nep-cba New Economics Papers
on Central Banking
Issue of 2021‒03‒22
25 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Inflation Anchoring and Growth: The Role of Credit Constraints By Sangyup Choi; Davide Furceri; Prakash Loungani; Myungkyu Shim
  2. Inflation Expectations and Risk Premia in Emerging Bond Markets: Evidence from Mexico By ; Remy Beauregard; Jens H. E. Christensen; Eric Fischer
  3. A Model of QE, Reserve Demand and the Money Multiplier By Ellen Ryan; Karl Whelan
  4. Macroprudential Regulation in the Post-Crisis Era: Has the Pendulum Swung Too Far? By Lyu, Juyi; Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick
  5. The political economy of euro area sovereign debt restructuring By Heinemann, Friedrich
  6. Optimal Monetary Policy Under Bounded Rationality By Benchimol, Jonathan; Bounader, Lahcen
  7. The Reversal Interest Rate. A Critical Review By Rafael Repullo
  8. Evolution of Monetary Policy in Peru: An Empirical Application Using a Mixture Innovation TVP-VAR-SV Model By Jhonatan Portilla Goicochea; Gabriel Rodríguez
  9. The Deposits Channel of Monetary Policy. A Critical Review By Rafael Repullo
  10. A Schematic View of Government as a Regulator and Insurer of the Financial System By Henri-Paul Rousseau
  11. How to Issue a Central Bank Digital Currency By David Chaum; Christian Grothoff; Thomas Moser
  12. Priors and the Slope of the Phillips Curve By Callum Jones; Mariano Kulish; Juan Pablo Nicolini
  13. Determinants of Japanese Household Saving Behavior in the Low-Interest Rate Environment By Sophia Latsos; Gunther Schnabl
  14. How safe are central counterparties in credit default swap markets? By Paddrick, Mark; Young, H. Peyton
  15. Investigating a measure of conventional and unconventional stimulus for the euro area By Arne Halberstadt; Leo Krippner
  16. The EU bank insolvency framework: could less be more? By Giovanni Majnoni; Gabriele Bernardini; Andreas Dal Santo; Maurizio Trapanese
  17. Interest Rates, Market Power, and Financial Stability By David Martinez-Miera; Rafael Repullo
  18. U.S. monetary policy uncertainty and RMB deviations from covered interest parity By Zhitao Lin; Xingwang Qian
  19. Reserve Accumulation and Firm Investment: Evidence from Matched Bank–Firm Data By Woo Jin Choi; Ju Hyun Pyun; Youngjin Yun
  20. Interest on reserves as main monetary policy tool By George J. Bratsiotis
  21. Why Did Bank Stocks Crash During COVID-19? By Viral V. Acharya; Robert F. Engle III; Sascha Steffen
  22. The Effect of Monetary Policy on House Prices - How Strong is the Transmission? By Dominika Ehrenbergerova; Josef Bajzik
  23. Is the Monetary Policy Effect Different for Bank Lending to Households and Firms? By Youngjin Yun; Byoungsoo Cho
  24. The ECB's conundrum and 21st century monetary policy: How European monetary policy can be green, social and democratic By van 't Klooster, Jens
  25. On the transmission of monetary policy to the housing market By Winfried Koeniger; Benedikt Lennartz; Marc-Antoine Ramelet

  1. By: Sangyup Choi (Yonsei University); Davide Furceri (IMF); Prakash Loungani (IMF); Myungkyu Shim (Yonsei University)
    Abstract: Can inflation anchoring foster growth? To answer this question, we use panel data on sectoral growth for 22 manufacturing industries from 36 advanced and emerging market economies over 1990–2014 and employ a difference-in-difference strategy based on the theoretical prediction that higher inflation uncertainty particularly depresses investment in industries that are more credit constrained. Industries characterized by high external financial dependence, liquidity needs, and R&D intensity, and low asset tangibility, tend to grow faster in countries with well-anchored inflation expectations. The results, based on an IV approach—using indicators of monetary policy transparency and central bank independence as instruments— confirm our findings.
    Keywords: industry growth; inflation anchoring; inflation forecasts; credit constraints; difference-in-difference; central bank independence
    JEL: E52 E63 O11 O43 O47
    Date: 2020–12–29
  2. By: ; Remy Beauregard; Jens H. E. Christensen; Eric Fischer
    Abstract: To study inflation expectations and associated risk premia in emerging bond markets, this paper provides estimates for Mexico based on an arbitrage-free dynamic term structure model of nominal and real bond prices that accounts for their liquidity risk. In addition to documenting the existence of large and time-varying liquidity premia in nominal and real bond prices that are only weakly correlated, the results indicate that long-term inflation expectations in Mexico are well anchored close to the inflation target of the Bank of Mexico. Furthermore, Mexican inflation risk premia are larger and more volatile than those in Canada and the United States.
    Keywords: term structure modeling; liquidity risk; financial market frictions; central bank credibility
    JEL: D84 E31 E43 E44 E47 E52 E58 G12
    Date: 2021–03–01
  3. By: Ellen Ryan; Karl Whelan
    Abstract: Quantitative easing programmes have driven unprecedented expansions in the supply of central bank reserves around the world over the past two decades, fundamentally changing the implementation of monetary policy. The collapse in money multipliers following QE episodes has often been interpreted as implying banks are happy to passively hold most of the reserves created by QE. This paper develops a simple micro-simulation model of the banking sector that adapts the traditional money multiplier model and allows for bank reserve demand to be inferred from monetary aggregates. The model allows the use of unwanted reserves by banks to play out over time alongside QE purchases and incorporates both significantly higher reserve demand after 2008 and capital constraints. With these additions, the model explains the persistently lower money multipliers seen in the US following QE, as well as the growth in commercial bank deposits. The model suggests the demand from banks for reserves has increased substantially since the introduction of QE but not to the point where banks are passively absorbing all newly created reserves.
    Keywords: Quantitative easing; Central banks; Money multiplier
    JEL: E51 E52 E58
    Date: 2021–02
  4. By: Lyu, Juyi (Cardiff Business School); Le, Vo Phuong Mai (Cardiff Business School); Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School)
    Abstract: This paper presents an institutional model to investigate the cooperation between a government and a central bank. The former selects the monetary policy and then delegates the organization of macroprudential policy to the latter. Their policy stances are the result of sequential constrained utility maximization. Using indirect inference, we find a set of coefficients that can capture the UK policy stances for 1993-2016. This suggests post-crisis regulation has been overly intrusive. Finally, we show that this regulatory dilemma can be avoided by committing to a highly stabilizing monetary regime that uses QE extensively.
    Keywords: Bank regulation; Financial stability; Monetary policy; Public choice theory
    JEL: E52 E58 G28
    Date: 2021–03
  5. By: Heinemann, Friedrich
    Abstract: The establishment of a sovereign debt restructuring mechanism (SDRM) is one of the important issues in the academic debate on a viable constitution for the European Monetary Union (EMU). Yet the topic seems to be taboo in official reform contributions to the debate. Against this backdrop, the article identifies the SDRM interests of key players, including the European Commission, the European Parliament, the European Central Bank and national governments. The empirical section takes advantage of the recently established EMU Positions Database. The findings confirm political economy expectations: Low-debt countries support an EMU constitution that includes an insolvency procedure whereas a coalition of high-debt countries and European institutions oppose it. The analysis points towards a possible political-economic equilibrium for coping with sovereign insolvencies: an institutional set-up without a SDRM and with hidden transfers. Recent European fiscal innovatios in response to the Covid-19 solvency shock confirm this prediction.
    Keywords: sovereign debt restructuring mechanism,banking regulation,EMU reform,fiscal union
    JEL: H63 H87 F53
    Date: 2021
  6. By: Benchimol, Jonathan; Bounader, Lahcen
    Abstract: We build a behavioral New Keynesian model that emphasizes different forms of myopia for households and firms. By examining the optimal monetary policy within this model, we find four main results. First, in a framework where myopia distorts agents’ inflation expectations, the optimal monetary policy entails implementing inflation targeting. Second, price level targeting emerges as the optimal policy under output gap, revenue, or interest rate myopia. Given that bygones are not bygones under price level targeting, rational inflation expectations are a minimal condition for optimality in a behavioral world. Third, we show that there are no feasible instrument rules for implementing the optimal monetary policy, casting doubt on the ability of simple Taylor rules to assist in the setting of monetary policy. Fourth, bounded rationality may be associated with welfare gains.
    Keywords: Behavioral macroeconomics; Central bank policy; Cognitive discounting; Heterogeneous expectations; Optimal simple rules
    JEL: C53 E37 E52 D01 D11
    Date: 2021–03
  7. By: Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper reviews the analysis in Brunnermeier and Koby (2018), showing that lower monetary policy rates can only lead to lower bank lending if there is a binding capital constraint and the bank is a net investor in debt securities, a condition typically satisfied by high deposit banks. It next notes that BK’s capital constraint features the future value of the bank’s capital, not the current value as in standard regulation. Then, it sets up an alternative model with a standard capital requirement in which profitability matters because bank capital is endogenously provided by shareholders, showing that in this model there is no reversal rate.
    Keywords: Monetary policy, reversal rate, negative interest rates, bank profitability, bank market power, capital requirements.
    JEL: E52 G21 L13
    Date: 2020–10
  8. By: Jhonatan Portilla Goicochea (Departamento de Economía de la Pontificia Universidad Católica del Perú); Gabriel Rodríguez (Departamento de Economía de la Pontificia Universidad Católica del Perú)
    Abstract: This paper discusses the evolution of monetary policy (MP) in Peru in 1996Q1-2016Q4 using a mixture innovation time-varying parameter vector autoregressive model with stochastic volatility (TVP-VAR-SV) as proposed by Koop et al. (2009). The main empirical results are: (i) the VAR coefficients and volatilities change more gradually than the covariance errors over time; (ii) the volatility of MP shocks was higher under the pre- Inflation Targeting (IT) regime; (iii) a surprise increase in the interest rate produces GDP growth falls and reduces inflation in the long run; (iv) the interest rate reacts more quickly to aggregate supply (AS) shocks than to aggregate demand (AD) shocks; (v) MP shocks explain a high percentage of domestic variable behavior under the pre-IT regime but their contribution decreases under the IT regime.
    Keywords: Poítica Monetaria, TVP-VAR-SV, Estimación Bayesiana, Modelo de Mezcla de Innovaciones, Economía Peruana
    Date: 2020
  9. By: Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: Drechsler, Savov, and Schnabl (2017) claim that increases in the monetary policy rate lead to reductions in bank deposits, which account for the negative effect on bank lending. This paper reviews their theoretical analysis, showing that the relationship between the policy rate and the equilibrium amount of deposits is in fact U-shaped. Then, it constructs an alternative model, based on a simple microfoundation for the households' demand for deposits, where an increase in the policy rate always increases the equilibrium amount of deposits. These results question the theoretical underpinnings of the "deposits channel" of monetary policy transmission.
    Keywords: Monetary policy transmission, banks' market power, deposits channel.
    JEL: E52 G21 L13
    Date: 2020–12
  10. By: Henri-Paul Rousseau
    Abstract: The purpose of this paper is to present a schematic of the interactions between the government as the REGULATOR of financial institutions and the government as the INSURER of financial institutions while considering the long-term feedback relationships between the size and the scope of the financial sector and the level of public debt resulting from financial crises over time. The analysis concludes that at certain high level of public debt and size of the expected support of the financial sector by the government, the regulator and/or the central bank may have to “stabilize” the situation, but there may be cases where the support becomes socially “unacceptable”.
    Keywords: Regulation,Regulator,Insurer,Financial,Government,Support,Public,Debt,
    Date: 2021–03–11
  11. By: David Chaum; Christian Grothoff; Thomas Moser
    Abstract: With the emergence of Bitcoin and recently proposed stablecoins from BigTechs, such as Diem (formerly Libra), central banks face growing competition from private actors offering their own digital alternative to physical cash. We do not address the normative question whether a central bank should issue a central bank digital currency (CBDC) or not. Instead, we contribute to the current research debate by showing how a central bank could do so, if desired. We propose a token-based system without distributed ledger technology and show how earlier-deployed, software-only electronic cash can be improved upon to preserve transaction privacy, meet regulatory requirements in a compelling way, and offer a level of quantum-resistant protection against systemic privacy risk. Neither monetary policy nor financial stability would be materially affected because a CBDC with this design would replicate physical cash rather than bank deposits.
    Date: 2021–02
  12. By: Callum Jones; Mariano Kulish; Juan Pablo Nicolini
    Abstract: The slope of the Phillips curve in New Keynesian models is difficult to estimate using aggregate data. We show that in a Bayesian estimation, the priors placed on the parameters governing nominal rigidities significantly influence posterior estimates and thus inferences about the importance of nominal rigidities. Conversely, we show that priors play a negligible role in a New Keynesian model estimated using state-level data. An estimation with state-level data exploits a relatively large panel dataset and removes the influence of endogenous monetary policy.
    Keywords: Slope of the Phillips curve; Priors; State-level data; Bayesian estimation
    JEL: E52 E58
    Date: 2021–03–17
  13. By: Sophia Latsos; Gunther Schnabl
    Abstract: This paper scrutinizes the role of prolonged, expansionary monetary policy on the savings behavior of Japanese households, focusing on the dramatic change of the household savings rate since 1998, from high to low savings. The literature generally attributes this change to the country’s shift from high-growth to low-growth and its demographic change. This paper empirically examines changes in the incentives for saving and the ability to save connected to monetary policy. It finds that monetary policy had a significant impact on Japan’s household behavior via the interest rate channel and the redistribution channel but not the labor income channel. There is also evidence that rising wealth boosts savings.
    Keywords: monetary policy, household savings, savings rate, Japan, financial repression
    JEL: E21 E43 E52
    Date: 2021
  14. By: Paddrick, Mark; Young, H. Peyton
    Abstract: We propose a general framework for estimating the vulnerability to default by a central counterparty (CCP) in the credit default swaps market. Unlike conventional stress testing approaches, which estimate the ability of a CCP to withstand nonpayment by its two largest counterparties, we study the direct and indirect effects of nonpayment by members and/or their clients through the full network of exposures. We illustrate the approach for the U.S. credit default swaps market under shocks that are similar in magnitude to the Federal Reserve’s stress tests. The analysis indicates that conventional stress testing approaches may underestimate the potential vulnerability of the main CCP for this market.
    Keywords: credit default swaps; central counterparties; stress testing; systemic risk; financial networks
    JEL: D85 L14
    Date: 2021–01–01
  15. By: Arne Halberstadt; Leo Krippner
    Abstract: We investigate the effect of the “Effective Monetary Stimulus” (EMS) on German and euro-area macroeconomic variables using a small-scale vector autoregression (VAR). The EMS is obtained from yield curve data and survey data, and is designed to reflect the influence of monetary policy conducted by conventional and unconventional means. Empirically, using the EMS in our VAR obtains plausible and stable structural relationships with inflation and economic activity across and within conventional and unconventional environments, and more so than short-maturity rates or alternative metrics. These results suggest that the EMS provides a useful practical measure of monetary/financial stimulus for policy makers. Our counterfactual results indicate that EMS shocks have been stimulatory for most of the time since 2007, and more so around episodes of unconventional policy actions by the ECB. In turn, these episodes have been followed by higher outcomes of inflation and economic activity.
    Keywords: Monetary Policy, Zero Lower Bound, Dynamic Term Structure Model.
    JEL: E43 E44 E52
    Date: 2021–03
  16. By: Giovanni Majnoni (Banca d'Italia); Gabriele Bernardini (Banca d'Italia); Andreas Dal Santo (Solidus Capital Group); Maurizio Trapanese (Banca d'Italia)
    Abstract: The framework for bank crisis management in the Banking Union (BU) complies with multiple criteria. Each of these criteria is based on a sound policy rationale; however, when combined, they can generate unintended consequences that undermine the effectiveness of the system, highlighting a case of fallacy of composition. This paper suggests that a piecemeal reform is not adequate to tackle the framework’s shortcomings. A broader effort is required to streamline the current criteria into a single rulebook, achieving effectiveness through simplification. The successful experience of the US framework for bank failure management provides a useful benchmark. It shows that the generalized, if not exclusive, reliance on a single, clearly defined, easily measurable and quickly actionable criterion – the Least Cost Test – makes it possible to offer full protection to taxpayers and to contain the destruction of value caused by bank failures, thereby safeguarding the economy. We suggest that its adoption by the BU would help to frame a common approach to failing banks of all sizes and would provide a unifying force and a solution to the geographic and institutional fragmentation of the current set-up.
    Keywords: financial crises, international regulation
    JEL: F53 G01 G20
    Date: 2021–02
  17. By: David Martinez-Miera (Universidad Carlos III de Madrid); Rafael Repullo (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paper shows the relevance of market power to assess the effects of safe interest rates on financial intermediaries' risk-taking decisions. We consider an economy where (i) intermediaries have market power in granting loans, (ii) intermediaries monitor borrowers which lowers their probability of default, and (iii) monitoring is costly and unobservable which creates a moral hazard problem with uninsured depositors. We show that lower safe rates lead to lower intermediation margins and higher risk-taking when intermediaries have low market power, but the result reverses for high market power. We examine the robustness of this result to introducing non-monitored market finance, heterogeneity in monitoring costs, and entry and exit of intermediaries. We also consider the effect of replacing uninsured by insured deposits, market power in raising deposits, and funding with both deposits and capital.
    Keywords: Imperfect competition, intermediation margins, bank monitoring, bank risk-taking, monetary policy.
    JEL: G21 L13 E52
    Date: 2020–07
  18. By: Zhitao Lin (Jinan University); Xingwang Qian (SUNY Buffalo State College)
    Abstract: This paper examines how U.S. monetary policy uncertainty (MPU) affects RMB deviations from covered interest parity (CIP) and how this effect is influenced by China’s capital controls, the RMB exchange rate regime, and international reserves that constrain the transmitting channel of U.S. MPU shocks. Our findings show that U.S. MPU has a spillover effect and creates deviations from RMB CIP. Capital controls insulate uncertainty shocks and alleviate the U.S. MPU spillover effect. There are some evidences that international reserves alleviate and the liberalized RMB exchange rate regime magnifies the spillover effect. However, their effects become insignificant in the presence of capital controls. Moreover, the U.S. MPU effect on RMB CIP deviation became prominent after the 2008 global financial crisis.
    Keywords: U.S. MPU; deviation from CIP; RMB cross-currency basis; capital controls; exchange rate regime; international reserves
    JEL: E43 F31 G15
    Date: 2020–12–07
  19. By: Woo Jin Choi (Korea Development Institute); Ju Hyun Pyun (Korea University Business School); Youngjin Yun (Bank of Korea)
    Abstract: We match non-financial firms in Korea with their main banks for the period over 2003-2017 to examine whether and how corporate investments are affected by changes in international reserves. We first show that firm investment is negatively associated with international reserves. By tracing the public securities used for sterilization, we further show that investment of a non-financial firm reduces if its main bank increases public securities holdings in accordance with reserve accumulation. Massive supply of sterilization securities shifts banks’ balance sheet composition and adversely affects investments, especially for financially constrained firms.
    Keywords: FX reserves, sterilized intervention, firm investment, bank balance sheet
    JEL: C23 E22 E58 F21 F31
    Date: 2020–11–15
  20. By: George J. Bratsiotis
    Date: 2021
  21. By: Viral V. Acharya; Robert F. Engle III; Sascha Steffen
    Abstract: We study the crash of bank stock prices during the COVID-19 pandemic. We find evidence consistent with a “credit line drawdown channel”. Stock prices of banks with large ex-ante exposures to undrawn credit lines as well as large ex-post gross drawdowns decline more. The effect is attenuated for banks with higher capital buffers. These banks reduce term loan lending, even after policy measures were implemented. We conclude that bank provision of credit lines appears akin to writing deep out-of-the-money put options on aggregate risk; we show how the resulting contingent leverage and stock return exposure can be incorporated tractably into bank capital stress tests.
    JEL: G01 G21
    Date: 2021–03
  22. By: Dominika Ehrenbergerova; Josef Bajzik
    Abstract: In the current long-lasting period of low interest rates and overheating housing markets, the discussion of the effect of monetary policy on house prices has arisen again. We examine the broad empirical literature on this topic. We collect 1,447 estimates of the effect of changes in short-term interest rates on house prices. These estimates come from 31 studies and are drawn from vector autoregression models. On average, an increase in the interest rate by one percentage point causes a median decrease in house prices of 0.7 percent for the one-year horizon and 0.9 percent for the two-year horizon. Moreover, we show that at the medium-term (monetary policy) horizon, the effect of monetary policy remains significant after correcting for the publication bias present in the literature. In addition, we collect more than 40 control variables. These capture, first, the context in which the estimates were obtained, and, second, the characteristics of the economies in question. Within both groups of variables we identify several significant aspects explaining differences in the estimates reported in the literature. The most prominent drivers of the heterogeneity are the use of sign restrictions, the inclusion of additional endogenous variables in VAR models, and the level of indebtedness.
    Keywords: House prices, meta-analysis, monetary policy, publication selection, transmission
    JEL: C83 E52 R21
    Date: 2020–12
  23. By: Youngjin Yun (Bank of Korea); Byoungsoo Cho (Bank of Korea)
    Abstract: Monetary policy may affect bank lending differently depending on who the borrower is. We examine both the price and quantity of bank loans in Korea for the 10 years between 2010 and 2019 to study whether the bank lending channel differs for households and firms. Identifying the channel by comparing banks with different amounts of security holdings, we find that the monetary policy effect is significant in business loans, but not in household loans. Evidence suggests that the difference in loan maturities is the reason behind it. Business loans typically have shorter maturities than household loans. Thus, the share of new or refinancing loans, which are more directly influenced by monetary policy shocks, is higher in business loans than in household loans. Our findings provide important policy implications for the cases where household and business sector debts evolve in different directions.
    Keywords: monetary policy, bank lending channel, business loans, household loans
    JEL: E3 E5 G2
    Date: 2021–01–01
  24. By: van 't Klooster, Jens
    Abstract: The ECB’s mandate was drafted 30 years ago and focuses narrowly on preventing inflation. As a consequences, the ECB lacks clear democratic guidance concerning the challenges it faces today: how to deal with government debt and what to do to fight climate change. This lack of guidance undermines the legitimacy of its choices and the effectiveness of its programmes. The EU’s political institutions can solve the ECB’s conundrum by providing it with renewed democratic authorisation.
    Date: 2021–02–03
  25. By: Winfried Koeniger; Benedikt Lennartz; Marc-Antoine Ramelet
    Abstract: We provide empirical evidence on the heterogeneous transmission of monetary policy to the housing market across and within countries. We use household-level data from Germany, Italy and Switzerland together with the respective monetary policy shocks identified from high-frequency data. We find that the pass-through of monetary policy shocks to rates of newly originated (fixed-rate) mortgages is twice as strong in Switzerland than in Germany and Italy. After an accommodative monetary policy shock, this is associated in the housing market with a larger immediate, and persistent increase of transitions from renting to owning; a stronger decrease in rents; and an increase of the price-rent ratio. Within Italy, we find a stronger pass-through to mortgage rates, housing tenure transitions and the price-rent ratio in the northern regions that have been characterized in the literature as more financially developed than the southern regions.
    Keywords: Monetary policy transmission, housing market, home ownership, rents, house prices
    JEL: E21 E52 R21
    Date: 2021

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