nep-cba New Economics Papers
on Central Banking
Issue of 2021‒04‒19
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. How risky is Monetary Policy? The Effect of Monetary Policy on Systemic Risk in the Euro Area By Georg Leitner; Teresa Hübel; Anna Wolfmayr; Manuel Zerobin
  2. Money Matters: Global banks, safe assets and monetary autonomy By Sergio Florez-Orrego
  3. Monetary policy, Twitter and financial markets: evidence from social media traffic By Donato Masciandaro; Davide Romelli; Gaia Rubera
  4. Divisia Monetary Aggregates for Russia: Money Demand, GDP Nowcasting, and the Price Puzzle By Makram El-Shagi; Kiril Tochkov
  5. MEDSEA-FIN A DSGE model of the Maltese economy with housing and financial frictions By William Gatt; Noel Rapa; Luca Brugnolini
  6. Asymmetric Effects of Monetary Policy on the Armenian Economy By Haykaz Igityan
  7. Global inflation: Low for long or higher for longer? By Demary, Markus; Hüther, Michael
  8. Unconventional monetary policy reaction functions: evidence from the US By Luca Agnello; Vitor Castro; Gilles Dufrénot; Fredj Jawadi; Ricardo Sousa
  9. Monetary policy rules and the effective lower bound in the Euro area By Haavio, Markus; Laine, Olli-Matti
  10. The Global Monetary System and the Use of Local Currencies in ASEAN+3 By ITO Hiroyuki; KAWAI Masahiro
  11. Euro area equity risk premia and monetary policy: a longer-term perspective By Kapp, Daniel; Kristiansen, Kristian
  12. Managing households' expectations with unconventional policies By D'Acunto, Francesco; Hoang, Daniel; Weber, Michael
  13. The Fed's response to economic news explains the "Fed information effect" By Bauer, Michael D.; Swanson, Eric T.
  14. Financial Spillover and Contagion Risks in the Euro Area in 2007-2019 By Roman Garcia; Dimitri Lorenzani; Daniel Monteiro; Francesco Perticari; Bořek Vašíček; Lukas Vogel
  15. Exchange Rate Pass-through in Armenia By Stella Mnoyan
  16. High-yield bond markets during the COVID-19 crisis: the role of monetary policy By Dmitry Khametshin
  17. Political Voice on Monetary Policy: Evidence from the Parliamentary Hearings of the European Central Bank By Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli
  18. Income-specific inflation rates and the effects of monetary policy: the case of North Macedonia By Biljana Jovanovic; Marko Josimovski
  19. Structural Reforms in DSGE Model By Vahagn Davtyan; Haykaz Igityan
  20. Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications By Dąbrowski, Marek A.; Papież, Monika; Śmiech, Sławomir
  21. How do inequalities affect the natural interest rate, and how do they impact monetary policy? Comparing Germany, Japan and the US By Mariam Camarero; Gilles Dufrénot; Cecilio Tamarit
  22. An empirical foundation for calibrating the G-SIB surcharge By Alexander Jiron; Wayne Passmore; Aurite Werman
  23. COVID-19 as a Stress Test: Assessing the Bank Regulatory Framework By Alice Abboud; Elizabeth Duncan; Akos Horvath; Diana A. Iercosan; Bert Loudis; Francis Martinez; Timothy Mooney; Benjamin Ranish; Ke Wang; Missaka Warusawitharana; Carlo Wix
  24. History as heresy: unlearning the lessons of economic orthodoxy By O'Sullivan, Mary
  25. Inflation Thresholds and Policy-Rule Inertia: Some Simulation Results By Cristina Fuentes-Albero; John M. Roberts
  26. Macroprudential Policy and Elections: What Matters? Abstract: By Can Sever; Emekcan Yucel
  27. Asymmetric Effects of Monetary Policy in Different Phases of Armenia's Business Cycle By Haykaz Igityan

  1. By: Georg Leitner (Department of Economics, Vienna University of Economics and Business); Teresa Hübel (Department of Economics, Vienna University of Economics and Business); Anna Wolfmayr (Department of Economics, Vienna University of Economics and Business); Manuel Zerobin (Department of Economics, Vienna University of Economics and Business)
    Abstract: This paper empirically investigates the effect of monetary policy on systemic risk within the Euro area. We estimate a Bayesian proxy-VAR where we exploit high-frequency identified monetary policy surprises for identification. Employing aggregate as well as market specific systemic risk measures, we provide novel evidence on the heterogeneous risk transmission of conventional and unconventional monetary policy on different financial markets. We find that expansionary conventional monetary policy, near term guidance and forward guidance decrease systemic risk whereas quantitative easing (QE) increases systemic risk. While the effects are qualitatively homogeneous for near term guidance and forward guidance, there exists heterogeneity in the risk transmission of conventional monetary policy and QE across different financial markets. The latter increases systemic risk significantly within bond markets, foreign exchange markets and among financial intermediaries. This might be caused by increased search for yield behaviour as QE distinctively reduces longer term interest rates. Our analysis shows that there is a potential threat to financial stability caused by QE which should be concerned by monetary- and macroprudential policymakers.
    Keywords: Monetary Policy, CISS, Systemic Risk, Bayesian-Proxy-VAR, High-Frequency Identification
    JEL: C32 E44 E52 G10
    Date: 2021–03
  2. By: Sergio Florez-Orrego
    Abstract: This paper depicts an often neglected channel of transmission of monetary policy, namely international safety appetite, as an important source of production and risk-taking international monetary spillovers. The model features a local economy with exogenous financial frictions that lead firms to need both local and foreign financing to pay for their factors of production. Global and local risk-averse banks supply firms with risky loans while buying safe assets to governments to hedge themselves against equity shocks. Monetary policy shocks of a hegemon currency issuer affect returns obtained by banks for the risky loans they concede, altering these agents' risk pricing and balance sheet composition. Main results outline that global monetary policy tightening reduces the returns of risky global loans, inducing global banks to reduce risky loan creation, ultimately decreasing both production and consumption volatility internationally. Two more secondary results arise. First, local monetary authorities may counteract global monetary policy spillovers, but this will entail a trade-off between boosting production and reducing consumption volatility. Second, both global and local expansive monetary policy increase the demand for global safe assets, relaxing the budget constraint of monopolistic global safe asset issuers. Understanding the international safety appetite mechanism of transmission appears to be of critical importance as it may impact the effectiveness of monetary policy in open economies as well as its optimal design.
    Keywords: global currencies, monetary policy spillovers, exorbitant privilege.
    JEL: E42 E44 E52 E63 F42 F44
    Date: 2021–04–07
  3. By: Donato Masciandaro; Davide Romelli; Gaia Rubera
    Abstract: How does central bank communication affect financial markets? This paper shows that the monetary policy announcements of three major central banks, i.e. the European Central Bank, the Federal Reserve and the Bank of England, trigger significant discussions on monetary policy on Twitter. Using machine learning techniques we identify Twitter messages related to monetary policy around the release of monetary policy decisions and we build a metric of the similarity between the policy announcement and Twitter traffic before and after the announcement. We interpret large changes in the similarity of tweets and announcements as a proxy for monetary policy surprise and show that market volatility spikes after the announcement whenever changes in similarity are high. These findings suggest that social media discussions on central bank communication are aligned with bond and stock market reactions.
    Keywords: monetary policy, central bank communication, financial markets, social media, Twitter, Federal Reserve, European Central Bank, Bank of England
    JEL: E44 E52 E58 G14 G15 G41
    Date: 2021
  4. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Kiril Tochkov (Texas Christian University, Fort Worth, TX, US)
    Abstract: The lack of developed financial markets and well-functioning transmission channels assigns monetary aggregates in emerging economies the potential role of nominal anchor, intermediate target, or informational variable for monetary policy. The effectiveness of this approach relies crucially on the correct measurement of money, which is not fulfilled by the conventional index based on the simple sum of financial assets. This paper calculates alternative Divisia monetary aggregates for Russia over the period 1998-2019, which account for the level of liquidity of a given monetary asset by assigning weights according to the usefulness of that asset for transaction services. Divisia is found to follow a growth pattern markedly different from the simple sum, whereby deviations between the two series are even more pronounced when foreign-currency accounts are included. We conduct three empirical exercises to demonstrate the advantages of Divisia over the simple sum. Divisia confirms the stability of the money demand function and reflects portfolio shifts in response to changes in the opportunity cost of simple sum. Lastly, Divisia mitigates the price puzzle phenomenon relative to the conventional measure. We conclude that Divisia monetary aggregates would improve the effectiveness of monetary policy in Russia.
    Keywords: Monetary policy, monetary aggregates, Divisia, nowcasting, Russia
    JEL: C43 E41 E52 O52
    Date: 2021–01
  5. By: William Gatt; Noel Rapa; Luca Brugnolini (Central Bank of Malta)
    Abstract: We extend the Central Bank of Malta’s core DSGE model – MEDSEA – with housing and financial frictions to capture the important theoretical links between house prices, credit and consumption. The model features a rich set of features that are inherent to small open economies in a monetary union. We add a borrowing constraint on a subset of households that is contingent on the value of housing wealth and a maximum loan-to-value (LTV) ratio. We also impose capital requirements on the financial intermediary through a minimum capital-to-assets ratio (CAR) constraint. These two requirements form the basis of a typical macroprudential regime in a developed economy. We show how the macroprudential authority can dampen the rise in credit and consumption during a credit boom by using these two policy tools to ‘lean against the wind’. MEDSEA-FIN is therefore tailored to study macro-financial issues related to housing and credit, and the adequate policy responses.
    JEL: C54 E44 E58 E60
    Date: 2020
  6. By: Haykaz Igityan (Monetary Policy Department, Central Bank of Armenia)
    Abstract: Whether inflation and output respond symmetrically or asymmetrically to contractionary and expansionary monetary policy shock of the same size has important policy implications. This paper shows the presence of asymmetric responses in Armenian inflation and output to positive and negative monetary policy shocks of the same size by employing econometric models. Contractionary policy decreases inflation less than expansionary policy increases it. Output reacts in the opposite way. An estimated small open economy DSGE model with sticky wages and investment adjustment costs explains about half of the asymmetry observed in the monetary policy transmission mechanism. This paper finds that the main part of inflation reaction asymmetry is a result of a highly convex Phillips curve for the importers. The nonlinearities of the internal economy explain the predominant part of the asymmetry in output reaction.
    Keywords: nonlinear VAR, New Keynesian Model, monetary policy, asymmetries, business cycle, expansion, recession, asymmetric effects of monetary policy
    JEL: C32 E12 E32 E52
    Date: 2021–03
  7. By: Demary, Markus; Hüther, Michael
    Abstract: Inflation has started to increase, and the return of inflation comes at a time in which economies begin to recover from pandemic-induced and lockdown-induced recessions. This raises questions about how much and how long inflation will go up as well as about whether central banks have to step-up against inflation at the cost of slowing down the economic recovery. Has "low for long" turned into "higher for longer"? We look at the different possible factors that could drive inflation, like pandemic- and lockdown-induced pend-up demand, price-wage-spirals, fiscal policy and other relevant factors. We conclude from our analysis that inflation could possibly rise in the short-term, but that inflation will return to low rates in the medium-term. While pend-up demand will result in higher prices, the inflation effect will only be transitory and moreover concentrated on services related to tourism and accommodation and be absent in other sectors where digital alternatives leading to more competition are available. Even in the case in which the combination of accommodative monetary policy and expansionary fiscal policy would close the output gap and drive the economy towards a state of overheating, we expect a low inflationary effect because of the flat Phillips-curve. Thus, we do not expect any trade-offs for central banks between fighting inflation and supporting the economies to grow and to deleverage. Instead, we see a welcomed return of inflation towards its target value accompanied by an economic recovery that enables central banks to end their asset purchasing programmes and their negative interest rate policies in a natural way, that means we expect higher interest rates without risks to the economic recovery.
    JEL: E31 E52
    Date: 2021
  8. By: Luca Agnello (SEAS - University of Palermo, Dept Econ Business & Stat); Vitor Castro (Loughborough University, Sch Business & Econ, NIPE - University of Minho, Econ Policies Res Unit); Gilles Dufrénot (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Fredj Jawadi (Université de Lille); Ricardo Sousa (The Economic Policies Research Unit (NIPE) - The Economic Policies Research Unit (NIPE), LSE - London School of Economics and Political Science)
    Abstract: We specify unconventional monetary policy reaction functions for the Fed using linear and nonlinear econometric frameworks. We find that nonstandard policy measures are largely driven by the dynamics of inflation and the output gap, with the effect being particularly strong during QE rounds. Moreover, we uncover the presence of asymmetry and regime dependence in central bank's actions since the global financial crisis, especially concerning the response of the term spread and the shadow short rate to the growth rate of central bank reserves. From a policy perspective and given the lack of a systematic response of monetary policy to asset price growth in nonstandard times, our findings seem to corroborate the view that concerns about asset price bubbles, financial sector pro-cyclicality and systemic risk should be part of the macro-prudential policy toolkit.
    Keywords: central bank reserves,asset prices,nonlinear models,inflation,output gap,shadow short rate,term spread,unconventional monetary policy reaction function
    Date: 2020–09
  9. By: Haavio, Markus; Laine, Olli-Matti
    Abstract: We analyze the economic performance of different monetary policy strategies, or rules, in a low interest rate environment, using simulations with a DSGE model which has been estimated for the euro area. We study how often the effective lower bound of interest rates (ELB) is likely to bind, and how much forgone monetary policy accommodation this entails. Macroeconomic outcomes are measured by the mean levels and the volatility of output (gaps), unemployment and inflation. We present three sets of results. First, the macroeconomic costs of the ELB are likely to grow in a non-linear manner if the monetary policy space (the difference between the normal, or average, level of nominal interest rates and the ELB) shrinks. Second, a point inflation target appears to outperform a target range. Third, the (relative) performance of low-for-long (L4L) monetary policy rules depends on the size of the monetary policy space. The L4L rules tend to perform well, if the monetary space is small, but if the space is larger these rules, while stabilizing inflation, may lead to more volatility in the real economy than flexible inflation targeting.
    JEL: E31 E32 E52 E58
    Date: 2021–04–08
  10. By: ITO Hiroyuki; KAWAI Masahiro
    Abstract: When the new corona virus (COVID-19) pandemic triggered the global economic crisis in March 2020, the US dollar appreciated while the prices of many other financial assets plunged. The US dollar also appreciated in the immediate aftermath of the Global Financial Crisis (GFC) in 2008. These two episodes signify the important role the US dollar plays as an international currency and the dominant role of the US dollar and the limited use of the local currencies for international transactions, especially in Asia. Using a wide variety of data on the use of currencies for international transactions, we find that the US dollar is the predominantly important currency in the Asian region for cross-border trade, investment, finance, international reserve holding and exchange rate management. In many aspects of international transactions, the use of local currencies in the ASEAN+3 countries is underdeveloped. Recently, the Chinese renminbi is on its way to becoming one of the major international currencies. However, it is still a long way for the renminbi to become a major currency even in the Asian region.
    Date: 2021–03
  11. By: Kapp, Daniel; Kristiansen, Kristian
    Abstract: This study analyses the effects of euro area monetary policy on equity risk premia (ERP). We find that changes in equity prices during periods of accommodative monetary policy mainly reflected adjustments in the discount factor and economic activity – rather than fluctuations in investors’ required risk compensation. Furthermore, the ERP appears to not have declined much since the introduction of unconventional monetary policy and stands higher than prior to the GFC. Use of identified monetary policy shocks points to insignificant effects of monetary policy on the ERP. Further breakdown of these shocks reveals that monetary policy has a significant upwards impact on the ERP if it is perceived as a negative information surprise, while the opposite prevails in the case of a genuine accommodative monetary policy surprise. Accumulating these effects over time suggests that the two might have largely offset each other since the introduction of unconventional monetary policy. JEL Classification: E22, E52, G12
    Keywords: equity risk premia, monetary policy shocks, monetary policy transmission
    Date: 2021–04
  12. By: D'Acunto, Francesco; Hoang, Daniel; Weber, Michael
    Abstract: Binding lower bounds on interest rates and large government deficits limit the scope of fiscal and monetary policies to stimulate households' spending through financial intermediaries and firms. Policymakers have thus been implementing unconventional policies that aim to increase households' spending directly through managing their expectations. We first show theoretically and empirically that higher in ation expectations increase households' consumption. We then design a difference-in-differences strategy to assess the effectiveness of unconventional fiscal policy and forward guidance, both of which aim to raise aggregate demand via managing expectations. Whereas unconventional fiscal policy increases households' expectations and spending, forward guidance announcements do not.
    Keywords: Expectations,Household Finance,Heterogeneous Beliefs,Fiscal Policy,Monetary Policy,Cognitive Abilities,Behavioral Macroeconomics,Macroeconomics with Micro Data
    JEL: D12 D84 D91 E21 E31 E32 E52 E65
    Date: 2021
  13. By: Bauer, Michael D.; Swanson, Eric T.
    Abstract: High-frequency changes in interest rates around FOMC announcements are a standard method of measuring monetary policy shocks. However, some recent studies have documented puzzling effects of these shocks on private-sector forecasts of GDP, unemployment, or inflation that are opposite in sign to what standard macroeconomic models would predict. This evidence has been viewed as supportive of a "Fed information effect" channel of monetary policy, whereby an FOMC tightening (easing) communicates that the economy is stronger (weaker) than the public had expected. The authors show that these empirical results are also consistent with a "Fed response to news" channel, in which incoming, publicly available economic news causes both the Fed to change monetary policy and the private sector to revise its forecasts. They provide substantial new evidence that distinguishes between these two channels and strongly favors the latter; for example, regressions that include the previously omitted public macroeconomic news, high-frequency stock market responses to Fed announcements, and a new survey that they conduct of individual Blue Chip forecasters all indicate that the Fed and private sector are simply responding to the same public news, and that there is little if any role for a "Fed information effect".
    Keywords: Federal Reserve,forecasts,survey,Blue Chip,Delphic forward guidance
    JEL: E43 E52 E58
    Date: 2021
  14. By: Roman Garcia; Dimitri Lorenzani; Daniel Monteiro; Francesco Perticari; Bořek Vašíček; Lukas Vogel
    Abstract: This paper analyses empirically the main direct and indirect transmission channels of financial spillovers and contagion risks in the euro area, focusing on the sovereign-to-sovereign, sovereign-to-bank, and bankto-bank channels. We employ correlation analysis, analysis of bank balance sheets, reduced-form models inferring the interconnectedness among agents from market data, and simulated structural models. The value added by this paper to the literature consists both in analysing the recent episodes of financial distress (until 2019), which happened after reforms of the Economic and Monetary Union (EMU) architecture were introduced in response to the euro area debt crisis, and in our reliance on complementary analytical tools (“tool kit”). Overall, the paper suggests that: (i) sovereign-to-sovereign spillover risks have weakened, arguably also due to a more limited role of redenomination risk; (ii) financial spillovers from sovereigns to banks (and vice versa) have become smaller in recent years; and (iii) the bank-to-bank transmission channel remains the most relevant in terms of financial spillovers and potential contagion. Finally, when analysing the impact of financial spillovers on the real economy, we find that higher financial risks can imply sizeable losses in terms of real GDP growth.
    JEL: C01 E43 G01 G21 G28
    Date: 2021–01
  15. By: Stella Mnoyan (Monetary Policy Department, Central Bank of Armenia)
    Abstract: In this paper, we develop a semi-structural macroeconomic model to estimate the Exchange Rate Pass-through in Armenia using Bayesian estimation. The pass-through both to import prices and core inflation is somewhat lower than the average results for comparable emerging economies reported in the literature. As we calculate time-varying pass-through rates we also explore critical factors causing shifts over time. The macroeconomic view of exchange rate pass-through incompleteness, especially the monetary policy credibility factor, plays a significant role.
    Keywords: Purchasing Power, Taylor Rule, Risk Premia, Exchange Rates, Exchange Rate Pass-through, Output Inflation, Bayesian Analysis, Econometric Modeling, Simulation
    JEL: F31 E31 E37 C11
    Date: 2019–10
  16. By: Dmitry Khametshin (Banco de España)
    Abstract: This article documents the difference in corporate bond issuance between the euro area (EA) and the United States (US) in 2020, especially in the high-yield (HY) segment, and discusses the role that the monetary policy measures undertaken by the US Federal Reserve (Fed) and the ECB in response to the Covid-19 crisis may have played in explaining such difference. We document that the issuance of HY bonds since February 2020 has been lower by historical standards in the EA than in the US. The Fed’s measures aimed at the HY segment, mainly the purchase of HY bond exchange traded funds (ETFs), could have reduced credit spreads and improved market liquidity, which in turn could have stimulated debt issuance. Alternatively, HY issuers in the EA may have faced better bank funding conditions due to the ECB’s targeted longer term refinancing operations (TLTRO) and to other measures by national fiscal authorities, leading such issuers to substitute bank credit for bond finance. The article discusses these possibilities and argues that they all may have played a role to a certain extent.
    Keywords: corporate bond purchase programs, monetary policy, COVID-19
    JEL: E58 E43 G12
    Date: 2021–03
  17. By: Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli
    Abstract: Previous scholarship on central bank accountability has generally focused on monetary authorities' deeds and words while largely ignoring the other side of the accountability relationship, namely politicians’ voice on monetary policy. This raises a fundamental question: what are central banks held accountable for by elected officials? To answer this question, we employ structural topic models on a new dataset of the Monetary Dialogues between the Members of the European Parliament (MEPs) and the President of the European Central Bank (ECB) from 1999 to 2019. Our findings are twofold. First, we uncover differences in how MEPs keep the ECB accountable for its primary, price stability objective. We show that European politicians also attempt to keep the central bank accountable for a broader set of issues that are connected with, but distinct from, the central bank's primary goal. Second, we show that unemployment is a key explanatory variable for the political voice articulated by individual MEPs in accountability settings. In particular, higher rates of domestic unemployment lead MEPs to devote less voice on issues related to the ECB’s price stability mission. These findings reveal the existence of a "political" Phillips curve reaction function, which enriches our understanding of the principal-agent accountability relationship between politicians and central bankers.
    Keywords: Accountability; European Central Bank; politicians; European Parliament
    JEL: E50 E52 E58
    Date: 2021
  18. By: Biljana Jovanovic (National Bank of the Republic of North Macedonia); Marko Josimovski (National Bank of the Republic of North Macedonia)
    Abstract: In this paper, we investigate the effects of monetary policy concerning the inflation rates specific for each income group of households. We find that the prices specific for high-income households are generally more rigid and less volatile compared to the prices specific for middle and lower-income households. This means that monetary policy can differently affect the different inflation rates specific for each of the income groups. By using a Factor-Augmented VAR (FAVAR) model, we show that a monetary policy shock affects high-income households less compared to middle and lower-income households, although the differences between the separate income groups are generally small. Then, by using a small scale gap model, we find that the prices of low-income households are the most sensitive to a monetary policy shock, while the prices of the top-income households are the least sensitive to the shock, which is in line with our empirical findings.
    Keywords: Inflation, monetary policy, distributional effects
    JEL: E31 E52
    Date: 2021
  19. By: Vahagn Davtyan (Monetary Policy Department, Central Bank of Armenia); Haykaz Igityan (Monetary Policy Department, Central Bank of Armenia)
    Abstract: This paper develops a DSGE model for a small open economy dividing it into tradable and non-tradable sectors in order to evaluate the impact of structural reforms on the economy for developing countries. The model is constructed and solved in a way that the steady state level of each sector’s employment rate is a function of its sector subsidy level. The economic meaning of such a result is that when a government subsidizes one of the sectors can become over employed. We also discuss the effects of exchange rate depreciation as an unconventional monetary policy tool when there is a ZLB problem or as a tool to boost the economy and to improve the current account. The results show that directly subsidizing the tradable sector can be a better policy than the depreciation of nominal exchange rate for making the economy more export oriented. The reason of such outcomes is the price stickiness of the sectors, which was validated by checking the sensitivity of the model with respect to its structural parameters. To conclude, for closing current account deficit or simply, for improving it the government should implement policies aimed at changing the structure of the economy.
    Keywords: small open economy, DSGE, monetary policy, taxes and subsidies, foreign exchange
    JEL: E12 E37 E52 E65 F31 H25
    Date: 2021–02
  20. By: Dąbrowski, Marek A.; Papież, Monika; Śmiech, Sławomir
    Abstract: This paper raises the question of whether the exchange rate regime matters for output volatility. Using the two de facto exchange rate regime classifications, it is demonstrated that the answer to this question is conditional ‘yes’. The key finding is that the exchange rate regime modifies the importance of determinants of output volatility rather than impacts it directly. This point is explained within a macroeconomic model of an open economy and is corroborated with empirical evidence for 48 advanced and emerging market economies. It is found that under the pegged regime the trade openness contributes to a reduction in output volatility, whereas the financial development has an opposite effect. Moreover, bigger economies experience lower output volatility irrespective of the exchange rate regime, albeit the beneficial size effect is stronger under floating regimes. The results do not depend on the classification employed to identify de facto pegs and floats.
    Keywords: exchange rate regime; output volatility; open economy macroeconomics; panel regressions
    JEL: C23 F33 F41
    Date: 2021–04–11
  21. By: Mariam Camarero (University Jaume I, INTECO - Grupo de Investigacion en Integracion Economica); Gilles Dufrénot (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique); Cecilio Tamarit (Department of Applied Economics II, University of Valencia, Avda. dels Tarongers s/n, Valencia 46022 - affiliation inconnue)
    Abstract: In this paper we analyze how growing income/wealth inequality and the functional income distribution inequality have contributed to the sustained low potential growth observed in the industrialized economies during the last two decades, a period that includes the Great Recession (GR). Growing inequality may constitute a drawback for the recovery of these economies, especially after the Great Pandemic (GP). To this aim, we modify the semi-structural model originally proposed by Holston, Laubach and William, by considering the effects of several types of inequalities. We jointly estimate potential growth and the natural interest rates. We show that the latter can substantially modify the time path of the real interest rate that prevails when economies are at full strength and inflation is stable.
    Keywords: potential growth,inequality,natural interest rate,G7,state-space model
    Date: 2021–04
  22. By: Alexander Jiron; Wayne Passmore; Aurite Werman
    Abstract: As developed by the BCBS, the expected impact framework is the theoretical foundation for calibrating the capital surcharge applied to global systemically important banks (G-SIB surcharge). This paper describes four improvements to the current implementation of the BCBS expected impact framework. We (i) introduce a theoretically sound and an empirically grounded approach to estimating a probability of default (PD) function; (ii) apply density-based cluster analysis to identify the reference bank for each G-SIB indicator; (iii) recalibrate the systemic loss-given-default (LGD) function that determines G-SIB scores, using both the current system based on supervisory judgment and using an alternative system based on CoVaR; and (iv) derive a continuous capital surcharge function to determine G-SIB capital surcharges. Our approach would strengthen the empirical and theoretical foundation of the G-SIB surcharge framework. Moreover, the continuous surcharge function would reduce banks' incentive to manage their balance sheets to reduce systemic capital surcharges, mitigate cliff effects, allow for the lifting of the cap on the substitutability score and penalise growth in the category for all G-SIBs. In addition, our two capital surcharge functions might be used to monitor G-SIBs' capital adequacy and distortions induced by G-SIB surcharges.
    Keywords: xxxxxx investment funds, herding, bank regulation, leverage ratio, social welfare
    JEL: G21 G23 G28 D62
    Date: 2021–03
  23. By: Alice Abboud; Elizabeth Duncan; Akos Horvath; Diana A. Iercosan; Bert Loudis; Francis Martinez; Timothy Mooney; Benjamin Ranish; Ke Wang; Missaka Warusawitharana; Carlo Wix
    Abstract: The widespread economic damage caused by the ongoing COVID-19 pandemic poses the first major test of the bank regulatory reforms put in place following the global financial crisis. This study assesses this framework, with an emphasis on capital and liquidity requirements. Leading up to the COVID-19 crisis, banks were well-capitalized and held ample liquid assets, reflecting in part heightened requirements. Capital requirements were comparable across major jurisdictions, despite differences in the implementation of the international Basel standards. The overall robust capital and liquidity levels resulted in a resilient banking system, which maintained lending through the early stages of the pandemic. Furthermore, trading activity was a source of strength for banks, reflecting in part a prudent regulatory approach. Areas for potential improvement include addressing the cyclicality of requirements.
    Keywords: Bank capital; Banking regulation; Liquidity
    Date: 2021–04–06
  24. By: O'Sullivan, Mary
    Abstract: In spring 2020, in the face of the covid-19 pandemic, central bankers in rich countries made unprecedented liquidity injections to stave off an economic crisis. Such radical action by central banks gained legitimacy during the 2008-2009 global financial crisis and enjoys strong support from prominent economists and economic historians. Their certainty reflects a remarkable agreement on a specific interpretation of the Great Depression of the 1930s in the United States, an interpretation developed by Milton Friedman and Anna Schwartz in A Monetary History of the United States (1963). In this article, I explore the origins, the influence and the limits of A Monetary History’s interpretation for the insights it offers on the relationship between theory and history in the study of economic life. I show how historical research has been mobilised to show the value of heretical ideas in order to challenge economic orthodoxies. Friedman and Schwartz understood the heretical potential of historical research and exploited it in A Monetary History to question dominant interpretations of the Great Depression in their time. Now that their interpretation has become our orthodoxy, I show how we can develop the fertile link between history and heresy to better understand our economic past.
    JEL: N0 N1 N2 B3 B4 B5
    Date: 2021
  25. By: Cristina Fuentes-Albero; John M. Roberts
    Abstract: In August 2020, the Federal Open Market Committee approved a revised Statement on Longer-Run Goals and Monetary Policy Strategy (FOMC, 2020) and in the subsequent FOMC meetings, the Committee made material changes to its forward guidance to bring it in line with the new framework. Clarida (2021) characterizes the new framework as comprising a number of key features.
    Date: 2021–04–12
  26. By: Can Sever; Emekcan Yucel
    Date: 2020–01
  27. By: Haykaz Igityan (Monetary Policy Department, Central Bank of Armenia)
    Abstract: This paper develops empirical models and shows the presence of asymmetric responses of inflation and output in Armenia to the same size of positive and negative monetary policy shocks. Tight monetary policy yields more reduction in output compared to the increase of output in a response to the same size of loose monetary policy. On the other hand, relatively more inflation is created by expansionary policy. The theoretical micro founded model with New Keynesian frictions is developed to explain asymmetries in transmission mechanism of policy. The model is estimated for the Armenian economy using fifteen macroeconomic time series and fifteen structural shocks. Impulse response functions of second order approximated theoretical model, based on estimated structural parameters, match asymmetries from empirical models. The methodology of mixed equations is applied to calculate the contribution of the particular friction in a creation of asymmetry in the transmission mechanism. The asymmetric response of inflation is mostly the result of highly convex Phillips curve of importers. Another part of asymmetry in inflation is created by internal economy’s price setting frictions and labor market rigidities. The significant part of asymmetric response in output is caused by nonlinearities in capital and labor markets. Adding curvatures of the small open economy into the second order approximated model, the size of asymmetry increases through the channel of higher asymmetry in real exchange rate. Third order theoretical moments of simulated models match directions and sizes of observed data. Variance decomposition of output shows that both demand and supply shocks are important drivers of output. The paper does policy experiments in demand and supply driven business cycle environments. In a demand driven growing economy, the aggressive contractionary monetary policy accelerates the decline of output with diminishing effect on inflation. Aggressive expansionary monetary policy increases the efficiency of creating inflation and decreases the stimulation of output in a demand driven recession. When the economy is in supply driven expansion, the increase in reaction of monetary policy accelerates the decline in output with no significant relative impact on inflation. In a supply driven recession, the aggressive response increases the reaction of output with diminishing effect on inflation.
    Keywords: Nonlinear VAR, Simulation, New Keynesian DSGE, Monetary Policy, Asymmetries, Business Cycle, Expansion, Recession, Asymmetric Effects of Monetary Policy
    JEL: C32 E12 E32 E52
    Date: 2019–09

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