nep-cba New Economics Papers
on Central Banking
Issue of 2021‒03‒15
twenty-six papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Quantitative Easing in the US and Financial Cycles in Emerging Markets By Marcin Kolasa; Grzegorz Wesołowski
  2. Financial inclusion, technology and their impacts on monetary and fiscal policy: theory and evidence By Robert Oleschak
  3. COVID-19: Monetary policy in times of crisis By Holton, Sarah; Parle, Conor; Phelan, Gillian; Stuart, Rebecca
  4. A Model of Credit, Money, Interest, and Prices By Saki Bigio; Yuliy Sannikov
  5. Do macroprudential policies affect non-bank financial intermediation? By Stijn Claessens; Giulio Cornelli; Leonardo Gambacorta; Francesco Manaresi; Yasushi Shiina
  6. Exchange Rate Pass-Through, Monetary Policy, and Real Exchange Rates: Iceland and the 2008 Crisis By Sebastian Edwards; Luis Cabezas
  7. Optimal bank leverage and recapitalization in crowded markets By Christoph Bertsch; Mike Mariathasan
  8. Monetary Policy Pass-Through with Central Bank Digital Currency By Janet Hua; Yu Zhu
  9. Financial Regulation in a Quantitative Model of the Modern Banking System By Juliane Begenau; Tim Landvoigt
  10. Currency Depreciations in Emerging Economies: A Blessing or a Curse for External Debt Management? By Boris Fisera; Menbere Workie Tiruneh; David Hojdan
  11. Interest Rate Swaps and the Transmission Mechanism of Monetary Policy: A Quantile Connectedness Approach By Ioannis Chatziantoniou; David Gabauer; Alexis Stenfor
  12. Risk and Strategic Complementarities: Banks Behavior, Supervision and Macroprudential Policies By T. Carraro; Edoardo Gaffeo; Marco Gallegati
  13. The FOMC risk shift By Kroencke, Tim-Alexander; Schmeling, Maik; Schrimpf, Andreas
  14. The narrative about the economy as a shadow forecast: an analysis using Banco de España quarterly reports By Nélida Díaz Sobrino; Corinna Ghirelli; Samuel Hurtado; Javier J. Pérez; Alberto Urtasun
  15. Macroepidemics and unconventional monetary policy: Coupling macroeconomics and epidemiology in a financial DSGE-SIR framework. By Verónica Acurio Vásconez; Olivier Damette; David W. Shanafelt
  16. Monetary policy surprises and their transmission through term premia and expected interest rates By Kaminska, Iryna; Mumtaz, Haroon; Sustek, Roman
  17. Big data and machine learning in central banking By Sebastian Doerr; Leonardo Gambacorta; José María Serena Garralda
  18. A Quantity Theory Framework for Thinking about Monetary Policy By Hetzel, Robert
  19. Negative Interest Rates; Taking Stock of the Experience So Far By Luis Brandao-Marques; Marco Casiraghi; R. G Gelos; Gunes Kamber; Roland Meeks
  20. Imperfect Banking Competition and Macroeconomic Volatility: A DSGE Framework By Jiaqi Li
  21. Fiscal Policy and Households' Inflation Expectations: Evidence from a Randomized Control Trial By Olivier Coibion; Yuriy Gorodnichenko; Michael Weber; Michael Weber
  22. Dual Labor Market and the "Phillips Curve Puzzle" By Hideaki Aoyama; Corrado Di Guilmi; Yoshi Fujiwara; Hiroshi Yoshikawa
  23. The dynamics of bank rates in a negative-rate environment - the Swiss case By Romain Baeriswyl; Lucas Marc Fuhrer; Petra Gerlach-Kristen; Jörn Tenhofen
  24. The money-inflation nexus revisited By Leopold Ringwald; Thomas O. Zörner
  25. Optimal irreversible monetary policy By Kohei Hasui; Teruyoshi Kobayashi; Tomohiro Sugo
  26. The Origination and Distribution of Money Market Instruments: Sterling Bills of Exchange during the First Globalization By Olivier Accominotti; Delio Lucena-Piquero; Stefano Ugolini

  1. By: Marcin Kolasa; Grzegorz Wesołowski
    Abstract: Large international capital movements tend to be associated with strong fluctuations in asset prices and credit, contributing to domestic financial cycles and posing challenges for stabilization policies, especially in emerging market economies. In this paper we argue that these challenges are particularly severe if the global financial cycle is driven by quantitative easing (QE) in the US, and when the local banking sector has large holdings of government bonds, like in many Latin American countries. We first show empirically that a typical round of QE by the US Fed leads to a persistent expansion in credit to households and a significant loss of price competitiveness in this group of economies. We next develop a quantitative macroeconomic model of a small open economy with segmented asset markets and banks, which accounts for these observations. In this framework, foreign QE creates tensions between macroeconomic and financial stability as a contractionary impact of exchange rate appreciation is accompanied by booming credit and house prices. As a consequence, conventional monetary policy accommodation aimed at stabilizing output and inflation would further exacerbate domestic financial cycle. We show that an effective way of resolving this trade-off is to impose a time-varying tax on capital inflows. Combining foreign exchange interventions with tightening of local credit policies can also restore macroeconomic and financial stability, but at the expense of a large redistribution of wealth between borrowers and savers.
    Keywords: quantitative easing, global financial cycle, domestic credit, exchange rate interventions, capital controls, macroprudential policy
    JEL: E44 E58 F41 F42 F44
    Date: 2021–03
  2. By: Robert Oleschak
    Abstract: In economies with a low level of financial inclusion (FI), most activities are settled in cash and are thus more difficult to trace, record, and tax. I show theoretically that economies with inefficient financial technologies exhibit low levels of FI and of tax revenue and that using an inflation tax as an additional source of income improves welfare. Improvements in technology lead to a higher level of FI, increased tax revenue and lower (optimal) inflation. I test this prediction using panel data from a broad set of countries. The data show a strong and robust negative link between FI and inflation and a positive link between FI and tax revenue for developing countries.
    Keywords: Financial inclusion, financial technology, monetary policy, fiscal policy
    JEL: C12 C22 E31 E41 G21 H21
    Date: 2021
  3. By: Holton, Sarah (Central Bank of Ireland); Parle, Conor (Central Bank of Ireland); Phelan, Gillian (Central Bank of Ireland); Stuart, Rebecca (Central Bank of Ireland)
    Abstract: The global pandemic has warranted swift and substantial policy responses, not least from monetary policy. This letter outlines the scope for monetary policy to react to this unprecedented crisis, in the light of the extensive fiscal policy measures introduced. We explore the interactions between monetary and fiscal policies and the consequent implications for sovereign debt sustainability. The key conclusion is that while monetary policy plays a vital role in supporting fiscal policies in the current crisis, there are important legal, practical and economic issues to consider when calibrating an effective response. This Letter argues that monetary and fiscal policies can support the economy and reinforce each other in fostering a sustainable recovery from the crisis when policymakers carefully consider and take account of these legal and economic issues.
    Date: 2020–09
  4. By: Saki Bigio; Yuliy Sannikov
    Abstract: This paper integrates a realistic implementation of monetary policy through the banking system into an incomplete-markets economy with wage rigidity. Monetary policy sets policy rates and alters the supply of reserves. These tools grant independent control over credit spreads and an interest target. Through these tools, monetary policy affects the evolution of real interests rates, credit, output, and the wealth distribution—both in the long and in the short run. We decompose the effects through a combination of the interest and credit channels that depend on the size of the central bank’s balance sheet. Monetary policy reaches an expansionary limit when it enters a liquidity trap. The model highlights a trade-off between worse microeconomic insurance (insurance across agents) and greater macroeconomic insurance (insurance across states). The model prescribes that monetary policy should operate with a small balance sheet which tightens credit during booms, and should expand its balance sheet and lower policy rates during busts.
    JEL: E31 E32 E41 E42
    Date: 2021–03
  5. By: Stijn Claessens; Giulio Cornelli; Leonardo Gambacorta; Francesco Manaresi; Yasushi Shiina
    Abstract: We analyse how macroprudential policies (MaPs), largely applied to banks and to a lesser extent borrowers, affect non-bank financial intermediation (NBFI). Using data for 24 of the jurisdictions participating in the Financial Stability Board's monitoring exercise over the period 2002–17, we study the effects of MaP episodes on bank assets and on those NBFI activities that may involve bank-like financial stability risks (the narrow measure of NBFI). We find that a net tightening of domestic MaPs increases these NBFI activities and decreases bank assets, raising the NBFI share in total financial assets. By contrast, a net tightening of MaPs in foreign jurisdictions leads to a reduction of the NBFI share – the effect of a drop in NBFI activities and an increase in domestic banking assets. Tightening and easing MaPs have largely symmetric effects on NBFI. We find that the effect of MaPs (both domestic and foreign) is economically and statistically significant for all those NBFI economic functions that may pose risks to financial stability.
    Keywords: macroprudential policy, non-bank financial intermediation, shadow banking, international spillovers
    JEL: G10 G21 O16 O40
    Date: 2021–02
  6. By: Sebastian Edwards; Luis Cabezas
    Abstract: We use detailed data for Iceland to examine two often-neglected aspects of the “exchange rate pass-through” problem. First, we investigate whether the pass-through coefficient varies with the degree of “international tradability” of goods. Second, we analyze if the pass-through coefficient depends on the monetary policy framework. We consider 12 disaggregated price indexes in Iceland for 2003-2019, a period that includes Iceland’s banking and currency crisis of 2008. We find that the pass-through declined around the time Iceland reformed its “flexible inflation targeting,” and that the coefficients are significantly higher for tradable than for nontradable goods.
    JEL: E31 E52 E58 F31 F41
    Date: 2021–03
  7. By: Christoph Bertsch; Mike Mariathasan
    Abstract: We study optimal bank leverage and recapitalization in general equilibrium when the supply of specialized investment capital is imperfectly elastic. Assuming incomplete insurance against capital shortfalls and segmented financial markets, ex-ante leverage is inefficiently high, leading to excessive insolvencies during systemic capital shortfall events. Recapitalizations by equity issuance are individually and socially optimal. Additional frictions can turn asset sales individually but not necessarily socially optimal. Our results hold for different bankruptcy protocols and we offer testable predictions for banks' capital structure management. Our model provides a rationale for macroprudential capital regulation that does not require moral hazard or informational asymmetries.
    Keywords: Bank capital, recapitalization, macroprudential regulation, incomplete markets, financial market segmentation, constrained inefficiency
    JEL: D5 D6 G21 G28
    Date: 2021–01
  8. By: Janet Hua; Yu Zhu
    Abstract: This paper investigates how the introduction of an interest-bearing central bank digital currency (CBDC) that serves as a perfect substitute for bank deposits as an electronic means of payment affects monetary policy pass-through. When the deposit market is not fully competitive, the CBDC tends to weaken the pass-through of the interest on reserves. The interest on CBDC impacts the deposit market more directly compared with the interest on reserves. The CBDC rate can also have stronger pass-through to the loan market; however, the effect can be dampened by the policy on the interest on reserves. Therefore, coordination between the two policy rates is needed to effectively achieve policy goals.
    Keywords: Digital currencies and fintech; Monetary policy transmission
    JEL: E52
    Date: 2021–03
  9. By: Juliane Begenau; Tim Landvoigt
    Abstract: How does the shadow banking system respond to changes in capital regulation of commercial banks? We propose a quantitative general equilibrium model with regulated and unregulated banks to study the unintended consequences of regulation. Tighter capital requirements for regulated banks cause higher convenience yield on debt of all banks, leading to higher shadow bank leverage and a larger shadow banking sector. At the same time, tighter regulation eliminates the subsidies to commercial banks from deposit insurance, reducing the competitive pressures on shadow banks to take risks. The net effect is a safer financial system with more shadow banking. Calibrating the model to data on financial institutions in the U.S., the optimal capital requirement is around 16%.
    JEL: E41 E44 G21 G23 G28
    Date: 2021–02
  10. By: Boris Fisera (Slovak Academy of Sciences; Charles University, Prague); Menbere Workie Tiruneh (Slovak Academy of Sciences; Webster Vienna Private University); David Hojdan (Webster Vienna Private University)
    Abstract: We investigate the long-term effect of domestic currency depreciation on the external debt for a panel of 41 emerging economies over the years 1999-2019. Using heterogenous panel cointegration methods, we find that domestic currency depreciation leads to an increase in external debt to GDP ratio over the long-term and it reduces the sustainability of external debt. This is particularly the case for larger depreciations, while smaller depreciations might reduce the external debt burden over the long-term for more developed emerging economies. Poorer emerging economies face a greater increase in external debt burden following domestic currency depreciation. We also find that higher exchange rate volatility and the use of floating exchange rates contributes to an increase in external debt burden over the long-term. Consequently, our results suggest that for emerging economies, having more volatile and floating exchange rates reduces the sustainability of external debt. We find asymmetrical effects of exchange rate depreciation on external debt: higher central bank independence limits the effect of currency depreciation on external debt, while higher financial development and illicit financial flows augment the effect of depreciation on external debt.
    Keywords: external debt, exchange rate, currency depreciation, exchange rate volatility, exchange rate regime, DFE estimator, PMG estimator
    JEL: E50 F31 F34
    Date: 2021–03
  11. By: Ioannis Chatziantoniou (University of Portsmouth); David Gabauer (Software Competence Center Hagenberg); Alexis Stenfor (University of Portsmouth)
    Abstract: We investigate 1-year interest rate swaps on USD, EUR, JPY and GBP between 2005 and 2020 utilising a quantile connectedness model. This approach allows for a nuanced investigation of connectedness and adds to understanding the monetary policy transmission mechanism within a highly integrated international financial system. Substantial interest rate changes (in either direction) matter for connectedness in financial markets. The results also indicate which currency drives developments depending on the direction of the change in interest rates.
    Keywords: Interest Rate Swaps; Monetary Policy Transmission Mechanism; Quantile Vector Autorergression
    JEL: C51 E43 F65 G15
    Date: 2021–03–08
  12. By: T. Carraro; Edoardo Gaffeo (Department of Economics and Management, Universita' degli Studi di Trento (Italy).); Marco Gallegati (Dipartimento di Scienze Economiche e Sociali - Universita' Politecnica delle Marche)
    Abstract: In this paper we present a model where frictions in the supervision process may set the stage for strategic complementarities among banks. We derive the conditions for strategic complementarities in the behavior of banks in a banking system in which the supervisory authority has a budget constraint on the resources to allocate for monitoring, and supervision is costly for banks. In such a framework, the goal of macroprudential policies consists in simultaneously restraining the incentive of banks in extending risky loans, without forcing the system towards a corner solution where all or none of the banks provide credit. We point out that the countercyclical bu er is a proper tool to reduce the number of banks issuing a higher amount of credit during booms, while a loan-support-program can increase the number of banks issuing higher credit during downturns.
    Keywords: Banking Crisis; Strategic complementarity; Macroprudential Supervision
    JEL: C49 E44 G32
    Date: 2021–03
  13. By: Kroencke, Tim-Alexander; Schmeling, Maik; Schrimpf, Andreas
    Abstract: We identify a component of monetary policy news that is extracted from high-frequency changes in risky asset prices. These surprises, which we call "risk shifts", are uncorrelated, and therefore complementary, to risk-free rate surprises. We show that (i) risk shifts capture the lion's share of stock price movements around FOMC announcements; (ii) that they are accompanied by significant investor fund flows, suggesting that investors react heterogeneously to monetary policy news; and (iii) that price pressure amplifies the stock market response to monetary policy news. Our results imply that central bank information effects are overshadowed by short-term dynamics stemming from investor rebalancing activities and are likely to be more difficult to identify than previously thought.
    Keywords: Monetary Policy Surprises,Equity Premium,Fund Flows,Portfolio Rebalancing,Price Pressures
    JEL: G10 G12 E44
    Date: 2021
  14. By: Nélida Díaz Sobrino (Universidad Nebrija); Corinna Ghirelli (Banco de España); Samuel Hurtado (Banco de España); Javier J. Pérez (Banco de España); Alberto Urtasun (Banco de España)
    Abstract: The aim of this paper is to construct a text-based indicator that reflects the sentiment of the Banco de España economic outlook reports. Our sentiment indicator mimics very closely the first release of the GDP growth rate, which is published after the publication of the reports, and the Banco de España quarterly forecasts of the GDP growth rate. This means that the qualitative narrative contained in the reports contains similar information to the one conveyed by the quantitative forecasts. In addition, the narrative complements the quantitative projections by discussing information which is not directly reflected in the point forecasts.
    Keywords: textual analysis, sentiment analysis, GDP growth rate, forecasting, central bank reports
    JEL: C53 C55 E37 E66 E58
    Date: 2020–12
  15. By: Verónica Acurio Vásconez; Olivier Damette; David W. Shanafelt
    Abstract: Despite the fact that the current covid-19 pandemic was neither the first nor the last disease to threaten a pandemic, only recently have studies incorporated epidemiology into macroeconomic theory. In our paper, we use a dynamic stochastic general equilibrium (dsge) model with a financial sector to study the economic impacts of epidemics and the potential for unconventional monetary policy to remedy those effects. By coupling a macroeconomic model to a traditional epidemiological model, we are able to evaluate the pathways by which an epidemic affects a national economy. We find that no unconventional monetary policy can completely remove the negative effects of an epidemic crisis, save perhaps an exogenous increase in the shares of claims coming from the Central Bank (“epi loans”). To the best of our knowledge, our paper is the first to incorporate disease dynamics into a dsge-sir model with a financial sector and examine the effects of unconventional monetary policy.
    Keywords: New-Keynesian model, dsge, covid-19, epidemiology.
    JEL: D58 E32 E52
    Date: 2021
  16. By: Kaminska, Iryna (Bank of England); Mumtaz, Haroon (Queen Mary University of London); Sustek, Roman (Queen Mary University of London)
    Abstract: Monetary policy moves the yield curve. How much is due to expected interest rates versus term premia? And does it matter for macroeconomic outcomes? Using an affine term structure model, we shed new light on these questions. Estimation is subject to restrictions addressing estimation bias in expected interest rates obtained by previous studies. High-frequency yield curve decompositions around FOMC announcements into term premia and expected interest rates then provides instruments for a local projection model. The effects of interest rate expectations and term premia are found equally important for the transmission mechanism and broadly consistent with macroeconomic theory.
    Keywords: High-frequency data; monetary policy transmission mechanism; restricted affine term structure models; yield curve decomposition; local projection method; Bayesian estimation
    JEL: C58 E43 E52 E58 G12
    Date: 2021–03–05
  17. By: Sebastian Doerr; Leonardo Gambacorta; José María Serena Garralda
    Abstract: This paper reviews the use of big data and machine learning in central banking, leveraging on a recent survey conducted among the members of the Irving Fischer Committee (IFC). The majority of central banks discuss the topic of big data formally within their institution. Big data is used with machine learning applications in a variety of areas, including research, monetary policy and financial stability. Central banks also report using big data for supervision and regulation (suptech and regtech applications). Data quality, sampling and representativeness are major challenges for central banks, and so is legal uncertainty around data privacy and confidentiality. Several institutions report constraints in setting up an adequate IT infrastructure and in developing the necessary human capital. Cooperation among public authorities could improve central banks' ability to collect, store and analyse big data.
    Keywords: big data, central banks, machine learning, artificial intelligence, data science
    JEL: G17 G18 G23 G32
    Date: 2021–03
  18. By: Hetzel, Robert (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In August 2020, FOMC chair Jerome Powell announced a strategy for achieving an inclusive value of the FOMC’s goal of maximum employment. The strategy rests on discovering the minimal value of sustainable unemployment by running the economy above potential until the unemployment rate declines to a level that initiates an inflation overshoot from the FOMC’s longer-run 2 percent target. There is presumably no contradiction with an FOMC target for inflation of 2 percent. As indicated by the appellation “flexible-average-inflation targeting” (FAIT), the inflation overshoot would compensate for prior undershoots of the 2 percent target. The FOMC’s current framework is reminiscent of the 1970s. With a country fractured over the Vietnam War and a militant civil rights movement, a socially desirable low unemployment rate became a political imperative. FOMC chairman Arthur Burns accepted the challenge (Hetzel 1998, 2008, Ch. 8). The Keynesian consensus of the time promised to deliver a socially desirable rate of unemployment at least as low as 4 percent at the cost of only moderate inflation. This desirable Phillips curve trade-off between unemployment and inflation became the centerpiece of monetary policy. Modigliani and Papademos (1975 and 1976) provided the organizing principle for monetary policy. Namely, there is a predictable and “exploitable” trade-off in which changes in inflation depend upon the difference between the unemployment rate and a full-employment rate termed the nonaccelerating inflation rate of unemployment (NAIRU). At least in 2021, however, the FOMC assumption is that there is no trade-off because the Phillips curve is assumed flat at least down to its prepandemic low of 3.5%. When persistent inflation above 2% emerges, the adjective “flexible” in FAIT becomes relevant. The FOMC will then trade off between two competing goals – 2% inflation and inclusive maximum employment.
    Date: 2021–03
  19. By: Luis Brandao-Marques; Marco Casiraghi; R. G Gelos; Gunes Kamber; Roland Meeks
    Abstract: This paper focuses on negative interest rate policies and covers a broad range of its effects, with a detailed discussion of findings in the academic literature and of broader country experiences.
    Keywords: Negative interest rates;Monetary policy;Bank lending rates;Nonbank financial institutions;Negative interest rates;monetary policy;bank lending and profitability;nonbank financial institutions
    Date: 2021–03–03
  20. By: Jiaqi Li
    Abstract: This paper studies the impact of imperfect banking competition on aggregate fluctuations using a DSGE framework that features a Cournot banking sector. The paper highlights a new propagation mechanism of imperfect banking competition that operates via the dynamics of the expected marginal product of capital. Since capital is partly financed by bank loans, a higher expected return on capital implies that firms are more willing to borrow to invest in capital, making their capital and thus loan demand more inelastic. Market power enables banks to take advantage of the lower loan demand elasticity by charging a higher loan rate markup. Given that different shocks affect the dynamics of the expected return on capital differently, this paper finds that while the loan rate markup after a contractionary monetary policy shock increases and thus amplifies aggregate fluctuations, the impact of imperfect banking competition after a productivity shock is less clear and depends on the persistence of the shock.
    Keywords: Business fluctuations and cycles; Financial institutions; Interest rates
    JEL: E44 G21 L13
    Date: 2021–03
  21. By: Olivier Coibion; Yuriy Gorodnichenko; Michael Weber; Michael Weber
    Abstract: Rising government debt levels around the world are raising the specter that authorities might seek to inflate away the debt. In theoretical settings where fiscal policy “dominates” monetary policy, higher debt without offsetting changes in primary surpluses should lead households to anticipate this higher inflation. Are household inflation expectations sensitive to fiscal considerations in practice? We field a large randomized control trial on U.S. households to address this question by providing randomly chosen subsets of households with information treatments about the fiscal outlook and then observing how they revise their expectations about future inflation as well as taxes and government spending. We find that information about the current debt or deficit levels has little impact on inflation expectations but that news about future debt leads them to anticipate higher inflation, both in the short run and long run. News about rising debt also induces households to anticipate rising spending and a higher rate of interest for government debt.
    Keywords: expectations management, inflation expectations, surveys
    JEL: E31 C83 D84
    Date: 2021
  22. By: Hideaki Aoyama; Corrado Di Guilmi; Yoshi Fujiwara; Hiroshi Yoshikawa
    Abstract: Low inflation was once a welcome to both policy makers and the public. However, Japan's experience during the 1990's changed the consensus view on price of economists and central banks around the world. Facing deflation and zero interest bound at the same time, Bank of Japan had difficulty in conducting effective monetary policy. It made Japan's stagnation unusually prolonged. Too low inflation which annoys central banks today is translated into the "Phillips curve puzzle". In the US and Japan, in the course of recovery from the Great Recession after the 2008 global financial crisis, the unemployment rate had steadily declined to the level which was commonly regarded as lower than the natural rate or NAIRU. And yet, inflation stayed low. In this paper, we consider a minimal model of dual labor market to explore what kind of change in the economy makes the Phillips curve flat. The level of bargaining power of workers, the elasticity of the supply of labor to wage in the secondary market, and the composition of the workforce are the main factors in explaining the flattening of the Phillips curve. We argue that the changes we consider in the model, in fact, has plausibly made the Phillips curve flat in recent years.
    Date: 2021–03
  23. By: Romain Baeriswyl; Lucas Marc Fuhrer; Petra Gerlach-Kristen; Jörn Tenhofen
    Abstract: This paper documents the change in banks' interest rate setting behaviour in a negative-rate environment. In a positive-rate environment, the pricing of mortgages and deposits follows the dynamics of capital market rates for comparable maturities. When capital market rates fall below zero, the dynamic of mortgage and deposit rates changes. Because deposit rates tend to be sticky at zero and do not fall with short-term capital market rates into negative territory, banks' liability margin shrinks. In an attempt to preserve their overall interest margin, banks raise long-term mortgage rates in response to a decline in short-term capital market rates, while they continue to decrease long-term mortgage rates when long-term market rates fall. Overall, our results imply that a policy rate cut reduces bank rates less in a negative-rate environment than in a positive-rate environment.
    Keywords: Interest rate pass-through, mortgages, monetary policy
    JEL: E43 E52 G21
    Date: 2021
  24. By: Leopold Ringwald (Department of Economics, Vienna University of Economics and Business); Thomas O. Zörner (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper proposes a Bayesian Logistic Smooth Transition Autoregressive (LSTAR) model with stochastic volatility (SV) to model inflation dynamics in a nonlinear fashion. Inflationary regimes are determined by smoothed money growth which serves as a transition variable that governs the transition between regimes. We apply this approach on quarterly data from the US, the UK and Canada and are able to identify well-known, high inflation periods in the samples. Moreover, our results suggest that the role of money growth is specific to the economy under scrutiny. Finally, we analyse a variety of different model specifications and are able to confirm that adjusted money growth still has leading indicator properties on inflation regimes.
    Keywords: Money-inflation link, Nonlinear modeling, Bayesian inference, LSTAR-SV model
    JEL: C11 C32 E31 E51
    Date: 2021–03
  25. By: Kohei Hasui (Faculty of Economics, Matsuyama University); Teruyoshi Kobayashi (Faculty of Economics, Kobe University); Tomohiro Sugo (Bank of Japan)
    Abstract: Real-world central banks have a strong aversion to policy reversals. Nevertheless, theoretical models of monetary policy within the dynamic general equilibrium framework normally ignore the irreversibility of interest rate control. In this paper, we develop a formal model that incorporates a central bank's discretionary optimization problem with an aversion to policy reversals. We show that, even under a discretionary regime, the optimal timing of liftoff from the zero lower bound is characterized by its history dependence, which arises from the option value to waiting, and there exists an optimal degree of policy irreversibility at which the social loss is minimized.
    Date: 2021–02
  26. By: Olivier Accominotti (LSE); Delio Lucena-Piquero (LEREPS); Stefano Ugolini (LEREPS)
    Abstract: This paper presents a detailed analysis of how liquid money market instruments -- sterling bills of exchange -- were produced during the first globalisation. We rely on a unique data set that reports systematic information on all 23,493 bills re-discounted by the Bank of England in the year 1906. Using descriptive statistics and network analysis, we reconstruct the complete network of linkages between agents involved in the origination and distribution of these bills. Our analysis reveals the truly global dimension of the London bill market before the First World War and underscores the crucial role played by London intermediaries (acceptors and discounters) in overcoming information asymmetries between borrowers and lenders on this market. The complex industrial organisation of the London money market ensured that risky private debts could be transformed into extremely liquid and safe monetary instruments traded throughout the global financial system.
    Date: 2021–03

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