| Abstract: | One of the most compelling pieces of evidence for monetary non-neutrality is the Mussa puzzle, in which the break in the monetary regime when the Bretton Woods System broke down increased the volatility of not only the nominal exchange rate but the real exchange rate. Using data covering thirty-one European countries from 1954 to 2019, I find that the Mussa puzzle is generalizable: any break in a monetary regime that changes the volatility of the nominal exchange rate also changes the volatility of the real exchange rate. This provides further evidence of monetary non-neutrality. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bro:econwp:2021-001&r=all |
| By: | Lastauskas, Povilas; Nguyen, Anh Dinh Minh |
| Abstract: | We build a new empirical model to estimate the global impact of an increase in the volatility of US monetary policy shocks. Specifically, we admit time-varying variances of local structural shocks from a stochastic volatility specification. By allowing for rich dynamic interaction between the endogenous variables and time-varying volatility in the global setting, we find that US interest rate uncertainty not only drives local output and inflation volatility, but also causes declines in output, inflation, and the interest rate. Moreover, we document strong global impacts, making the world move in a very synchronous way. Crucially, spillback effects are found to be significant even for the US economy. JEL Classification: C32, C54, E52, E58, F44 |
| Keywords: | global economy, uncertainty, US monetary policy, volatility shocks |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212513&r=all |
| By: | Stefan Avdjiev; José María Serena Garralda |
| Abstract: | We investigate the links among US monetary policy, bank capital, and risk taking in international bank lending. Using syndicated loan data, we find that low US interest rates spur the origination of risky dollar-denominated international loans through two distinct mechanisms. First, consistent with the existence of a regulatory capital channel, banks with higher levels of regulatory capital originate riskier loans when interest rates decline. Second, banks with low levels of market capital have a higher propensity to extend riskier loans in response to falling interest rates. This finding implies the existence of a market capital channel, which operates in the opposite direction to the regulatory capital channel. |
| Keywords: | interest rates, bank capital, risk taking, international leveraged loans |
| JEL: | G21 G32 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:912&r=all |
| By: | Michael Peneder |
| Abstract: | From Aristotle to Ricardo and Menger, economists have emphasised the function of money as a medium of exchange together with the intrinsic qualities that increase its saleability and credibility as a most liquid store of value. But the social institution of money co-evolves with technology. It is significant that the advent of digital cryptocurrencies was initiated by computer scientists and has taken economists completely by surprise. As a consequence, it also forces our profession to rethink the basic phenomenology of money. In accordance with the views of Wieser and Schumpeter, digitization brings to the fore its immaterial function as a standard of value and social technology of account, which increasingly absorbs that of a medium of exchange. The potential impact on economic policy is huge. The variety of different crypto coins has proven the technical feasibility of competing private currencies as proposed by Hayek. In the long term, however, there is reason to doubt the persistence of intense competition. One must fear that major digital platforms will extend their current dominance in multisided virtual market places to include digital payments and money. Central banks are increasingly anxious to preserve public sovereignty over the common unit of account and consider issuing their own digital fiat money. After the current era of intense creative experimentation, the potentially new spontaneous order of private crypto-currencies is likely to be supplanted by central bank digital currencies (CBDCs), the design of which will depend on deliberate public choices and policies. |
| Keywords: | Digitization, evolution of money, currency competition, general ledger, crypto coins, central bank digital currency (CBDC), Austrian economics |
| Date: | 2021–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2021:i:620&r=all |
| By: | Michael D. Bordo; Mickey D. Levy |
| Abstract: | In this paper we survey the historical record for over two centuries on the connection between expansionary fiscal policy and inflation. As a backdrop, we briefly lay out several theoretical approaches to the effects of fiscal deficits on inflation: the earlier Keynesian and monetarist approaches; and modern approaches incorporating expectations and forward looking behavior: unpleasant monetarist arithmetic and the fiscal theory of the price level. We find that the relationship between fiscal deficits and inflation generally holds in wartime when fiscally stressed governments resorted to the inflation tax. There were two peacetime episodes in the early twentieth century when bond financed fiscal deficits that were unbacked by future taxes seem to have greatly contributed to inflation: France in the 1920s and the recovery from the Great Recession in the 1930s in the U.S. In the post-World War II era a detailed examination of the Great Inflation in the 1960s and 1970s in the U.S. and the U.K. suggests that fiscal influences on monetary policy was a key factor. Finally we contrast the experience of the Great Financial Crisis of 2007-2008, when both expansionary fiscal and monetary policy did not lead to rising inflation, with the recent pandemic, which may involve the risks of fiscal dominance and future inflation. |
| JEL: | E3 E62 N4 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28195&r=all |
| By: | Chris D'Souza; Jane Voll |
| Abstract: | Many central banks conduct economic field research involving in-depth interviews with external parties. But very little is known about how this information is used and its importance in the formation of monetary policy. We address this gap in the literature through a thematic analysis of open-ended interviews with senior central bank economic and policy staff who work closely with policy decision-makers. We find that these central bankers consider information from field research programs not just useful but also an essential input for monetary policy making. They use this information in conjunction with quantitative tools primarily to inform their near-term forecasts. The information is considered most valuable at potential turning points in the economy when uncertainty about the pace of economic growth is heightened (in the advent of large shocks to the economy) and when timely official data are not available or are viewed as unreliable. Senior staff also place a high value on maintaining a reliable and credible sample of representative economic agents that can be accessed on an ongoing basis and very quickly when required. |
| Keywords: | Business fluctuations and cycles; Monetary policy; Monetary policy and uncertainty |
| JEL: | C83 E52 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:21-1&r=all |
| By: | Xing Guo; Pablo Ottonello; Diego J. Perez |
| Abstract: | We study how monetary policy affects the asymmetric effects of globalization. To this end, we build an open-economy heterogeneous-agent New Keynesian model (HANK), in which households differ in their income, wealth, and real and financial integration with international markets. We use the model to reassess classic questions in international macroeconomics, but from a distributional perspective: What are the international spillovers of policies and shocks, how do alternative exchange-rate regimes compare, and what are the implications for monetary policy of the international price system. Our results indicate the presence of a trade-off between aggregate stabilization and inequality in consumption responses to external shocks. The asymmetric effects of globalization can be smaller for economies with higher international integration. |
| JEL: | E21 E52 F3 F32 F41 F6 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:28213&r=all |
| By: | Tatjana Dahlhaus; Julia Schaumburg; Tatevik Sekhposyan |
| Abstract: | We introduce a flexible, time-varying network model to trace the propagation of interest rate surprises across different maturities. First, we develop a novel econometric framework that allows for unknown, potentially asymmetric contemporaneous spillovers across panel units and establish the finite sample properties of the model via simulations. Second, we employ this innovative framework to jointly model the dynamics of interest rate surprises and to assess how various monetary policy actions—for example, short-term, long-term interest rate targeting and forward guidance—propagate across the yield curve. We find that the network of interest rate surprises is indeed asymmetric and defined by spillovers between adjacent maturities. Spillover intensity is high on average but shows strong time variation. Forward guidance is an important driver of the spillover intensity. Pass-through from short-term interest rate surprises to longer maturities is muted, yet there are stronger spillovers associated with surprises at medium- and long-term maturities. We illustrate how our proposed framework helps our understanding of the ways various dimensions of monetary policy propagate through the yield curve and interact with each other. |
| Keywords: | Econometric and statistical methods; Interest rates; Monetary policy implementation |
| JEL: | C53 E52 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-4&r=all |
| By: | Jeannine Bailliu; Xinfen Han; Barbara Sadaba; Mark Kruger |
| Abstract: | Given China's complex monetary policy framework, the People's Bank of China's (PBOC) monetary policy rule is difficult to infer from its observed behaviour. In this paper, we adopt a novel approach, using text analytics to estimate and interpret the unknown component in the PBOC's reaction function. We extract the unknown component in a McCallum-type monetary policy rule for China through a state-space model framework using a set of summary topics extracted from official PBOC documents. Then, using a set of sectional topics extracted from the same set of PBOC documents, we provide this component with its rightful interpretation. Our results show that this unknown component is related to the Chinese government's agenda of supply-side structural reforms, suggesting that monetary policy is used as a tool to achieve structural reform objectives. Structural vector autoregression (SVAR) results confirm these findings by providing evidence of the importance of the government's supply-side reform objectives for the conduct of monetary policy. |
| Keywords: | Econometric and statistical methods; International topics; Monetary policy communications; Monetary policy framework |
| JEL: | C63 E58 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-3&r=all |
| By: | Tanai Khiaonarong; Terry Goh |
| Abstract: | Financial technology (Fintech) has prompted authorities to consider their potential financial stability benefits, risks, and effective regulation. Recent developments suggest that regulatory approaches and their legal foundations need to augment entity-based regulation with increasing focus on activities and risks as market structure changes. This paper draws on recent international experiences in modernizing legal and regulatory frameworks for payment services. An analytical framework based on a four-step process is proposed—(i) identifying payment activities; (ii) licensing entities and designating systems; (iii) analyzing and managing risks, and (iv) promoting legal certainty. As payment activities evolve and potential systemic risks heighten, adherence to international standards and additional regulatory requirements should be warranted. |
| Keywords: | Payment systems;Digital currencies;Mobile banking;Legal support in revenue administration;Virtual currencies;WP,payment transaction,oversight framework,payment activity,payment infrastructure,payment scheme |
| Date: | 2020–05–29 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2020/075&r=all |
| By: | Franz Hamann; Cesar Anzola; Oscar Avila-Montealegre; Juan Carlos Castro-Fernandez; Anderson Grajales-Olarte; Alexander Guarín; Juan C Mendez-Vizcaino; Juan J. Ospina-Tejeiro; Mario A. Ramos-Veloza |
| Abstract: | We develop a small open economy model with nominal rigidities and fragmented labor markets to study the response of the monetary policy to a migration shock. Migrants are characterized by their productivity levels, their restrictions to accumulate capital, as well as by the fl exibility of their labor income. Our results show that the monetary policy response depends on the characteristics of migrants and the local labor market. An infl ow of low(high)-productivity workers reduces(increases) marginal costs, lowers(raises) infl ation expectations and pushes the Central Bank to reduce(increase) the interest rate. The model is calibrated to the Colombian economy and used to analyze a migratory in flow of financially constraint workers from Venezuela into a sector with flexible and low wages. **** RESUMEN: En este artículo analizamos la respuesta de política monetaria ante un choque migratorio, mediante el desarrollo de modelo de economía pequeña y abierta con mercados de trabajo fragmentados. Los migrantes se caracterizan por sus bajos niveles de productividad, restricciones de acumulación de capital y la mayor flexibilidad de su ingreso laboral. Los resultados evidencian que la respuesta de política monetaria depende de las características de los migrantes y del mercado laboral. Una entrada de trabajadores de baja(alta) productividad reduce(aumenta) los costos marginales, disminuye(incrementa) las expectativas de in flación y lleva al Banco Central a reducir(aumentar) la tasa de interés. El modelo se calibra para la economía colombiana y se usa para analizar un in flujo migratorio de trabajadores venezolanos en un sector de salarios bajos y flexibles. |
| Keywords: | Neoclassical Model, Wage Differentials, Informal Labor Markets, Migration, Monetary Policymodelo, neoclásico, diferenciales salariales, mercados informales de trabajo, migración, política monetaria |
| JEL: | E13 J31 J46 J61 E50 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdr:borrec:1153&r=all |
| By: | Goetz, Martin; Laeven, Luc; Levine, Ross |
| Abstract: | We evaluate the role of insider ownership in shaping banks’ equity issuances in response to the global financial crisis. We construct a unique dataset on the ownership structure of U.S. banks and their equity issuances and discover that greater insider ownership leads to less equity issuances. Several tests are consistent with the view that bank insiders are reluctant to reduce their private benefits of control by diluting their ownership through equity issuances. Given the connection between bank equity and lending, the results stress that ownership structure can shape the resilience of banks—and hence the entire economy—to aggregate shocks. JEL Classification: G32, G21, G28 |
| Keywords: | banking, equity issuances, financial crisis, ownership structure, regulation |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212511&r=all |
| By: | Pierre Durand; Gaëtan Le Quang |
| Abstract: | Prudential regulation is supposed to strengthen financial stability and banks' resilience to new economic shocks. We tackle this issue by evaluating the impact of leverage, capital, and liquidity ratios on banks default probability. To this aim, we use logistic regression, random forest classification, and artificial neural networks applied on the United-States and European samples over the 2000-2018 period. Our results are based on 4707 banks in the US and 3529 banks in Europe, among which 454 and 205 defaults respectively. We show that, in the US sample, capital and equity ratios have strong negative impact on default probability. Liquidity ratio has a positive effect which can be justified by the low returns associated with liquid assets. Overall, our investigation suggests that fewer prudential rules and higher leverage ratio should reinforce the banking system's resilience. Because of the lack of official failed banks list in Europe, our findings on this sample are more delicate to interpret. |
| Keywords: | Banking regulation ; Capital requirements ; Basel III ; Logistic ; Statistical learning classification ; Bankruptcy prediction models. |
| JEL: | C44 G21 G28 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-2&r=all |
| By: | Hubert Gabrisch (The Vienna Institute for International Economic Studies, wiiw) |
| Abstract: | This study attempts to identify uncertainty in the long-term rate of interest based on the controversial interest rate theories of Keynes and Kalecki. While Keynes stated that the future of the rate of interest is uncertain because it is numerically incalculable, Kalecki was convinced that it could be predicted. The theories are empirically tested using a reduced-form GARCH-in-mean model assigned to six globally leading financial markets. The obtained results support Keynes’s theory – the long-term rate of interest is a nonergodic financial phenomenon. Analyses of the relation between the interest rate and macroeconomic variables without interest uncertainty are thus seriously incomplete. |
| Keywords: | uncertainty, interest rate, Keynes, Kalecki, GARCH |
| JEL: | B26 C58 E43 E47 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:wii:wpaper:191&r=all |
| By: | David Andolfatto; Ed Nosal |
| Abstract: | Short-term debt is commonly used to fund illiquid assets. A conventional view asserts that such arrangements are run-prone in part because redemptions must be processed on a first-come, first-served basis. This sequential service protocol, however, appears absent in the wholesale banking sector—and yet, shadow banks appear vulnerable to runs. We explain how banking arrangements that fund fixed-cost operations using short-term debt can be run-prone even in the absence of sequential service. Interventions designed to eliminate run risk may or may not improve depositor welfare. We describe how optimal policies vary under different conditions and compare these to recent policy interventions by the Securities and Exchange Commission and the Federal Reserve. We conclude that the conventional view concerning the societal benefits of liquidity transformation and its recommendations for prudential policy extend far beyond their application to depository institutions. |
| Keywords: | shadow banks; bank runs; short-term debt |
| JEL: | G01 G21 G28 |
| Date: | 2020–08–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:89443&r=all |
| By: | Niko Hauzenberger; Florian Huber; Karin Klieber |
| Abstract: | In this paper, we assess whether using non-linear dimension reduction techniques pays off for forecasting inflation in real-time. Several recent methods from the machine learning literature are adopted to map a large dimensional dataset into a lower dimensional set of latent factors. We model the relationship between inflation and these latent factors using state-of-the-art time-varying parameter (TVP) regressions with shrinkage priors. Using monthly real-time data for the US, our results suggest that adding such non-linearities yields forecasts that are on average highly competitive to ones obtained from methods using linear dimension reduction techniques. Zooming into model performance over time moreover reveals that controlling for non-linear relations in the data is of particular importance during recessionary episodes of the business cycle. |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2012.08155&r=all |