nep-cba New Economics Papers
on Central Banking
Issue of 2021‒04‒12
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Liquidity management and monetary transmission: Empirical analysis for India By Vikas Chamal; Ashima Goyal
  2. Bank Supervisory Goals versus Monetary Policy Implementation By Larry D. Wall
  3. It's Worse than "Reverse" The Full Case Against Ultra Low and Negative Interest Rates By William White
  4. Artificial intelligence applied to bailout decisions in financial systemic risk management By Daniele Petrone; Neofytos Rodosthenous; Vito Latora
  5. The Science and Art of Communicating Fan Chart Uncertainty: The case of Inflation Outcome in Sierra Leone By Jackson, Emerson Abraham; Tamuke, Edmund
  6. Monetary Policy Spillover into a Developing Country When the US Federal Fund Rate Rises: Evidence on a Bank Lending Channel By Daiju Aiba
  7. Economic performance under different monetary policy frameworks By Cobham, David; Macmillan, Peter; Mason, Connor; Song, Mengdi
  8. Unconventional Monetary Policy and Bond Market Connectedness in the New Normal By Umut Akovali; Kamil Yilmaz
  9. Fiscal Stimulus of Last Resort By Alessandro Piergallini
  10. Inflation, endogenous quality increment, and economic growth By Zheng, Zhijie; Hu, Ruiyang; Yang, Yibai
  11. Reforming Australian Monetary Policy: How Nominal Income Targeting Can Help Get the Reserve Bank Back on Track By Kirchner, Stephen
  12. Herd Behavior in Crypto Asset Market and Effect of Financial Information on Herd Behavior By \"Uzeyir Aydin; B\"u\c{s}ra A\u{g}an; \"Omer Aydin
  13. COVID-19 and the Fed?s Monetary Policy By Hetzel, Robert
  14. Financial regulation and bank supervision during a pandemic By Ozili, Peterson Kitakogelu
  15. Commodity Money, Free Banking, and Nominal Income Targeting: Lessons for Monetary Policy Reform By Hendrickson, Joshua
  16. Procyclical Leverage and Crisis Probability in a Macroeconomic Model of Bank Runs By Daisuke Ikeda; Hidehiko Matsumoto
  17. Rules vs. Discretion Revisited: A Proposal to Make the Strategy of Monetary Policy Transparent By Hetzel, Robert
  18. Dancing Alone or Together: The Dynamic Effects of Independent and Common Monetary Policies By Povilas Lastauskas; Julius Stakenas
  19. A Critique of Interest Rate?Oriented Monetary Economics By Sumner, Scott
  20. How can green differentiated capital requirements affect climate risks? A dynamic macrofinancial analysis By Yannis Dafermos; Maria Nikolaidi

  1. By: Vikas Chamal (Indira Gandhi Institute of Development Research); Ashima Goyal (Indira Gandhi Institute of Development Research)
    Abstract: A change in monetary operating procedures provides a natural experiment we use to evaluate first whether Indian monetary policy transmission is better when durable liquidity is in surplus or when it is in deficit; second is it better with interest rates as the policy instrument or quantity of money or a mixture of the two. After showing our period of analysis can be divided into two liquidity regimes, we estimate separate structural vector auto-regressions for the financial and real sector, as well as SVARs for the whole period with alternative operating instruments. Monetary transmission from the repo rate was better during the period the liquidity adjustment facility (LAF) was in surplus with the central bank in absorption mode denoting excess durable liquidity. Pass through was faster and the repo rate had a greater influence on other variables. The impact of the rate on output gap exceeds that on inflation. The weighted average call money rate was found to outperform others as the operating target. Monetary policy has evolved so that policy rates are more effective in transmission compared to money supply, but best results are when durable liquidity is also in surplus. The results suggest keeping the LAF in deficit mode over 2011-19 was not optimal.
    Keywords: Monetary transmission, liquidity deficit and surplus, repo rate, instrument, operating target
    JEL: E52 E58 E65
    Date: 2021–03
  2. By: Larry D. Wall
    Abstract: The global financial crisis of 2007–09 revealed substantial weaknesses in large banks' capital adequacy and liquidity. Bank regulators responded with a variety of prudential measures intended to strengthen both. However, these prudential measures resulted in conflicts with the implementation of monetary policy that helped alter the way the Federal Reserve conducts monetary policy. I review three such conflicts: regulation inhibiting interest on excess reserves arbitrage starting in 2008, regulation inhibiting banks' operations in the repo market in 2019, and regulation inhibiting their operations in the Treasury securities market in 2020. The article concludes with a discussion of the issues associated with changing specific banking regulations and some more general suggestions for dealing with these types of conflicts.
    Keywords: banking regulation; capital adequacy; bank liquidity regulation; interest on reserves; Treasury market; repo market
    JEL: E52 E58 G28
    Date: 2021–03–29
  3. By: William White (Economic Development and Review Committee, OECD)
    Abstract: It is becoming increasingly accepted that lowering interest rates might at some point prove contractionary (the 'reversal interest rate') if lower lending margins cut the supply of bank loans. This paper argues that there are many other reasons to question reliance on monetary policy to provide economic stimulus, particularly over successive financial cycles. By encouraging the issue of debt, often for unproductive purposes, monetary stimulus becomes increasingly ineffective over time. Moreover, it threatens financial stability in a variety of ways, it leads to real resource misallocations that lower potential growth, and it finally produces a policy 'debt trap' that cannot be escaped without significant economic costs. Debt-deflation and high inflation are both plausible outcomes.
    Keywords: negative interest rates, yield curve control, financial stability, banking supervision, shadow banking.
    JEL: E40 E43 E44
    Date: 2021–03–05
  4. By: Daniele Petrone; Neofytos Rodosthenous; Vito Latora
    Abstract: We describe the bailout of banks by governments as a Markov Decision Process (MDP) where the actions are equity investments. The underlying dynamics is derived from the network of financial institutions linked by mutual exposures, and the negative rewards are associated to the banks' default. Each node represents a bank and is associated to a probability of default per unit time (PD) that depends on its capital and is increased by the default of neighbouring nodes. Governments can control the systemic risk of the network by providing additional capital to the banks, lowering their PD at the expense of an increased exposure in case of their failure. Considering the network of European global systemically important institutions, we find the optimal investment policy that solves the MDP, providing direct indications to governments and regulators on the best way of action to limit the effects of financial crises.
    Date: 2021–02
  5. By: Jackson, Emerson Abraham; Tamuke, Edmund
    Abstract: The use of macro-econometric modelling technique has become a norm for policy decisions in central banks and in particular, the Bank of Sierra Leone. This study has leveraged on the technicalities of scientific and artistic approaches of assessing risks around point / baseline forecast; this in general makes it more convincing for probability confidence bands to be used in explaining uncertainty that surround point forecast in particular. In the case of this study, the use of the Box-Jenkins ARIMAX model has made it possible to highlight the relevance of Composite Leading Indicator (CLI) like Exchange Rate in alerting signals about early turning point of inflation outcome, both in terms of the uncertainty and risks surrounding its projections. With the derived (scientific) probability distribution of risks (30%, 60% and 90%), it was possible for the study outcome to unearth vast amount of information from the Inflation Fan Chart, particularly with respect to the art of providing balanced assessment of policy framework needed to communicate the BSL’s price stability objective. While the use of Fan Chart is hailed as a very relevant tool, the paper also recommend the use of other model approaches like Scenario and Sensitivity analysis, also considered relevant in providing leading evidence of balancing risks surrounding macroeconomic outlook.
    Keywords: Fan Chart; Normal Distribution; Forecast uncertainty; Balanced Risks
    JEL: C15 C52 C81 E37 E59
    Date: 2021–01–02
  6. By: Daiju Aiba
    Abstract: Banks in developing countries are highly dependent on funding sources from abroad, and such high dependency on external funding could cause vulnerability to the sector by channeling the effects of foreign monetary policies to domestic bank lending. In this paper, we study the international transmission of monetary policy of US and banks’ major shareholders’ home countries into bank lending in Cambodia, using data on banks’ loan disbursement and balance sheets from 2013Q1 to 2019Q2. Cambodia is one of the least developed countries in the south-east Asian region, while its economy is highly dollarized and capital movement is free. This environment is likely to allow banks to transmit financial shocks into domestic lending. As a result, we find that US monetary policy affected domestic lending through the channel of foreign funding exposure, suggesting that Cambodian banks with foreign funding exposure are likely to reduce lending when there is a rise in the cost of funding from abroad. We also find that an increase in the US monetary policy rate is associated with increases in loan disbursements in secured loans, USD currency loans, and retail loans, suggesting the monetary transmission also affected loan reallocations by changing risk-taking behavior in bank lending. In addition, we find that these results are robust for US monetary policy effects, but weak and not robust for monetary policies of banks’ major shareholders’ home countries.
    Keywords: Bank Lending Channel, International Monetary Policy Transmission, Capital Inflow, Developing Countries, Dollarization, Cambodia
    Date: 2020–08–11
  7. By: Cobham, David; Macmillan, Peter; Mason, Connor; Song, Mengdi
    Abstract: We first outline the major trends in monetary policy frameworks, which are shifts towards inflation targeting and towards frameworks which offer higher degrees of monetary control. We then examine the economic performance (inflation and growth) associated with different frameworks, presenting unconditional and conditional analyses, running regressions weighted by GDP and population as well as by the number of countries, and using predictions of countries’ monetary policy framework choices to address the issue of endogeneity. We find some differences in performance associated with the different monetary policy frameworks, together with a general improvement over time which is explained in part by the trends towards inflation targeting and more precise monetary control but in part, and perhaps more strongly, reflects a more general trend towards better economic performance.
    Keywords: monetary policy framework, exchange rate targeting, inflation targeting, inflation, economic growth, weighted regressions
    JEL: E52 E61 F41
    Date: 2021–04–03
  8. By: Umut Akovali (Koc University); Kamil Yilmaz (Koc University)
    Abstract: Since the global financial crisis, major central banks gradually switched to unconventional monetary policies (UMPs) as part of their efforts to directly influence the long-term interest rates. This study analyzes the impact of conventional/unconventional monetary policies on sovereign bond return spillovers across countries and maturities since February 2007. Following the Taper Tantrum of mid-2013 and the ECB’s policy convergence to other major central banks in 2015, the long-term return connectedness across countries increased, overtaking the short-term connectedness and lowering the dispersion of connectedness measures across maturities. Over the same period, net connectedness from short- to long-term maturities weakens, while net connectedness from medium- to long-term maturities stays strong. Finally, panel regression results show that UMPs in the form of higher central bank asset ratios led to higher pairwise long-term return connectedness even when the control variables such as trade and portfolio investment flows and the distance between pairs of countries are included in regression analysis.
    Keywords: Unconventional monetary policy, quantitative easing, yield curve, vector autoregression, variance decomposition, elastic net.
    JEL: F34 G15 C32 G23
    Date: 2021–03
  9. By: Alessandro Piergallini
    Abstract: I examine global dynamics in a monetary model with overlapping generations of finite-horizon agents and a binding lower bound on nominal interest rates. Debt targeting rules exacerbate the possibility of self-fulfilling liquidity traps, for agents expect austerity following deflationary slumps. Conversely, activist but sustainable fiscal policy regimes - implementing intertemporally balanced tax cuts and/or transfer increases in response to disinflationary trajectories - are capable of escaping liquidity traps and embarking inflation into a globally stable path that converges to the target. Should fiscal stimulus of last resort be overly aggressive, however, spiral dynamics around the liquidity-trap steady state exist, causing global indeterminacy.
    Date: 2021–04
  10. By: Zheng, Zhijie; Hu, Ruiyang; Yang, Yibai
    Abstract: This study explores the effects of monetary policy in a Schumpeterian growth model with endogenous quality increment and distinct cash-in-advance (CIA) constraints on consumption, manufacturing and R&D investment. Our results are summarized as follows. When the CIA constraint is solely on consumption expenditure, an increase in the nominal interest rate may stifle economic growth by lowering the arrival rate of innovation and stimulate it at the same time by raising the size of quality increment. An additional CIA constraint on manufacturing weakens the growth-retarding effect and enhances the growth-promoting effect, whereas an additional CIA constraint on R&D investment strengthens only the negative growth effect. The quantitative analysis finds that the relationship between inflation and growth can be either monotonically decreasing or hump-shaped, but the welfare effect of inflation is always negative.
    Keywords: Monetary Policy, Economic Growth, R&D, Endogenous Quality Increment
    JEL: E41 O30 O40
    Date: 2021–03–15
  11. By: Kirchner, Stephen (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2021–01–27
  12. By: \"Uzeyir Aydin; B\"u\c{s}ra A\u{g}an; \"Omer Aydin
    Abstract: The initial purpose of the study is to search whether the market exhibits herd behaviour or not by examining the crypto-asset market in the context of behavioural finance. And the second purpose of the study is to measure whether the financial information stimulates the herd behaviour or not. Within this frame, the announcements of the Federal Open Market Committee (FOMC), Governing Council of European Central Bank (ECB) and Policy Board of Bank of Japan (BOJ) for interest change, and S&P 500, Nikkei 225, FTSE 100 and GOLD SPOT indices data were used. In the study, the analyses were made over 100 cryptocurrencies with the highest trading volume by the use of the 2014:5 - 2019:12 period. For the analysis, the Markov Switching approach, as well as loads of empiric models developed by Chang et al. (2000), were used. According to the results obtained, the presence of herd behaviour in the crypto-asset market was determined in the relevant period. But it was found that interest rate announcements and stock exchange performances had no effect on herd behaviour.
    Date: 2021–04
  13. By: Hetzel, Robert (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2020–10–08
  14. By: Ozili, Peterson Kitakogelu
    Abstract: Pandemics lead to a sudden decline in the level of economic activities. Lending institutions reduce credit supply to businesses due to fears of rising bad debts during a pandemic. This paper highlights some approach to financial regulation and bank supervision during a pandemic such as the SARS and COVID-19 pandemic. The approach suggested in this paper are intended to be applicable to all types of pandemic since their effect on banks and financial institutions are relatively the same.
    Keywords: Pandemic, COVID-19, coronavirus, SARS, bank regulation, financial institution, banks, bank supervision, financial regulation.
    JEL: G21 G23 G24 G28 I18
    Date: 2021
  15. By: Hendrickson, Joshua (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2019–06–13
  16. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Assistant Professor, National Graduate Institute for Policy Studies, E-mail:
    Abstract: A macroprudential perspective posits a link between bank fundamentals and the likelihood of banking crises. We articulate this link by developing a dynamic general equilibrium model that features bank runs in a global game framework. The model endogenizes the probability of bank runs as a function of bank fundamentals, leverage in particular. The model generates procyclical leverage and shows that credit growth tends to precede banking crises, replicating the empirical finding of Schularick and Taylor (2012). Countercyclical leverage restrictions can improve social welfare by reducing the crisis probability despite dampening economic activities in normal times.
    Keywords: Banking crises, global games, macroprudential policy
    JEL: E32 E44 G21 G28
    Date: 2021–03
  17. By: Hetzel, Robert (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2019–06–25
  18. By: Povilas Lastauskas (Bank of Lithuania, Vilnius University); Julius Stakenas (Vilnius University)
    Abstract: What would have been the hypothetical effect of monetary policy shocks had a country never joined the euro area, in cases where we know that the country in question actually did join the euro area? It is one thing to investigate the impact of joining a monetary union, but quite another to examine two things at once: joining the union and experiencing actual monetary policy shocks. We propose a methodology that combines synthetic control ideas with the impulse response functions to uncover dynamic response paths for treated and untreated units, controlling for common unobserved factors. Focusing on the largest euro area countries, Germany, France, and Italy, we find that an unexpected rise in interest rates depresses inflation and significantly appreciates exchange rate, whereas GDP fluctuations are less successfully controlled when a country belongs to the monetary union than would have been the case under the independent monetary policy. Importantly, Italy turns out to be the overall beneficiary, since all three channels – price, GDP, and exchange rate – deliver the desired results. We also find that stabilizing an economy within a union requires somewhat smaller policy changes than attempting to stabilize it individually, and therefore provides more policy space.
    Keywords: Dynamic causal effects; Monetary union; Price puzzle; Common factors
    JEL: C14 C32 C33 E52
    Date: 2021–03–26
  19. By: Sumner, Scott (Mercury Publication)
    Abstract: Abstract not available.
    Date: 2020–11–23
  20. By: Yannis Dafermos; Maria Nikolaidi
    Abstract: Using an ecological macrofinancial model, we explore the potential impact of the ‘green supporting factor’ (GSF) and the ‘dirty penalising factor’ (DPF) on climate-related financial risks. We identify the transmission channels by which these green differentiated capital requirements (GDCRs) can affect credit provision and loan spreads, and we analyse these channels within a dynamic framework in which climate and macrofinancial feedback effects play a key role. Our main findings are as follows. First, GDCRs can reduce the pace of global warming and decrease thereby the physical financial risks. This reduction is quantitatively small, but is enhanced when the GSF and the DPF are implemented simultaneously or in combination with green fiscal policies. Second, the DPF reduces banks' credit provision and leverage, making them less fragile. Third, both the DPF and the GSF generate some transition risks: the GSF increases bank leverage because it boosts green credit and the DPF increases loan defaults since it reduces economic activity. These effects are small in quantitative terms and are attenuated when there is a simultaneous implementation of the DPF and the GSF. Fourth, fiscal policies that boost green investment amplify the transition risks of the GSF and reduce the transition risks of the DPF; the combination of green fiscal policy with the DPF is thereby a potentially effective climate policy mix from a financial stability point of view.
    Keywords: : stock-flow consistent modelling, climate change, financial stability, green financial regulation
    JEL: E12 E44 G18 Q54
    Date: 2021–03

This nep-cba issue is ©2021 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.