nep-cba New Economics Papers
on Central Banking
Issue of 2021‒03‒01
thirty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Central Bank Independence and challenges during the global pandemic: balancing monetary and fiscal policy objectives By Ojo, Marianne; Roedl, Marianne
  2. Revisiting the New Keynesian policy paradoxes under QE By Bonciani, Dario; Oh, Joonseok
  3. "Low for Long" and Risk-Taking By Tobias Adrian
  4. Should the ECB adjust its strategy in the face of a lower r*? By Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
  5. Mortgage regulation and financial vulnerability at the household level By Knut Are Aastveit; Ragnar Enger Juelsrud; Ella Getz Wold
  6. The Interdependence of Fiscal and Monetary Policy in Uruguay By Elizabeth Bucacos
  7. Inflation Gap Persistence, Indeterminacy, and Monetary Policy By Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
  8. The Interaction Between Domestic Monetary Policy and Macroprudential Policy in Israel By Jonathan Benchimol; Gamrasni Inon; Kahn Michael; Ribon Sigal; Saadon Yossi; Ben-ZeâEv Noam; Segal Asaf; Shizgal Yitzchak
  9. An indicator of monetary bias for emerging and dollarized economies The case of Uruguay By Conrado Brum Civelli; Alfredo García-Hiernaux
  10. On the interaction between monetary and macroprudential policies By Martin, Alberto; Mendicino, Caterina; Van der Ghote, Alejandro
  11. Bank Regulatory Reforms and Declining Diversity of Bank Credit Allocation By Takeo Hoshi; Ke Wang
  12. Does the Cost of Private Debt Respond to Monetary Policy? Heteroskedasticity-Based Identification in a Model with Regimes By Massimo Guidolin; Valentina Massagli; Manuela Pedio
  13. The Hockey Stick Phillips Curve and the Zero Lower Bound By Gregor Boehl; Philipp Lieberknecht
  14. How Powerful Is Unannounced, Sterilized Foreign Exchange Intervention? By Naef, Alain; Weber, Jacob
  15. The Sovereign-Bank Nexus: the Role of Debt and Monetary Policy By Hernán D. Seoane
  16. Whatever it takes to save the planet? Central banks and unconventional green policy By Alessandro Ferrari; Valerio Nispi Landi
  17. How the New Fed Municipal Bond Facility Capped Muni-Treasury Yield Spreads in the COVID-19 Recession By Michael D. Bordo; John V. Duca
  18. Monetary policy and the corporate bond market: How important is the Fed information effect? By Michael Smolyansky; Gustavo A. Suarez
  19. Differential Effects of Monetary Policy on Household Consumption: The Case of Israel By Sigal Ribon
  20. Honing in on Housing By Zoë Venter
  21. Central Bank Digital Currencies and payments: A review of domestic and international implications By Lilas Demmou; Quentin Sagot
  22. The Dynamic Effects of the ECB’s Asset Purchases: a Survey-Based Identification By Lhuissier Stéphane; Nguyen Benoît
  23. The Twin Endogeneities Hypothesis: A Theory of Central Bank Evolution By Daniyal Khan
  24. Can debt monetisation be helpful for Chinaís post-Covid recovery? Some empirical evidence By Cao, Ziyi; Ou, Zhirong
  25. Estimating Policy Functions in Payments Systems Using Reinforcement Learning By Pablo S. Castro; Ajit Desai; Han Du; Rodney Garratt; Francisco Rivadeneyra
  26. The Effectiveness of Asset Purchases in Small Open Economies By Eliezer Borenstein; Alex Ilek
  27. Official statistics release and inflation expectations By Serafín Frache; Rodrigo Lluberas
  28. Do Expert Experience and Characteristics Affect Inflation Forecasts? By Jonathan Benchimol; Makram El-Shagi; Yossi Saadon
  29. A Prudential trade-off? Leakages and Interactions with Monetary Policy By Meunier Baptiste; Pedrono Justine
  30. Impact of Green Central Bank Collateral Policy: Evidence from the People’s Bank of China By Macaire, Camille; Naef, Alain
  31. Parallel Digital Currencies and Sticky Prices By Harald Uhlig; Taojun Xie

  1. By: Ojo, Marianne; Roedl, Marianne
    Abstract: As well as highlighting why unconventional and conventional accommodative monetary policies have been propagated as being crucial to achieving dual mandates and goals of leading central bank economies, drawing from lessons and experiences whereby accommodative monetary policies have been instigated as a means of addressing prolonged periods of low inflation, this paper highlights how such experiences can also be used to bolster the proposition that "since monetary policy space is limited, and since many of the challenges faced are beyond mandates of central banks, these should be addressed through structural and fiscal policies. " The concept and notion of central bank independence has been interpreted and applied differently across several jurisdictions over the decades. As the financial environment over the years, with the emergence of more complex trading and financial instruments, the traditional tools of central banking - as well as monetary policy tools and channels of transmission have adapted to cope with corresponding changes, challenges and demands of the financial environment. Why are interest rates at such historically low levels? These constitute some of the questions, amongst several research objectives which will be highlighted under the introductory section, that this paper aims to address.
    Keywords: counter-cyclical instruments; Effective Lower Bound; interest rate; accommodative monetary policies; asset purchase program; quantitative easing; uncertainty; government bonds; negative interest rates; inflation
    JEL: E3 E5 E52 E58 E6 E62 K2
    Date: 2021–02
  2. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: Standard New Keynesian models deliver puzzling results at the effective lower bound of short-term interest rates: greater price flexibility amplifies the fall in output in response to adverse demand shocks; labour tax cuts are contractionary; the multipliers of wasteful government spending are large. These outcomes stem from a failure to characterise monetary policy correctly. Both analytically and numerically, we show that allowing the central bank to respond to inflation with quantitative easing (QE) can resolve all these paradoxes. In quantitative terms, mild adjustments to the central bank’s balance sheet are sufficient to obtain results more in line with conventional wisdom.
    Keywords: Policy paradoxes; unconventional monetary policy; quantitative easing; liquidity trap; effective lower bound
    JEL: E52 E58 E62 E63
    Date: 2021–02–22
  3. By: Tobias Adrian
    Abstract: The COVID-19 pandemic is causing an unprecedented worldwide economic contraction, leading central banks to reduce interest rates to historically low levels and making unconventional monetary policies—including “low for long” interest rates and asset purchases—increasingly common. Arguably, however, the policies implemented are efficient because they encourage increased risk-taking, and they may have, if unintentionally, increase medium- and long-run macro-financial vulnerabilities. This paper argues that the resulting trade-offs need to be carefully accounted for in monetary policy models and outlines how that can be achieved in practice.
    Keywords: Monetary policy;Financial risk;Financial stability;Monetary Policy;Risk-Taking;Financial Stability
    Date: 2020–11–24
  4. By: Philippe Andrade; Jordi Galí; Hervé Le Bihan; Julien Matheron
    Abstract: We address this question using an estimated New Keynesian DSGE model of the Euro Area with trend inflation, imperfect indexation, and a lower bound on the nominal interest rate. In this setup, a decrease in the steady-state real interest rate, r*, increases the probability of hitting the lower bound constraint, which entails signiï¬ cant welfare costs and warrants an adjustment of the monetary policy strategy. Under an unchanged monetary policy rule, an increase in the inflation target of eight tenth the size of the drop in the real natural rate of interest is warranted. Absent an increase in the inflation target, and assuming the effective lower bound prevents the ECB from implementing more aggressive negative interest rate policies, adjusting the monetary strategy requires considering alternative instruments or policy rules, such as committing to make-up for recent, below-target inflation realizations.
    Keywords: inflation target, effective lower bound, monetary policy strategy, euro-area.
    JEL: E31 E52 E58
    Date: 2021–01
  5. By: Knut Are Aastveit; Ragnar Enger Juelsrud; Ella Getz Wold
    Abstract: We evaluate the impact of mortgage regulation on credit volumes, household balance sheets and the reaction to adverse economic shocks. Using a comprehensive dataset of all housing transactions in Norway matched with buyers' balance sheet information from official tax records, we identify causal effects of mortgage loan-to-value (LTV) limits. Our results show that LTV-requirements have substantial effects on credit volumes, especially on the extensive margin. As a result, such requirements contribute to dampening aggregate credit growth. We find that affected households lower their debt uptake and face lower interest expenses, thereby reducing their vulnerability to adverse shocks. However, affected households also deplete liquid assets when purchasing a home, in order to meet the new requirement. This negative effect on liquid savings persists in the years following the house purchase, suggesting that the impact on financial vulnerability at the household level is in fact ambiguous. We illustrate this further by documenting that households affected by the regulation are more likely to sell their home when becoming unemployed compared to non-affected households.
    Keywords: household leverage, financial regulation, macroprudential policy, mortgage markets
    JEL: E21 E58 G21 G28 G51
    Date: 2020–06
  6. By: Elizabeth Bucacos (Banco Central del Uruguay)
    Abstract: The global COVID-19 pandemic has called for heightened levels of policy intervention stressing governmnt accounts and amplifying their impact on the macroeconomy through an already nonexistent fiscal space. Policymakers' choices during this disruption may shape the economy for decades to come. The main objective of this investigation is to evaluate the degree of fiscal dominance in Uruguay in 1999-2019 in order to improve the understanding of economic policy not only for theoretical reasons but for applied needs related to good practices and accountability. Two strategies are followed: one, to quantify the fraction of fiscal expenditures that is financed by monetary liabilities and, the other one, to analyze the effects of fiscal deficit on the price level and inflation because inflationary financing may prevent the central bank from reaching its inflation target. Both situations may subordinate the monetary policy to the fiscal policy signaling fiscal dominance. In addition, through the analysis performed to assess the degree of fiscal dominance, it was possible to detect the main determining factors of the Uruguayan price level (inflation) formation during the last two decades. So far, preliminary results suggest that inflation is not exclusively a monetary phenomenon and point to some inflationary financing with a mild degree of fiscal dominance.
    Keywords: monetary policy, joint analysis of fiscal and monetary policy, Uruguay
    JEL: E52 E63
    Date: 2021
  7. By: Yasuo Hirose; Takushi Kurozumi; Willem Van Zandweghe
    Abstract: Empirical studies have documented that the persistence of the gap between inflation and its trend declined after the Volcker disinflation. Previous research into the source of the decline has offered competing views while sidestepping the possibility of equilibrium indeterminacy. This paper examines the source by estimating a medium-scale DSGE model using a Bayesian method that allows for indeterminacy. The estimated model shows that the Fed's change from a passive to an active policy response to the inflation gap or a decrease in firms' probability of price change can fully account for the decline in inflation gap persistence by ruling out indeterminacy that induces persistent dynamics of the economy.
    Keywords: Inflation gap persistence; Predictability; Equilibrium indeterminacy; Monetary policy; Non-CES aggregator
    JEL: C62 E31 E52
    Date: 2021–02–22
  8. By: Jonathan Benchimol (Bank of Israel); Gamrasni Inon (Bank of Israel); Kahn Michael (Bank of Israel); Ribon Sigal (Bank of Israel); Saadon Yossi (Bank of Israel); Ben-ZeâEv Noam (Bank of Israel); Segal Asaf (Bank of Israel); Shizgal Yitzchak (Bank of Israel)
    Abstract: We examine the impact of domestic macroprudential (MaP) policy measures targeted at the banking sector, alongside the impact of domestic monetary policy on housing, consumer, and business bank credit dynamics, using individual bank panel data for the period 2004â19. We find that domestic MaP measures targeting housing sector credit reduced the growth rate of housing credit and contributed to business credit growth. Other general MaP measures reduced growth of credit to the business sector. Monetary policy was generally found to be effective, with a significant negative impact on bank credit before the Global Financial Crisis (GFC). The interaction between monetary policy and MaP highlights the role of monetary policy after 2008, and the effect of accommodative monetary policy on consumer and business credit fostered by housing MaP measures. We found that the impact of foreign monetary policy on credit growth is negative, as is the impact of domestic monetary policy, suggesting its capacity to function as a leading indicator for domestic monetary policy.
    Keywords: financial stability, policy evaluation, banking sector, credit markets, regulation, global financial crisis
    JEL: E51 E52 E58 G01 G21 G28
    Date: 2021–02
  9. By: Conrado Brum Civelli (Banco Central del Uruguay; Universidad Complutense de Madrid; Universidad de la República); Alfredo García-Hiernaux (Universidad Complutense de Madrid)
    Abstract: The instability of the relationships between interest rates, amount of money, and exchange rate, and the transmission problems between different interest rates hinder the measurement of monetary policy through a single variable. This difficulty is particularly relevant in emerging and dollarized economies. This paper proposes a multivariate indicator of monetary bias for these economies in which the monetary and financial variables are considered according to the impact they have on inflation in each period. We analyze the case of Uruguay and use a Factor Augmented Vector Autoregressive Moving Average model with exogenous variables (FAVARMAX) to estimate these effects. Using the evolution of the indicator proposed, called the Monetary Conditions Index (MCI), we characterize the policy adopted by the Central Bank of Uruguay between 2010-2019, a period of inflation targeting.
    Keywords: monetary policy bias; multivariate Indicator; Inflation; FAVARMAX
    JEL: E58 E52 E31 C32
    Date: 2020
  10. By: Martin, Alberto; Mendicino, Caterina; Van der Ghote, Alejandro
    Abstract: The Global Financial Crisis fostered the design and adoption of macroprudential policies throughout the world. This raises important questions for monetary policy. What, if any, is the relationship between monetary and macroprudential policies? In particular, how does the effectiveness of macroprudential policies (or lack thereof) influence the conduct of monetary policy? This discussion paper builds on the insights of recent theoretical and empirical research to address these questions. JEL Classification: E3, E44, G01, G21
    Keywords: capital requirements, financial frictions, systemic risk
    Date: 2021–02
  11. By: Takeo Hoshi (The University of Tokyo); Ke Wang (Federal Reserve Board)
    Abstract: This paper addresses the concerns on correlated risks across banks that tightening regulation may have induced. Facing higher required capital ratio after the global financial crisis, a bank can reduce the risk-weighted assets by shifting its portfolios from asset classes with high risk-weights to asset classes with low risk-weights. This may reduce the risk exposures of individual banks, but may end up concentrating various banks’ assets to the same set of low risk assets, hence increase the joint default probability and systemic risk of the banking system. Using risk-weighted asset data in Form FFIEC101, reported by the U.S. banks that are allowed to use the advanced approach, we show banks’ average risk weights indeed declined since 2010, partly due to portfolio shifts in credit allocation. We measure the convergence in credit allocation by the cosine similarity of portfolio compositions for pairs of banks. We document that the average cosine similarity across the advanced approach banks rose monotonically and significantly since 2010, which coincides with a period of tightened capital regulations. Finally, we observe that the two prevailing systemic risk measures –SRISK and CoVaR –also show signs of convergence among banks during the same time period. We conclude that the capital regulation may have unintended consequences on systemic risk by encouraging herd behavior across regulated banks.
    Date: 2021–02
  12. By: Massimo Guidolin; Valentina Massagli; Manuela Pedio
    Abstract: We investigate the effects of the Federal Reserve's quantitative easing and maturity extension programs on the yields of US dollar-denominated corporate bonds using a multiple-regime heteroskedasticity-based VAR identification approach. Impulse response functions suggest that a traditional, rate-based expansionary policy may lead to an increase in yields while quantitative easing is linked to a general and persistent decrease in yields, particularly for long-term bonds. The responses generated by the maturity extension program are significant and of larger magnitude. A decomposition shows that the unconventional programs reduce the cost of private debt primarily through a reduction in risk premia that cannot be entirely accounted for by a reduction in corporate default risk. Keywords: unconventional monetary policy; transmission channels; heteroskedasticity; vector autoregressions; identification; corporate bond yields. JEL code: G12, C32, G14
    Date: 2021
  13. By: Gregor Boehl; Philipp Lieberknecht
    Abstract: The recently observed disconnect between in ation and economic activity can be ex- plained by the interplay between the zero lower bound (ZLB) and the costs of external nancing. In normal times, credit spreads and the nominal interest rate balance out; factor costs dominate rms' marginal costs. When nominal rates are constrained, larger spreads can more than o set the e ect of lower factor costs and induce only moderate in ation responses. The Phillips curve is hence at at the ZLB, but features a posi- tive slope in normal times and thus a hockey stick shape. Via this mechanism, forward guidance may induce de ationary e ects.
    Keywords: Phillips Curve, Financial Frictions, Zero Lower Bound, Disin ation, Forward Guidance
    JEL: C62 C63 E31 E32 E44 E52 E58 E63
    Date: 2021–02
  14. By: Naef, Alain; Weber, Jacob
    Abstract: Though most central banks actively intervene on the foreign exchange market, the literature offers mixed evidence on their effectiveness: particularly for unannounced interventions. We use new, declassified data from the archives of the Bank of England and the institutional features of the Bretton Woods era to estimate the effects of intervention on the exchange rate. We find that a purchase of pounds equivalent to 1% of the money supply causes a statistically significant, 4-5 basis point appreciation in the pound.
    Date: 2021–02–23
  15. By: Hernán D. Seoane
    Abstract: This policy report analyzes one aspect of the sovereign-bank nexus: the feedback effects between banks and sovereigns derived from the holdings of sovereign debt in domestic banks. We study how this relationship evolved during the European debt crisis and how it responded to the implementation of ECB monetary policy based on Open Market Operations and Marginal Lending Facilities. We find evidence of carry trade behavior by banks and we have some mild evidence that this channel may have been boosted by the liquidity provision policies.
    Date: 2020
  16. By: Alessandro Ferrari (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: We study the effects of a temporary Green QE, defined as a policy that temporarily tilts the central bank's balance sheet toward green bonds, i.e. bonds issued by firms in non-polluting sectors. To this purpose, we merge a standard DSGE framework with an environmental model, in which detrimental emissions increase the stock of pollution. Imperfect substitutability between green and brown bonds is a necessary condition for the effectiveness of Green QE. While a temporary Green QE is an effective tool in mitigating detrimental emissions, it has limited effects in reducing the stock of pollution, if pollutants, such as CO2, stay in the atmosphere for a long time. The welfare gains of Green QE are positive but small. Welfare gains are larger if the flow of emissions negatively affects the utility of households.
    Keywords: central bank, monetary policy, quantitative easing, climate change
    JEL: E52 E58 Q54
    Date: 2021–02
  17. By: Michael D. Bordo; John V. Duca
    Abstract: For over two centuries, the municipal bond market has been a source of systemic risk, which returned early in the COVID-19 downturn when borrowing from securities markets became costly for many private and public entities, and some found it difficult to borrow at all. Indeed, just before the Fed announced its unprecedented intervention into the municipal (muni) bond market, spreads of muni over Treasury yields rose in line with the unemployment rate and appeared headed to levels not seen since the Great Depression, when real municipal gross investment plunged 35 percent below 1929 levels. To prevent a repeat, the Fed created the Municipal Liquidity Facility (MLF) to purchase newly issued, (near) investment grade state and local government bonds at normal ratings-based interest rate spreads over Treasury bonds plus a fee of 100 basis points, later reduced to 50 basis points. Despite a modest take-up, the MLF has effectively capped muni spreads at near normal levels plus the Fed fee and limited the extent to which interest rate spreads could have amplified the impact of the COVID pandemic. To establish the MLF the Fed needed Treasury indemnification against default losses. There are concerns about whether the creation of the MLF could undermine the efficiency of the bond market if the facility lasts too long and could induce moral hazard among borrowers. How the MLF will be unwound will affect these downside aspects and help answer the question whether the program’s benefits exceed its costs.
    Keywords: state and local governments; municipal finance; central bank policy; credit policy
    JEL: E40 E50 G21
    Date: 2021–01–15
  18. By: Michael Smolyansky; Gustavo A. Suarez
    Abstract: Does expansionary monetary policy drive up prices of risky assets? Or, do investors interpret monetary policy easing as a signal that economic fundamentals are weaker than they previously believed, prompting riskier asset prices to fall? We test these competing hypotheses within the U.S. corporate bond market and find evidence strongly in favor of the second explanation—known as the "Fed information effect". Following an unanticipated monetary policy tightening (easing), returns on corporate bonds with higher credit risk outperform (underperform). We conclude that monetary policy surprises are predominantly interpreted by market participants as signaling information about the state of the economy.
    Keywords: Monetary policy; Corporate bonds; Reaching for yield; Federal Reserve information
    JEL: E40 E52 G12 G14
    Date: 2021–02–16
  19. By: Sigal Ribon (Bank of Israel)
    Abstract: We investigate the distinct effect of monetary policy on householdsâ consumption in Israel, based on information from the Household Expenditure Surveys for 2003 to 2018. Analyzing aggregate distribution indices, a pseudo panel and the granular household data, and using the local projections methodology proposed by Jorda (2005), we find that (unexpected) changes in monetary policy mainly affect the expenditure on durables. The effect is mostly evident in the higher income quantiles, and to a lesser extent in the lower quantiles. We did not find significant evidence for a monetary policy effect on nondurables consumption. The findings support the existence of an intertemporal substitution effect and a negative wealth effect of the interest rate, and to a lesser extent the interest rateâs effect on the exchange rate which would have increased the consumption of (imported) durables due to the appreciated exchange rate following an interest rate increase. The findings do not support a strong indirect effect of monetary policy on labor income, which is expected to influence aggregate consumption, particularly in lower quantiles with higher marginal propensity to consume
    Date: 2020–11
  20. By: Zoë Venter
    Abstract: Using a six variable SVAR model, we study the transmission mechanism of monetary policy to the housing market over the period between 1996:Q1 and 2019:Q4. The SVAR is repeated for two measures of fiscal policy namely, tax revenue and government spending as well as for three measures of the housing market namely, residential prices, the price-to-rent ratio and the price-to-income ratio. Our main results show that monetary policy shocks do not have an impact on residential prices however, when running our model using fiscal policy shocks instead of monetary policy shocks, the results become statistically significant. Further, our results show that the response of housing prices to fiscal policy shocks differs between Portugal and Spain. We conclude that the difference in the housing markets in these two countries can be attributed to the variation in the fiscal policy mandates adopted while the common monetary policy framework implemented by the ECB does not play a role.
    Keywords: E44; E52; R21
    Date: 2021–02
  21. By: Lilas Demmou; Quentin Sagot
    Abstract: Recent technological developments linked to secure messaging and traceability present an opportunity to address certain challenges in international and domestic payment systems. From an international perspective, foreign exchange markets remain costly and relatively less efficient than domestic payment systems. From a domestic perspective, the decline in the relative importance of cash in most economies reflects changes in consumers’ preferences, which questions the future of money and payment infrastructure. Against that background, private initiatives falling outside of current regulation, such as stable coins and other virtual assets, are associated with several risks and opportunities and have fueled the debate on the opportunities for central banks to issue new form of digital public currency. This note reviews those different propositions and examine their implication for the international and domestic payment systems.
    Keywords: CBDC, central banking, digital currency, international markets, payment systems
    JEL: E42 F33 G28
    Date: 2021–02–05
  22. By: Lhuissier Stéphane; Nguyen Benoît
    Abstract: While monetary and prudential policies are generally analysed separately, this paper focuses on how the two interact. Taking an international perspective, we show that monetary policy in a centre economy (Euro Area) spill over its borders through bank lending – therefore inducing volatility in cross-border lending flows. Investigating a sample of 30 advanced and emerging economies, we find evidence that prudential policy in the receiving-country interact with monetary policy so that a tighter prudential stance in the recipient-country mitigates the volatility of banking flows induced by monetary policy abroad. But we also show that a tighter prudential stance – interactions apart – implies a higher growth of cross-border lending. Taken together, these results might suggest a trade-off: while a tighter prudential stance reduces the volatility of cross-border lending flows, it also implies that local borrowers resort more to lending from abroad. Taking advantage of the granularity of our confidential dataset, we finally explore heterogeneities and show that such leakages arise only for financially more open economies and only through the financial sector, with evidence that such leakages are driven by intra-group lending.ion-JEL: O31, L11, L51, J8, L25
    Keywords: Monetary Policy, Asset Purchase Programme, Proxy-SVAR, Eurosystem, ECB, QE
    JEL: E31 E32 E44 E52
    Date: 2021
  23. By: Daniyal Khan (Department of Economics, New School for Social Research)
    Abstract: The paper outlines a theory according to which central banking evolves as the result of an interaction between endogenous money and endogenous institutions. This theory is called the twin endogeneities hypothesis and forms the basis for two models which are developed and used to explain two stylized facts of central bank evolution. These models are examples of operationalization of the hypothesis. The first model, combining endogenous money and hysteresis, explains the first stylized fact, namely that there are two different origin tendencies in the history of central banking. The second model is a heuristic model which combines the swings of the Polanyi pendulum (or the Polanyian double movement) with swings in long run central bank independence to explain the latter. These examples serve to demonstrate how the twin endogeneities hypothesis, a theory in the tradition of institutionalist Post Keynesianism, can be used to develop models which help us unpack and address the evolution of central banking from a theoretical point of view.
    Keywords: Endogeneity, evolution, money, institutions, central banking
    JEL: B52 E02 E5
    Date: 2021–02
  24. By: Cao, Ziyi; Ou, Zhirong (Cardiff Business School)
    Abstract: A measure of the degree of debt monetisation is constructed for its impact on the business cycle to be studied in a standard VAR model. Debt monetisation is hardly expansionary, as it raises public demand that crowds out almost as much demand from the private sector. However, it generates ináation, presumably because of ináationary expectations. Nevertheless the impact of debt monetisation on the business cycle dynamics is trivial, due to the low e¢ ciency of the monetary transmission mechanism. Unless policy proposals are for extraordinarily aggressive moves, or they are accompanied by monetary reforms which facilitate monetary transmission, the recent debate on debt monetisation, we argue, possesses more theoretical meaning than practical meaning for Chinaís post-Covid recovery.
    Keywords: Debt monetisation; business cycle; VAR; China
    JEL: E31 E32 E63 H63
    Date: 2021–02
  25. By: Pablo S. Castro; Ajit Desai; Han Du; Rodney Garratt; Francisco Rivadeneyra
    Abstract: This paper uses reinforcement learning (RL) to approximate the policy rules of banks participating in a high-value payments system. The objective of the agents is to learn a policy function for the choice of amount of liquidity provided to the system at the beginning of the day. Individual choices have complex strategic effects precluding a closed form solution of the optimal policy, except in simple cases. We show that in a simplified two-agent setting, agents using reinforcement learning do learn the optimal policy that minimizes the cost of processing their individual payments. We also show that in more complex settings, both agents learn to reduce their liquidity costs. Our results show the applicability of RL to estimate best-response functions in real-world strategic games.
    Keywords: Digital currencies and fintech; Financial institutions; Financial system regulation and policies; Payment clearing and settlement systems
    JEL: A12 C7 D83 E42 E58
    Date: 2021–02
  26. By: Eliezer Borenstein (Bank of Israel); Alex Ilek (Bank of Israel)
    Abstract: We examine the potential effectiveness of asset purchases (AP) in small open economies. To that end we extend the model of Gertler and Karadi (2011) to a small open economy, in which households and firms can borrow and lend in the global. financial market. Our results confirm a previous finding of the literature: In a small open economy, the response of the main variables to AP is weaker than in a closed economy. However, this weaker response does not necessarily imply a weaker benefit of AP: We show that even in a small open economy AP can improve welfare, and that the improvement could potentially be larger than in a closed economy. The reason is that conducting AP allows the economy to restore a more efficient financing structure, in the sense that it reduces intermediation costs paid to foreign lenders.
    Date: 2021–01
  27. By: Serafín Frache (Universidad de Montevideo); Rodrigo Lluberas (Banco Central del Uruguay)
    Abstract: The empirical evidence on the social value of public information is scarce. In this paper, we provide evidence on how firms' inflation expectations react to the publication of public information, i.e. the monthly Consumer Price Index (CPI) in a country with a history of high and volatile inflation. We show that firms that answer the survey after the release of public information are more likely to revise their current year inflation expectations, have lower forecast errors, and lower disagreement about future inflation than firms that answer the survey before the publication of the official CPI monthly statistics. In that sense albeit the existing evidence for low-inflation countries suggests that agents do not react to monetary policy announcements or the publication of public information, we show that might not be the case in medium or high-inflation countries.
    Keywords: national accounts, agricultural sector, methodology, regions, employment, structure
    JEL: D22 D84 E31
    Date: 2020
  28. By: Jonathan Benchimol (Bank of Israel); Makram El-Shagi (Henan University); Yossi Saadon (Bank of Israel)
    Abstract: Each person's characteristics may influence that person's behaviors and their outcomes. We build and use a new database to estimate experts' performance and boldness based on their experience and characteristics. We classify experts providing inflation forecasts based on their education, experience, gender, and environment. We provide alternative interpretations of factors affecting experts' inflation forecasting performance, boldness, and pessimism by linking behavioral economics, the economics of education, and forecasting literature. An expert with previous experience at a central bank appears to have a lower propensity for predicting deflation.
    Keywords: expert forecast, behavioral economics, survival analysis, panel estimation, global financial crisis
    JEL: C53 E37 E70
    Date: 2020–10
  29. By: Meunier Baptiste; Pedrono Justine
    Abstract: While monetary and prudential policies are generally analysed separately, this paper focuses on how the two interact. Taking an international perspective, we show that monetary policy in a centre economy (Euro Area) spill over its borders through bank lending – therefore inducing volatility in cross-border lending flows. Investigating a sample of 30 advanced and emerging economies, we find evidence that prudential policy in the receiving-country interact with monetary policy so that a tighter prudential stance in the recipient-country mitigates the volatility of banking flows induced by monetary policy abroad. But we also show that a tighter prudential stance – interactions apart – implies a higher growth of cross-border lending. Taken together, these results might suggest a trade-off: while a tighter prudential stance reduces the volatility of cross-border lending flows, it also implies that local borrowers resort more to lending from abroad. Taking advantage of the granularity of our confidential dataset, we finally explore heterogeneities and show that such leakages arise only for financially more open economies and only through the financial sector, with evidence that such leakages are driven by intra-group lending.ion-JEL: O31, L11, L51, J8, L25
    Keywords: Monetary Policy, Prudential Policy, Policy Interactions, Spillovers, Prudential Leakages, Internation Banking.
    JEL: E52 F34 F36 F42 G18 G21
    Date: 2021
  30. By: Macaire, Camille; Naef, Alain
    Abstract: In June 2018, the People’s Bank of China (PBoC) decided to include green financial bonds into the pool of assets eligible as collateral for its Medium Term Lending Facility. We measure the impact of the policy on the yield spread between green and non-green bonds, or greenium. Using a difference-in-differences approach to compare pairs of green and non-green bonds issued by the same institutions, we show that the policy increased the greenium by 46 basis points. This experience can be useful to other central banks considering similar polices.
    Date: 2021–02–19
  31. By: Harald Uhlig (University of Chicago - Department of Economics; CEPR; NBER); Taojun Xie (National University of Singapore - Lee Kuan Yew School of Public Policy, Asia Competitiveness Institute)
    Abstract: The recent rise of digital currencies opens the door to their use in parallel alongside official currencies (“dollar†) for pricing and transactions. We construct a simple New Keynesian framework with parallel currencies as pricing units and sticky prices. Relative prices become a state variable. Exchange rate shocks can arise even without other sources of uncertainty. A one-time exchange rate appreciation for a parallel currency leads to persistent redistribution towards the dollar sector and dollar inflation. The share of the non-dollar sector increases when prices in the dollar sector become less sticky and when firms can choose the pricing currency.
    Keywords: Private money, cryptocurrency, digital currency, currency choice, monetary policy
    JEL: E52 E30
    Date: 2020

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