nep-cba New Economics Papers
on Central Banking
Issue of 2021‒02‒15
thirteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy Surprises and Inflation Expectation Dispersion By Bertrand Gruss; Sandra Lizarazo; Francesco Grigoli
  2. Bank Balance Sheets and External Shocks in Asia: The Role of FXI, MPMs and CFMs By Zefeng Chen; Sanaa Nadeem; Shanaka J Peiris
  3. Monetary and Macroprudential Policy with Endogenous Risk By Tobias Adrian; Fernando Duarte; Nellie Liang; Pawel Zabczyk
  4. Investor Information and Bank Instability During the Euro Crisis By Silvia Iorgova; Chase P. Ross
  5. Monetary Policy Under an Exchange Rate Anchor By Mariam El Hamiani Khatat; Mark Buessings-Loercks; Vincent Fleuriet
  6. Short Rate Dynamics: A Fed Funds and SOFR Perspective By Karol Gellert; Erik Schlogl
  7. Structural estimates of the South African sacrifice ratio By Hayelom Yrgaw Gereziher; Naser Yenus Nuru
  8. Microdata for Macro Models: the Distributional Effects of Monetary Policy By Luisa Corrado; Daniela Fantozzi
  9. Profit Taxation and Bank Risk Taking By Michael Kogler
  10. Growth Forecasts and News about Monetary Policy By Karnaukh, Nina
  11. Dynamic Rational Inattention and the Phillips Curve By Hassan Afrouzi; Choongryul Yang
  12. Who did it? A European Detective Story Was it Real, Financial, Monetary and/or Institutional: Tracking Growth in the Euro Area with an Atheoretical Tool By Mariarosaria Comunale; Francesco Paolo Mongelli
  13. Central Bank Reserves during the Bretton Woods Period: New data from France, the UK and Switzerland By Naef, Alain

  1. By: Bertrand Gruss; Sandra Lizarazo; Francesco Grigoli
    Abstract: Anchoring of inflation expectations is of paramount importance for central banks’ ability to deliver stable inflation and minimize price dispersion. Relying on daily interest rates and inflation forecasts from major financial institutions in the United States, we calculate monetary policy surprises of individual analysts as the unexpected changes in the federal funds rate before the meetings of the Federal Reserve Board. We then assess the effect of monetary policy surprises on the dispersion of inflation expectations, a proxy for the extent of anchoring, which is based on the same analysts’ inflation projections submit-ted after the Fed meetings. With an identification strategy that hinges on a tight window around the Fed meetings, we find that monetary policy surprises lead to an increase in the dispersion of inflation expectations up to nine months after the policy meeting. We rationalize these results with a partial equilibrium model that features rational expectations and sticky information. When we allow the degree of information rigidity to depend on the realization of firm-specific shocks, the theoretical results are qualitatively consistent and quantitatively close to the empirical evidence.
    Keywords: Inflation;Economic forecasting;Inflation targeting;Central bank policy rate;Futures;Anchoring,disagreement,dispersion,information rigidity,in?ation expectations,sticky information.,WP,inflation expectation,expectation dispersion,monetary policy surprise,price level,inflation dispersion,inflation expectation formation mechanism
    Date: 2020–11–13
  2. By: Zefeng Chen; Sanaa Nadeem; Shanaka J Peiris
    Abstract: In emerging Asia, banks constitute the dominant source of financing consumption and investment, and bank balance sheets comprise large gross FX assets and liabilities. This paper extends the DSGE model of Gertler and Karadi (2011) to incorporate these key features and estimates a panel vector autoregression on ten Asian economies to understand the role of the banking sector in transmitting spillovers from the global financial cycle to small open economies. It also evaluates the effectiveness of foreign exchange intervention (FXI) and other macroeconomic policies in responding to external financing shocks. External financial shocks affect net external liabilities of banks and the exchange rate, leading to changes in credit supply by banks and investment. For example, a capital outflow shock leads to a deprecation that reduces the net worth and intermediation capacity of banks exposed to foreign currency liabilities. In such cases, the exchange rate acts as shock amplifier and sterilized FXI, often deployed by Asian economies, can help cushion the economy. By contrast, with real shocks, the exchange rate serves as a shock absorber, and any FXI that weakens that function can be costly. We also explore the effectiveness of the monetary policy interest rate, macroprudential policies (MPMs) and capital flow management measures (CFMs).
    Date: 2021–01–15
  3. By: Tobias Adrian; Fernando Duarte; Nellie Liang; Pawel Zabczyk
    Abstract: We extend the New Keynesian (NK) model to include endogenous risk. Lower interest rates not only shift consumption intertemporally but also conditional output risk via their impact on risk-taking, giving rise to a vulnerability channel of monetary policy. The model fits the conditional output gap distribution and can account for medium-term increases in downside risks when financial conditions are loose. The policy prescriptions are very different from those in the standard NK model: monetary policy that focuses purely on inflation and output-gap stabilization can lead to instability. Macroprudential measures can mitigate the intertemporal risk-return tradeoff created by the vulnerability channel.
    Date: 2020–11–13
  4. By: Silvia Iorgova; Chase P. Ross
    Abstract: Outside of financial crises, investors have little incentive to produce private information on banks’ short-term liabilities held as information-insensitive safe assets. The same does not hold true during crises. We measure daily information production using data from credit default swap spreads during the global financial crisis and the subsequent European debt crisis. We study abnormal information production around major events and interventions during these crises and find that, on average, capital injections reduced abnormal information production while early European stress tests increased it. We also link information production to outcomes: high levels of information production predict bank balance sheet contraction and higher government expenditures to support financial institutions. In an addendum, we show information production on nonfinancials dramatically increased relative to financials at the height of the COVID-19 crisis, reflecting the nonfinancial nature of the initial shock.
    Date: 2021–01–08
  5. By: Mariam El Hamiani Khatat; Mark Buessings-Loercks; Vincent Fleuriet
    Abstract: This paper argues that there is scope for monetary policy under an exchange rate anchor, and discusses the related monetary policy design and implementation. It shows that the exchange rate can be used as the main monetary policy instrument while the policy rate can target the exchange rate. An exchange rate anchor is compatible with an inflation objective, provided fiscal dominance is not an issue, monetary conditions are supportive of the peg, and the level of international reserves is adequate. The paper argues that, while an exchange rate anchor is more prone to policy inconsistencies, there is ample scope for strengthening monetary policy design and implementation under soft pegs. In that context, the principles of dichotomy and interest rate parity are critical.
    Keywords: Exchange rates;Exchange rate arrangements;Exchange rate anchor;Central bank policy rate;Banking;WP,exchange rate,interest rate,monetary policy
    Date: 2020–09–04
  6. By: Karol Gellert; Erik Schlogl (Finance Discipline Group, UTS Business School, University of Technology Sydney)
    Abstract: The Secured Overnight Funding Rate (SOFR) is becoming the main Risk–Free Rate benchmark in US dollars, thus interest rate term structure models need to be updated to reflect the key features exhibited by the dynamics of SOFR and the forward rates implied by SOFR futures. Historically, interest rate term structure modelling has been based on rates of substantially longer time to maturity than overnight, but with SOFR the overnight rate now is the primary market observable. This means that the empirical idiosyncrasies of the overnight rate cannot be ignored when constructing interest rate models in a SOFR–based world. <p>As a rate reflecting transactions in the Treasury overnight repurchase market, the dynamics of SOFR are closely linked to the dynamics Effective Federal Funds Rate (EFFR), which is the interest rate most directly impacted by US monetary policy target rate decisions. Therefore, these rates feature jumps at known times (Federal Open Market Committee meeting dates), and market expectations of these jumps are reflected in prices for futures written on these rates. On the other hand, forward rates implied by Fed Funds and SOFR futures continue to evolve diffusively. The model presented in this paper reflects the key empirical features of SOFR dynamics and is calibrated to futures prices. In particular, the model reconciles diffusive forward rate dynamics with piecewise constant paths of the target short rate.
    Keywords: SOFR; EFFR; Fed Funds; interest rate term structure modelling; interest rate futures
    JEL: G13 G18 E43
    Date: 2021–01–01
  7. By: Hayelom Yrgaw Gereziher; Naser Yenus Nuru
    Abstract: This paper estimates the output cost of fighting inflation?the sacrifice ratio?for the South African economy using quarterly data spanning the period 1998Q1-2019Q3. To compute the sacrifice ratio, the structural vector autoregressive model developed by Cecchetti and Rich (2001) based on Cecchetti (1994) is employed. Our findings show us a small sacrifice ratio, which lies within the range 0.00002-0.231 per cent with an average of 0.031 per cent, indicating a low level of output to be sacrificed while fighting inflation.
    Keywords: Monetary policy, inflation targeting, output, sacrifice ratio, South Africa, structural VAR
    Date: 2021
  8. By: Luisa Corrado (DEF and CEIS, Università di Roma "Tor Vergata"); Daniela Fantozzi (National Statistical Institute (Istat))
    Abstract: In this paper we investigate the effect of standard and non-standard monetary policy implemented by the ECB on income inequality in Italy. We use for the first time the survey microdata on Income and Living Conditions (EU-SILC, Istat) in a repeated cross-section experiment to build measures of inequality and the distribution over time for incomes and subgroups of individuals. The identification strategy is based on surprises estimated in the EA-MPD database for the Euro Area. Using a battery of Local Projections, we evaluate the impact of monetary policy by comparing the performance of the impulse response functions of our inequality measures in different policy scenarios (pre and post-QE). The main findings show that an expansionary unconventional monetary policy shock compressed inequality of disposable and labor income more persistently than a conventional monetary shock. The financial channel has an equalizing effect favoring the less wealthy households mainly in the long-run. Overall, our evidence suggests that QE is associated with a decrease in Italian households inequality.
    Keywords: Income Inequality, Monetary Policy, Local Projections, Survey Data, High Frequency Data.
    JEL: C81 D31 E52 E58
    Date: 2020–06–03
  9. By: Michael Kogler
    Abstract: How can tax policy improve financial stability? Recent studies suggest large stability gains from eliminating the debt bias in corporate taxation. It is well known that this reform reduces bank leverage. This paper analyzes a novel, complementary channel: risk taking. We model banks’ portfolio choice under moral hazard and emphasize the ‘incentive function’ of equity. We find that (i) an allowance for corporate equity (ACE) and a lower tax rate discourage risk taking and offer stability and welfare gains, (ii) a revenue-neutral ACE unambiguously improves financial stability, and (iii) capital regulation and deposit insurance influence the risk-taking effects of taxation.
    Keywords: corporate taxation, tax reform, banking, risk taking, financial stability
    JEL: G21 G28 H25
    Date: 2021
  10. By: Karnaukh, Nina (Ohio State U)
    Abstract: I find that 30-minute changes in bond yields around scheduled Federal Open Market Committee (FOMC) announcements are predictable with the pre-FOMC Blue Chip professionals' revisions in GDP growth forecasts. A positive pre-FOMC GDP growth revision predicts a contractionary policy news shock (positive change in bond yields), a negative GDP growth revision predicts an expansionary policy news shock (negative change in bond yields). Failing to account for this predictability biases the estimates of monetary policy effects on the economy. First, the Fed's information effect dissipates as the truly unpredictable policy news shock does not affect professionals' beliefs about the economy. Second, net policy shock has a more negative impact on future actual GDP, than the raw policy shock.
    JEL: E43 E52 G12 G17
    Date: 2020–10
  11. By: Hassan Afrouzi; Choongryul Yang
    Abstract: We develop a fast, tractable, and robust method for solving the transition path of dynamic rational inattention problems in linear-quadratic-Gaussian settings. As an application of our general framework, we develop an attention-driven theory of dynamic pricing in which the Phillips curve slope is endogenous to systematic aspects of monetary policy. In our model, when the monetary authority is more committed to stabilizing nominal variables, rationally inattentive firms pay less attention to changes in their input costs, which leads to a flatter Phillips curve and more anchored inflation expectations. This effect, however, is not symmetric. A more dovish monetary policy flattens the Phillips curve in the short-run but generates a steeper Phillips curve in the long-run. In a calibrated version of our general equilibrium model, we find that our mechanism quantifies a 75% decline in the slope of the Phillips curve in the post-Volcker period, relative to the period before it.
    Keywords: rational inattention, dynamic information acquisition, Phillips curve
    JEL: D83 D84 E03 E58
    Date: 2021
  12. By: Mariarosaria Comunale (Bank of Lithuania & the Australian National University); Francesco Paolo Mongelli (European Central Bank)
    Abstract: During the past thirty years, euro area countries have undergone significant changes and experienced diverse shocks. We aim to investigate which variables have consistently supported growth in this tumultuous period. The paper unfolds in three parts. First, we assemble a set of 35 real, financial, monetary and institutional variables for all euro area countries covering the period between 1990Q1 and 2016Q4. Second, using the Weighted-Average Least Squares (WALS) method, as well as other techniques, we gather clues about which variables to select. Third, we quantify the impact of various determinants of growth in the short and long runs. Our main finding is the positive and robust role of institutional reforms on long-term growth for all countries in the sample. An improvement in competitiveness matters for growth in the overall euro area in the long run as well as a decline in sovereign and systemic stress. The debt over GDP negatively influences growth for the periphery, but only in the short run. Property and equity prices have a significant impact only in the short run, whereas the loans to NFCs positively affect the core euro area. An increase in global GDP also supports growth.
    Keywords: euro area, GDP growth, monetary policy, fiscal policy, institutional integration, financial crisis, systemic stress, and synchronization
    JEL: C23 E40 F33 F43
    Date: 2020–05–11
  13. By: Naef, Alain
    Abstract: This paper presents new daily data on central bank reserves during the Bretton Woods period. It is the first paper to provide daily data for the Bank of France, Bank of England and Swiss National Bank directly from these central bank’s archives. I discuss some of the issue with these data and make them available to other researchers for further analysis.
    Date: 2021–01–19

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