nep-cba New Economics Papers
on Central Banking
Issue of 2021‒02‒22
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Chain linking over December and methodological changes in the HICP: view from a central bank perspective By Dietrich, Andreas; Eiglsperger, Martin; Mehrhoff, Jens; Wieland, Elisabeth
  2. The Joint Impact of Bank Capital and Funding Liquidity on the Monetary Policy's Risk-Taking Channel By Bruno de Menna
  3. Does bank efficiency affect the bank lending channel in China? By Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
  4. The Balance Sheet of the Exchange Stabilization Fund, 1934-2019 By Sheng, Jiemin
  5. Optimal Bailouts in Banking and Sovereign Crises By Sewon Hur; César Sosa-Padilla; Zeynep Yom
  6. Conditions for Effective Macroprudential Policy Interventions By Khan, Fahad; Ramayandi, Arief; Schröder, Marcel
  7. Policy uncertainty, lender of last resort and the real economy By Jasova, Martina; Mendicino, Caterina; Supera, Dominik
  8. Spillover Effects of the European Central Bank's Expanded Asset Purchase Program to Non-eurozone Countries in Central and Eastern Europe By Lorant Kaszab; Mark Antal
  9. The Impact of the Bank of Japan’s Exchange Traded Fund and Corporate Bond Purchases on Firms’ Capital Structure By Linh, Nguyen Thuy
  10. The Fed, housing and household debt over time By Giacomo Rella
  11. Effectiveness of Foreign Exchange Interventions: Evidence from New Zealand By Andrew Besuyen; Tom Coupé; Kuntal K. Das
  12. The Transmission of Monetary Policy via the Banks' Balance Sheet - Does Bank Size Matter? By Tumisang Loate; Nicola Viegi
  13. Lumpy Durable Consumption Demand and the Limited Ammunition of Monetary Policy By ; Alisdair McKay
  14. Banking Supervision and Risk-Adjusted Performance inthe Host Country Environment By Karel Janda; Oleg Kravtsov
  15. The Analytic Theory of a Monetary Shock By Fernando E. Alvarez; Francesco Lippi
  16. Effective Exchange Rate Regimes and Inflation By Philipp Harms; Jakub Knaze
  17. Monetary Policy, Credit Risk, and Profitability: The Influence of Relationship Lending on Cooperative Banks' Performance By Bruno de Menna
  18. A Reconsideration of the Doctrinal Foundations of Monetary-Policy Rules: Fisher versus Chicago By Tavlas, George S.; Assistant, JHET
  19. Uncertainty spill-overs: when policy and financial realms overlap By Emanuele Bacchiocchi; Catalin Dragomirescu-Gaina
  20. Investor monitoring, money-likeness and stability of money market funds By Järvenpää, Maija; Paavola, Aleksi

  1. By: Dietrich, Andreas; Eiglsperger, Martin; Mehrhoff, Jens; Wieland, Elisabeth
    Abstract: Consumer price inflation, as measured by the year-on-year increase in the Harmonised Index of Consumer Prices (HICP), is used by the European Central Bank (ECB) for assessing its monetary policy. The European Statistical System regularly introduces methodological improvements into this chain-linked price index in the linking month (December). If the outcome of such changes is a new series with a very different profile in December – either due to changed seasonality or one-off (sampling) effects – significant statistical distortions may arise when the new index series is chain-linked to the existing series. This paper explains the mechanism behind statistical distortions due to chain linking and provides some recent examples from European price statistics. Several alternative chain-linking practices, as well as recommendations for data users on how to deal with such statistical breaks in the HICP, are presented. JEL Classification: C43, E31
    Keywords: central bank communication, chain linking, Consumer prices, index aggregation methods, seasonality
    Date: 2021–02
  2. By: Bruno de Menna (LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: Despite an extensive literature on the risk–taking channel of monetary policy, the joint impact of bank capital and deposits on the latter remains poorly documented. Yet that prospect is essential for monetary policy taking action under the Basel III framework involving concomitant capital and funding liquidity standards. Using data on euro area from 1999 to 2018 and triple interactions between monetary policy, equity and funding liquidity, we shed light on a "crowding–out of deposits" effect prior to the 2008 GFC which supports the need for simultaneous capital and funding liquidity ratios to mitigate the monetary transmission to bank credit risk. Interestingly, our findings also highlight a missing "crowding–out of deposits" effect amongst poorly efficient banks in the aftermath of the GFC. As a result, a trade-off arises between financial stability and increased funding liquidity for these financial intermediaries, making a special treatment required for inefficient banks operating in a low interest rate environment. These results challenge the implementation of uniform funding liquidity requirements across the euro area.
    Keywords: Credit risk,Monetary policy transmission,Capital buffer,Funding liquidity
    Date: 2021–02–11
  3. By: Fungáčová, Zuzana; Kerola, Eeva; Weill, Laurent
    Abstract: This work examines the impact of bank efficiency on the bank lending channel in China. Using a sample of 175 Chinese banks over the period 2006–2017, we investigate how the reaction of the loan supply to monetary policy actions depends on a bank’s efficiency. While bank efficiency does not exert an impact on the effectiveness of monetary policy transmission overall, it does favor the transmission of monetary policy for banks with low loan-to-deposit ratios. In addition, the expansion of shadow banking activities has been associated with a positive impact of bank efficiency on monetary policy transmission. These results suggest that bank efficiency may influence the bank lending channel in certain cases.
    JEL: E52 G21
    Date: 2021–02–08
  4. By: Sheng, Jiemin (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In this paper, the author explores the balance sheet of the Exchange Stabilization Fund (ESF) over its first 85 years as a lens though which to analyze the fund. An accompanying spreadsheet workbook provides data from the annual balance sheet of the ESF since the fund’s inception in 1934. These data are available in electronic form for the first time, which will be of interest to those wishing to do quantitative analyses of its role in U.S. monetary policy.
    Keywords: Exchange Stabilization Fund (ESF); balance sheet; assets; liabilities; gold; foreign exchange intervention
    JEL: E52 E59 N12
    Date: 2021–02
  5. By: Sewon Hur (Federal Reserve Bank of Dallas); César Sosa-Padilla (University of Notre Dame and NBER); Zeynep Yom (Department of Economics, Villanova School of Business, Villanova University)
    Abstract: We study optimal bailout policies in the presence of banking and sovereign crises. First, we use European data to document that asset guarantees are the most prevalent way in which sovereigns intervene during banking crises. Then, we build a model of sovereign borrowing with limited commitment, where domestic banks hold government debt and also provide credit to the private sector. Shocks to bank capital can trigger banking crises, with government sometimes finding it optimal to extend guarantees over bank assets. This leads to a trade-off: Larger bailouts relax domestic financial frictions and increase output, but also imply increasing government fiscal needs and possible heightened default risk (i.e., they create a 'diabolic loop'). We find that the optimal bailouts exhibit clear properties. Other things equal, the fraction of banking losses that the bailouts would cover is: (i) decreasing in the level of government debt; (ii) increasing in aggregate productivity; and (iii) increasing in the severity of the banking crisis. Even though bailouts mitigate the adverse effects of banking crises, we find that the economy is ex ante better off without bailouts: the 'diabolic loop' they create is too costly.
    Keywords: Bailouts; Sovereign Defaults; Banking Crises; Conditional Transfers; Sovereign-bank diabolic loop
    JEL: E32 E62 F34 F41 G01 G15 H63
    Date: 2021–01
  6. By: Khan, Fahad (Asian Development Bank); Ramayandi, Arief (Asian Development Bank); Schröder, Marcel (Lebanese American University)
    Abstract: This paper aims at identifying effective macroprudential policy (MPP) interventions and analysing the macroeconomic conditions that promote them. We define effective MPP interventions as those that stabilize its underlying target variable, such as credit growth, house price growth, etc. For our analysis, we construct a new database that documents the use of a large number of MPP instruments for 61 advanced and emerging market economies from 2000 to 2016. The new feature of the database is that it maps every recorded MPP intervention in these economies and over this period to stabilize a specific target variable category for banking, health, domestic loans, the exchange rate, foreign capital movements, and house prices. Using this dataset, we introduce a practical way for defining the macroprudential policy effectiveness. We find that MPP interventions are more likely to be effective when several prudential measures are taken together, but at the same time avoid the diminishing returns of repeated MPP tightening. Monetary tightening seems to override the effectiveness of MPP instruments. The output gap, credit cycle, external debt, current account, and global risk appetite also count for the likelihood of MPP successes. The paper provides a guideline for the effective conduct of MPPs.
    Keywords: effectiveness; financial stability; macroprudential policy; probabilistic analysis
    JEL: E32 E58 G15 G28
    Date: 2020–02–25
  7. By: Jasova, Martina; Mendicino, Caterina; Supera, Dominik
    Abstract: We show that a reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks’ exposure to uncertainty and find that the size of the haircut subsidy - the gap between private market and central bank security valuations - plays a key role in the propagation of the shock to lending and the real economy. JEL Classification: E44, E52, E58, G21, G32
    Keywords: bank credit, central bank liquidity, firm-level employment and investment, haircut subsidy, policy uncertainty
    Date: 2021–02
  8. By: Lorant Kaszab (Magyar Nemzeti Bank (Central Bank of Hungary)); Mark Antal (European Central Bank)
    Abstract: For a panel of six Central and Eastern European countries outside the eurozone (Bulgaria, Croatia, Czechia, Hungary, Poland and Romania) we estimate the spillover effects of the European Central Bank's Expanded Asset Purchase Program (APP) on exchange rates, equity prices, government bond yields of various maturities, and CDS spreads. We find that the most pronounced spillovers induced sovereign bond yields to drop by around 1-6 basis points in a two-day time window in response to the Public Sector Purchase Program (PSPP) announcements.
    Keywords: ordinary least squares estimation, panel data, unconventional monetary policy
    JEL: E51 E32 E44 F45 F47
    Date: 2021
  9. By: Linh, Nguyen Thuy
    Abstract: This study examines the effects of the Bank of Japan’s (BOJ’s) exchange traded fund (ETF) and corporate bond (CB) purchases on the capital structure of Japanese listed firms. The results suggest that following the expansion of ETF purchases, treatment firms actively issued more stocks and became less dependent on bond debt and bank loans than control firms, resulting in a lower level of leverage. In contrast, following the introduction of CB purchases, firms whose bonds were eligible for CB purchases issued more corporate bonds, while reducing long-term bank debt by a smaller extent, thus they have a higher leverage ratio than ineligible firms. Moreover, evidence further suggests the existence of an interaction between these two purchasing programs. These results indicate that the BOJ’s ETF and CB purchases have had a considerable impact, implying that the supply of capital plays an important role in determining firms’ capital structure.
    Keywords: Unconventional monetary policy, Risk asset purchases, Difference in differences, Capital structure, Supply-side effects
    JEL: E52 E58 G32
    Date: 2021–01
  10. By: Giacomo Rella
    Abstract: Did the transmission mechanism of monetary policy through housing and household debt change over time? I explore this question using a ten-variable time-varying parameter VAR model with stochastic volatility estimated on US data from 1960 to 2018. The model captures the joint dynamics of aggregate economy, housing sector, policy and household debt. Monetary policy shocks are identified with timing restrictions. I find evidence that the transmission mechanism of monetary policy through housing and household debt changed over time. The response of new housing starts and residential investment to monetary policy shocks has become slower and slightly larger. In contrast, the sensitivity of household debt to monetary policy shocks diminished since the late 1960s, except of the early 2000s when it increased. House prices stand as the most important variable for the transmission of monetary policy through housing in most recent decades. In the last part of the paper, I frame the aggregate evidence in the light of the institutional changes that have been affecting the US housing finance system since the 1970s.
    Keywords: time-varying parameter VAR, monetary policy, housing, household debt
    JEL: E44 E52 E58 G51 N1
    Date: 2021–02
  11. By: Andrew Besuyen; Tom Coupé (University of Canterbury); Kuntal K. Das (University of Canterbury)
    Abstract: This paper examines the effectiveness of explicit and implicit foreign exchange (FX) interventions in New Zealand: one secret spot market intervention and two implicit interventions – a regular Monetary Policy Statement (MPS) and an unexpected oral intervention by the Reserve Bank of New Zealand (RBNZ) governor addressing the New Zealand Dollar (NZD). By applying a synthetic control methodology to a unique dataset of RBNZ interventions, we construct a counterfactual to estimate their effect. The results indicate that the actual intervention and the MPS release were ineffective in moving the NZD. However, the speech depreciated the NZD by 1.12%, although the effect was small and short lived. Our findings suggest that FX interventions, explicit or implicit, are a weak policy tool to affect the exchange rate in New Zealand.
    Keywords: Foreign exchange intervention; Explicit intervention; Implicit intervention; Synthetic control; Effectiveness
    JEL: C31 E58 F31
    Date: 2021–02–01
  12. By: Tumisang Loate (Department of Economics, University of Pretoria); Nicola Viegi (SARB Chair in Monetary Economics, Department of Economics, University of Pretoria)
    Abstract: We study the credit channel of monetary policy in South Africa between 2002 and 2019 using banks' balance sheets. We show that there is a significant heterogeneity within the banking sector in both the loan and deposit sides of the banks' balance sheets. In response to a contractionary monetary policy shock, big banks adjust their loan portfolio by lending to businesses and reducing lending to households whereas for small banks we find the opposite. The increase in corporate lending amid declining inventories is consistent with the hypothesis of ``hedging and safeguarding the capital adequacy ratio" rather than funding business inventories. This paper highlights the importance of heterogeneity in customers, market power and business models in the banking sector, which characterises the socio-demographics dynamics in South Africa.
    Keywords: Credit channel, banks balance sheets, monetary policy
    JEL: E32 E52 G21
    Date: 2021–01
  13. By: ; Alisdair McKay
    Abstract: The prevailing neo-Wicksellian view holds that the central bank's objective is to track the natural rate of interest (r*), which itself is largely exogenous to monetary policy. We challenge this view using a fixed-cost model of durable consumption demand, in which expansionary monetary policy prompts households to accelerate purchases of durable goods. This yields an intertemporal trade-off in aggregate demand as encouraging households to increase durable holdings today leaves fewer households acquiring durables going forward. Interest rates must be kept low to support demand going forward, so accommodative monetary policy today reduces r* in the future. We show that this mechanism is quantitatively important in explaining the persistently low level of real interest rates and r* after the Great Recession.
    Keywords: Monetary policy; Durable goods; Interest rates
    JEL: E21 E43 E52
    Date: 2021–02–16
  14. By: Karel Janda; Oleg Kravtsov
    Abstract: In this paper, we examine the impact of the supervision as a monitoring activity and regulatory scrutiny on the performance and riskiness of the financial institutions in countries of Central, Eastern and South-Eastern Europe, whose banking sectors are characterized by foreign-bank dominated systems. For a dataset of 450 banks from 20 economies of the region, we use statistics from the World Bank-Bank Regulation and Supervisory Survey to construct the measures of the supervision activities, capital regulation stringency and supervisory power. We find that a higher intensity of supervision monitoring activities, especially by the centralized form of supervision, contributes to the decline of the bank's riskiness in case of larger banks while not affecting their economic performance. The regulatory power and stringency indicate a positive effect on the risk-adjusted performance for capital constrained banks, but moderately decrease the economic benefit for larger banks. The findings highlight the potential area of attention for regulators and policymakers and thus, contribute to the designing of effective supervision mechanism in the region.
    Keywords: supervision, financial regulation, RAROC, causal mediation analysis, moderation analysis, Central Eastern and South-Eastern Europe
    JEL: G20 G21 G28
    Date: 2020–11–19
  15. By: Fernando E. Alvarez; Francesco Lippi
    Abstract: We propose an analytical method to analyze the propagation of a once-and-for-all shock in a broad class of sticky price models. The method is based on the eigenvalue- eigenfunction representation of the dynamics of the cross-sectional distribution of firms’ desired adjustments. A key novelty is that, under assumptions that are appropriate for low-inflation economies, we can approximate the whole profile of the impulse response for any moment of interest in response to an aggregate shock (any displacement of the invariant distribution). We present several applications and discuss extensions.
    JEL: E5 E50
    Date: 2021–02
  16. By: Philipp Harms (Johannes Gutenberg University); Jakub Knaze (Johannes Gutenberg University)
    Abstract: This paper introduces a new effective exchange rate regime classification. Traditional classifications define the stability or flexibility of a currency with respect to one (“anchor”) currency, thus implicitly neglecting information on exchange rate relationships against other currencies. Our new measure is computed as a trade-weighted average of bilateral exchange rate regimes, thus taking into account both direct and indirect relationships against all other currencies. We argue that our “effective” approach is superior when it comes to assessing the impact of exchange rate regimes on inflation, because fixing an exchange rate vis-`a-vis one currency does not completely anchor domestic prices in a world with multiple trading partners. Using our measure of effective exchange rate regimes in a standard empirical analysis of inflation determinants, we find that – compared to freely floating regimes – not only hard pegs, but also narrow and wide soft pegs are associated with significantly lower inflation rates. This challenges the established view that soft pegs do not matter – or are even detrimental – for price stability. We find that the effect of fixing the exchange rate goes significantly beyond the “disciplining effect” on money growth, with the inflation reduction being at least as strong as the effect of an official inflation target.
    Keywords: Exchange rate regimes · Effective exchange rates · Inflation
    JEL: E31 E52 F41
    Date: 2021–01–29
  17. By: Bruno de Menna (IEP Toulouse - Sciences Po Toulouse - Institut d'études politiques de Toulouse, LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux - UT1 - Université Toulouse 1 Capitole - UT2J - Université Toulouse - Jean Jaurès - Institut d'Études Politiques [IEP] - Toulouse - ENSFEA - École Nationale Supérieure de Formation de l'Enseignement Agricole de Toulouse-Auzeville)
    Abstract: Financial theory indicates that low interest rates hamper credit risk and profitability, two interrelated components of banks' balance sheets. Using a simultaneous equations framework, we investigate the effects of euro area monetary easing on cooperative banks' performance depending on their commitment to relationship lending. First, we find no evidence of a risk-taking channel of monetary policy for consolidated cooperative banks. Further, the profitability of relationship-based cooperative banks is more severely hit in a low interest rate environment than that of consolidated cooperative banks. This raises issues about the middle-term durability of relationship lending when rates hold "low-for-long". Finally, non-cooperative banks and relationship-based cooperative banks both increase credit risk under accommodating monetary policy. However, we suggest that these similarities do not occur for the same reasons: while non-cooperative banks prioritize profitability through higher credit risk when interest rates fall, relationship-based cooperative banks instead increase their capital buffers to ensure credit access to their customers, which mainly comprise small businesses and high-risk firms.
    Keywords: Monetary policy,Credit risk,Profitability,Cooperative banks,Relationship lending
    Date: 2021–02–11
  18. By: Tavlas, George S.; Assistant, JHET
    Abstract: There has long been a presumption that the price-level-stabilization frameworks of Irving Fisher and Chicagoans Henry Simons and Lloyd Mints were essentially equivalent. I show that there were subtle, but important, differences in the rationales underlying the policies of Fisher and the Chicagoans. Fisher’s framework involved substantial discretion in the setting of the policy instruments; for the Chicagoans the objective of a policy rule was to tie the hands of the authorities in order to reduce discretion and, thus, monetary-policy uncertainty. In contrast to Fisher, the Chicagoans provided assessments of the workings of alternative rules, assessed various criteria -- including simplicity and reduction of political pressures -- in the specification of rules, and concluded that rules would provide superior performance compared with discretion. Each of these characteristics provided a direct link to the rules-based framework of Milton Friedman. Like Friedman’s framework, Simons’s preferred rule targeted a policy instrument.
    Date: 2021–02–12
  19. By: Emanuele Bacchiocchi; Catalin Dragomirescu-Gaina
    Abstract: No matter its source, financial- or policy-related, uncertainty can feed onto itself, inflicting the real economic sector, altering expectations and behaviours, and leading to identification challenges in empirical applications. The strong intertwining between policy and financial realms prevailing in Europe, and in Euro Area in particular, might complicate the problem and create amplification mechanisms difficult to pin down. To reveal the complex transmission of country-specific uncertainty shocks in a multi-country setting, and to properly account for cross-country interdependencies, we employ a global VAR specification for which we adapt an identification approach based on magnitude restrictions. Once we separate policy uncertainty from financial uncertainty shocks, we find evidence of important cross-border uncertainty spill-overs. We also uncover a new amplification mechanism for domestic uncertainty shocks, whose true nature becomes more blurred once they cross the national boundaries and spill over to other countries. With respect to ECB policy reactions, we reveal stronger but less persistent responses to financial uncertainty shocks compared to policy uncertainty shocks. This points to ECB adopting a more (passive or) accommodative stance towards the former, but a more pro-active stance towards the latter shocks, possibly as an attempt to tame policy uncertainty spill-overs and prevent the fragmentation of the Euro Area financial markets.
    Date: 2021–02
  20. By: Järvenpää, Maija; Paavola, Aleksi
    Abstract: An asset is money-like if investors have no incentives to acquire costly private information on the underlying collateral. However, privately provided money-like assets—like prime money market fund (MMF) shares—are prone to runs if investors suddenly start to question the value of the collateral. Therefore, for risky assets, lack of money-likeness is a necessary condition for lack of run incentives. But is it a sufficient one? This paper studies the effect of the U.S. money market fund reform of 2014–2016 on investor monitoring, money-likeness and stability of institutional prime MMFs. Using the number of distinct IP addresses accessing MMFs’ regulatory reports as a proxy for investor monitoring, we find that the reform increased monitoring and thus decreased money-likeness of institutional prime funds. However, we also show that after the reform, institutional prime funds that are more likely to impose the newly introduced redemption restrictions are more monitored, suggesting that investors may monitor in order to avoid being hit by the restrictions. Overall, our results indicate that increased monitoring, or decreased money-likeness, has not made institutional prime MMFs run-free, and it may have actually created a new source of fragility for MMFs.
    JEL: G01 G23 G28
    Date: 2021–02–12

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