nep-cba New Economics Papers
on Central Banking
Issue of 2021‒05‒03
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Central Bank Digital Currencies and Monetary Policy Effectiveness in the Euro Area By Alexandra Mitschke
  2. Monetary Policy, Equity Markets and the Information Effect By Calvin He
  3. Testing for UIP: Nonlinearities, Monetary Announcements and Interest Rate Expectations By Christina Anderl; Guglielmo Maria Caporale
  4. Euro Area House Prices and Unconventional Monetary Policy Surprises By Oliver Hülsewig; Horst Rottmann
  5. Monetary Policy Press Releases: An International Comparison By Mario Gonzalez; Raul Cruz Tadle
  6. Collateral Framework: Liquidity Premia and Multiple Equilibria By Lengwiler, Yvan; Orphanides, Athanasios
  7. Optimal monetary policy with non-homothetic preferences By Blanco, Cesar; Diz, Sebastian
  8. Payments on Digital Platforms: Resiliency, Interoperability and Welfare By Jonathan Chiu; Tsz-Nga Wong
  9. Modeling the impact of Coronavirus uncertainty on bank system vulnerability and monetary policy conduct By Ben salem, salha; slama, ines
  10. Supplementary Paper Series for the "Assessment" (2): Estimating Effects of Expansionary Monetary Policy since the Introduction of Quantitative and Qualitative Monetary Easing (QQE) Using the Macroeconomic Model (Q-JEM) By Takuji Kawamoto; Takashi Nakazawa; Yui Kishaba; Kohei Matsumura; Jouchi Nakajima
  11. Bagehot for Central Bankers By Laurent Le Maux
  12. The Importance of External Shocks and Global Monetary Conditions for A Small-Open Economy By Gulnihal Tuzun
  13. Systemic Instability of the Interbank Credit Market - A Contribution to a Resilient Financial System By Thomas Gries; Alexandra Mitschke
  14. Supplementary Paper Series for the "Assessment" (1): The Effects of the Bank of Japan's ETF Purchases on Risk Premia in the Stock Markets By Ko Adachi; Kazuhiro Hiraki; Tomiyuki Kitamura
  15. The bias and efficiency of the ECB inflation projections: a State dependent analysis By Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta
  16. The Credit Channel Through the Lens of a Semi- Structural Model By Francisco Arroyo Marioli; Juan Sebastián Becerra; Matías Solorza
  17. A game-theoretic analysis of fiscal policy under economic growth from the perspective of MMT By Tanaka, Yasuhito
  18. Reconstruction of the Spanish Money Supply, 1492-1810 By Felix Ward; Yao Chen; Nuno Palma
  19. Point Targets, Tolerance Bands, or Target Ranges? Inflation Target Types and the Anchoring of Inflation Expectations By Michael Ehrmann
  20. Low interest rates and the distribution of household debt By Marina Emiris; François Koulischer

  1. By: Alexandra Mitschke (University of Paderborn)
    Abstract: In consequence of the progressive digitalization and declining trend of cash- usage in payments, the majority of central banks is currently researching the topic of Central Bank Digital Currencies (CBDCs). Since 2020, the ECB is preparing a review into whether to issue a digital complement to physical cash and central bank deposits, the so-called digital euro. This study investigates its potential impact on the transmission of monetary policy. We fiÂ…rst survey and interpret key properties of money and money-like assets in the current monetary framework, which motivates a discussion of the proposed forms of CBDCs and the digital euro. Against this background, we extend and close the arbitrage model of Meaning et al. (2018) to investigate the effect of CBDCs on the effectiveness of monetary policy transmission and the ability of the banking sector to fulÂ…fil regulatory liquidity requirements. We conclude that monetary policy would be effective following the introduction of interest-bearing CBDCs, potentially reinforcing the mechanism. Further, we confiÂ…rm that an increase in non-pecuniary benefiÂ…ts of holding bank deposits in relation to CBDCs can mitigate the risk of a potential disintermediation of the banking sector.
    Keywords: Central Bank Digital Currencies, Monetary System, Monetary Policy
    JEL: E41 E42 E52 E58
    Date: 2021–04
  2. By: Calvin He (Reserve Bank of Australia)
    Abstract: Central banks analyse copious amounts of information to assess the economic outlook to then set monetary policy. So, could changes in monetary policy reveal some additional information about the economic outlook to the public? This channel is known as the 'information effect'. The information effect posits that, in addition to the usual effects of monetary policy, agents interpret an interest rate increase as signalling some additional positive economic information. This effect, if strong enough, could then lead to dynamics where an increase in interest rates causes an expansion in economic activity. I evaluate whether the information effect can be detected in Australia through the lens of equity markets. I find that, contrary to the predictions of the information effect, a surprise monetary tightening from a monetary policy announcement causes equity prices to fall. I also show that this response in equity prices is, at least in part, driven by downward adjustments in expected earnings growth. These responses are consistent with conventional views of the effects of monetary policy. However, looking beyond monetary policy announcements yields some evidence that an information effect could be present through other forms of Reserve Bank of Australia (RBA) communication. I find speeches delivered by the RBA Governor generate responses in equity prices and earnings forecasts consistent with the information effect. But this result appears to be the exception rather than the rule. For most monetary policy communication, at least in equity markets, the information effect is not an important channel of monetary policy.
    Keywords: monetary policy; information effect; equity markets; equity prices; earnings forecasts
    JEL: E40 E43 E44 E50 E52 E58
    Date: 2021–04
  3. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper re-examines the UIP relation by estimating first a benchmark linear Cointegrated VAR including the nominal exchange rate and the interest rate differential as well as central bank announcements, and then a Cointegrated Smooth Transition VAR (CVSTAR) model incorporating nonlinearities and also taking into account the role of interest rate expectations. The analysis is conducted for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) using daily data from January 2000 to December 2020. We find that the nonlinear framework is more appropriate to capture the adjustment towards the UIP equilibrium, since the estimated speed of adjustment is substantially faster and the short-run dynamic linkages are stronger. Further, interest rate expectations play an important role: a fast adjustment only occurs when the market expects the interest rate to increase in the near future, namely central banks are perceived as more credible when sticking to their goal of keeping inflation at a low and stable rate. Also, central bank announcements have a more sizeable short-run effect in the nonlinear model. Finally, UIP holds better in inflation targeting countries, where monetary authorities appear to achieve a higher degree of credibility.
    Keywords: UIP, exchange rate, nonlinearities, asymmetric adjustment, CVAR (Cointegrated VAR), CVSTAR (Cointegrated Smooth Transition VAR), interest rate expectations, interest rate announcements
    JEL: C32 F31 G15
    Date: 2021
  4. By: Oliver Hülsewig; Horst Rottmann
    Abstract: This paper examines the reaction of house prices in a panel of euro area countries to monetary policy surprises over the period 2010-2019. Using Jordà’s (2005) local projection method, we find that real house prices rise in response to expansionary monetary policy shocks that can be related to unconventional policy measures. In the core countries including Ireland, we also find that lending for house purchases increases relative to nominal output. Thus, household debt rises.
    Keywords: Euro area house prices, unconventional monetary policy, local projection method
    JEL: E52 E58 E32 G21
    Date: 2021
  5. By: Mario Gonzalez; Raul Cruz Tadle
    Abstract: Around the world, several countries have adopted inflation targeting as their monetary policy framework. These institutions set their target interest rates in monetary policy meetings. The policy decisions are then circulated through press releases that explain those decisions. The information contained in these press releases includes current policies, economic outlook, and signals about likely future policies. In this paper, we examine and compare the information contained in the monetary press releases of a group of inflation targeting countries using linguistic methods, such as Latent Dirichlet Allocation (LDA), an automated linguistic method. In addition, using Semi-automated Content Analysis, we create a measure that we call the Sentiment Score index based on this information for each of the countries in the sample. We use this index to compare the communication strategy of the central banks and how predictable monetary policy movements are based on the information given in the press releases.
    Date: 2021–04
  6. By: Lengwiler, Yvan (University of Basel); Orphanides, Athanasios
    Abstract: Central banks normally accept debt of their own governments as collateral in liquidity operations without reservations. This gives rise to a valuable liquidity premium that reduces the cost of government finance. The ECB is an interesting exception in this respect. It relies on external assessments of the creditworthiness of its member states, such as credit ratings, to determine eligibility and the haircut it imposes on such debt. We show how such features in a central bank's collateral framework can give rise to cliff effects and multiple equilibria in bond yields and increase the vulnerability of governments to external shocks. This can potentially induce sovereign debt crises and defaults that would not otherwise arise.
    Keywords: monetary policy, government finance, yields, liquidity premium, default premium, collateral, cliff effect, multiple equilibria.
    JEL: E58 E62 E43
    Date: 2021–04
  7. By: Blanco, Cesar; Diz, Sebastian
    Abstract: This paper explores the optimal design of monetary policy in a multisector model where agents' preferences are non-homothetic. Non-homotheticity derives from the existence of a minimum consumption requirement for food, which households need to satisfy for subsistence. We find that the introduction of a minimum consumption requirement reduces the weight on food inflation in the optimal index that the monetary authority should target. We identify three motives for such prescription. First, non-homothetic preferences turn the stabilization of food inflation more costly, as it requires larger deviations of output from the efficient level. Second, proximity to the subsistence level turns the demand for food insensitive to monetary policy. Inflation in this sector thus becomes difficult to control. Third, non-homothetic preferences imply that households spend only a small share of any additional income on food. This means that prices in this sector have a reduced impact on aggregate consumption demand. Hence, responding to inflation in this sector becomes less relevant. Importantly, our results provide a rationale for targeting an index that excludes (or attaches a limited weight to) food inflation, a usual practice amongst central bankers.
    Keywords: Inflation, Price Index, Monetary Policy
    JEL: E31 E52
    Date: 2021–04–26
  8. By: Jonathan Chiu; Tsz-Nga Wong
    Abstract: Digital platforms, such as Alibaba and Amazon, operate an online marketplace to facilitate transactions. This paper studies a platform's business model choice between accepting cash and issuing tokens, as well as the implications for welfare, resiliency, and interoperability. A cash platform free rides on the existing payment infrastructure and profits from collecting transaction fees. A token platform earns seigniorage, albeit bearing the costs of setting up the system and holding reserves to mitigate the cyber risk. Tokens earn consumers a return, insulating transactions from the liquidity costs of using cash, but also expose them to the remaining cyber risk. The platform issues tokens if the interest rate is high, the platform scope is large, and the cyber risk is small. Unbacked floating tokens with zero transaction fees or interest-bearing stablecoins can implement the equilibrium business model, which is not necessarily socially optimal because the platform does not internalize its impacts on off-platform activities. The model explains why Amazon does not issue tokens but Alipay issues tokens circulatable outside its Alibaba platforms. Regulations such as a minimum reserve requirement can reduce welfare.
    Keywords: Digital currencies and fintech; Monetary policy; Payment clearing and settlement systems
    JEL: E5 L5
    Date: 2021–04
  9. By: Ben salem, salha; slama, ines
    Abstract: The uncertainty of COVID-19 seriously disrupts the world through various macroeconomic and financial channels. For Tunisia, the Pandemic came when the economy was confronting persevering macroeconomic imbalances, regardless of new progress with policy and reform implementation. This context hits the Tunisian economy, especially as it has not yet exited from the negative effect of the 2011 revolution. This paper aims to analyze how the coronavirus uncertainty shock affects the monetary policy's conduct and the banking system's vulnerability in Tunisia. Using the structural VAR model, we find that the adaptation of an easing credit' policy by the bank can attenuate the uncertainty of COVID-19 uncertainty in a short period but it causes negative consequences on the Tunisian economy in a subsequent period. The empirical results show also that uncertainty decreases the ability of the central bank to improve economic activity and control inflation.
    Keywords: COVID-19 uncertainty, bank vulnerability, monetary policy conduct, economic implication
    JEL: E4 E6 G1
    Date: 2021–04
  10. By: Takuji Kawamoto (Bank of Japan); Takashi Nakazawa (Bank of Japan); Yui Kishaba (Bank of Japan); Kohei Matsumura (Bank of Japan); Jouchi Nakajima (Bank of Japan)
    Abstract: This paper estimates the macroeconomic effects of the Bank of Japan's expansionary monetary policies since the introduction of Quantitative and Qualitative Monetary Easing (QQE) using the Bank of Japan's large-scale macroeconomic model, Q-JEM (Quarterly Japanese Economic Model). We consider counterfactual paths of major financial variables, such as real interest rates, constructing hypothetical scenarios where the QQE and subsequent easing measures had not been introduced. We then conduct counterfactual simulations to examine how Japan's macroeconomic variables such as real GDP and CPI would have evolved under those hypothetical scenarios. In this setting, we estimate the policy effects on the macroeconomic variables as the difference between actual values and the counterfactual. Estimation results show that, on average during the period from the introduction of QQE to the July-September quarter of 2020, the policy effect on the level of real GDP is between around +0.9 and +1.3 percent and that on the year-on-year rate of change in the CPI (all items less fresh food and energy) is between around +0.6 and +0.7 percentage points.
    Keywords: Monetary Policy; Policy effect; Large-scale macroeconomic model; Simulation
    JEL: C53 E37 E47 E52 E58
    Date: 2021–04–30
  11. By: Laurent Le Maux (University of Western Brittany)
    Abstract: Walter Bagehot (1873) published his famous book, Lombard Street, almost 150 years ago. The adage "lending freely against good collateral at a penalty rate" is associated with his name and his book has always been set on a pedestal and is still considered as the leading reference on the role of lender of last resort. Nonetheless, without a clear understanding of the theoretical grounds and the institutional features of the British banking system, any interpretation of Bagehot's writings remains vague if not misleading-which is worrisome if they are supposed to provide a guideline for policy makers. The purpose of the present paper is to determine whether Bagehot's recommendation remains relevant for modern central bankers or whether it was indigenous to the monetary and banking architecture of Victorian times.
    Keywords: Bagehot,Central Banking,Lender of Last Resort
    Date: 2021–04–19
  12. By: Gulnihal Tuzun
    Abstract: The purpose of this study is to assess how do the domestic and foreign shocks affect the fundamental macroeconomic variables of a small-open economy, and in particular Turkey. The domestic supply, demand and monetary policy shocks as well as their global counterparts are identified by employing a Bayesian structural VAR model with sign and zero restrictions. After a US monetary tightening shock, the results demonstrate an appreciation of US Dollar against Turkish lira, a rise in the consumer price level in the Turkish economy, a contractionary monetary policy shock accompanied by a fall in the real output level. This reaction is a strong evidence of the existence of a global interest rate contagion present in the international macroeconomics literature.
    Keywords: Bayesian VAR, Sign and zero restrictions, Shock identification, Monetary policy
    JEL: C11 C32 E52 F41
    Date: 2021
  13. By: Thomas Gries (University of Paderborn); Alexandra Mitschke (University of Paderborn)
    Abstract: Interbank markets have infrequently exhibited sudden interest rate spikes. These disruptions in a key …financial market can undermine fi…nancial stability. Imperfections, such as moral hazard, …financial frictions, and negative externali- ties have been suggested as potential explanations for interbank market disrup- tions. However, we still know very little how the interbank market works (Allen et al., 2018). We complement traditional stock analyses by modelling dynamics in the interbank credit market, focusing on the ‡flow process between lending and borrowing institutions. In our theoretical model credit supply is restricted by the availability of stochastic liquidity in‡ows to lending institutions. Follow- ing a shock in the form of an increase in volatility of these liquidity in‡flows, a sequential fl‡ow adjustment process sets in. In "“normal times" ”the fl‡ow dynamics remain smooth within a stable adjustment regime. However, a higher volatility can change the lending process, resulting in a bifurcation of the equilibrium. Defi…ning interbank "market resilience" as the probability of remaining in the stable regime, we examine the impact of monetary policy tightening on inter- bank market stability. A change in the volatility of reserve fl‡ows, which is more likely when central banks tighten monetary policy, may threaten the resilience of interbank markets and increase the probability of the market to fall into a regime of unstable dynamics. Thus, we stress that tightening monetary policy could incidentally reduce interbank market resilience up to a potential market collapse, even in the absence of contagion phenomena.
    Keywords: Financial Markets, Interbank Lending, Monetary Policy
    JEL: E44 E52 G11 G21
    Date: 2021–04
  14. By: Ko Adachi (Bank of Japan); Kazuhiro Hiraki (Bank of Japan); Tomiyuki Kitamura (Bank of Japan)
    Abstract: This paper provides an empirical investigation of the effects of the Bank of Japan's exchange traded funds (ETF) purchases on risk premia in the stock markets. The analysis examines the following two indicators of risk premia: equity risk premium implied by Nikkei 225 option prices, and yield spreads of individual stocks. The former indicator is analyzed at daily frequency, and the latter is analyzed at weekly frequency. The analysis also examines how the effects of ETF purchases vary depending on market conditions and the size of ETF purchases. The results show that the Bank of Japan's ETF purchases have lowering effects on risk premia. The results also suggest that the lowering effects are larger (1) the lower the stock price index relative to its moving average trend, (2) the higher the volatility in the stock market when the stock price index is below its trend, (3) the larger the percentage decline in the stock price index immediately before the purchases, and (4) the larger the size of the purchases.
    Keywords: Monetary Policy; ETF Purchases; Risk Premia; Purchase Effect Function
    JEL: E52 E58 G10 G12
    Date: 2021–04–30
  15. By: Granziera, Eleonora; Jalasjoki, Pirkka; Paloviita, Maritta
    Abstract: We test for bias and efficiency of the ECB inflation forecasts using a confidential dataset of ECB macroeconomic quarterly projections. We investigate whether the properties of the forecasts depend on the level of inflation, by distinguishing whether the inflation observed by the ECB at the time of forecasting is above or below the target. The forecasts are unbiased and efficient on average, however there is evidence of state dependence. In particular, the ECB tends to overpredict (underpredict) inflation at intermediate forecast horizons when inflation is below (above) target. The magnitude of the bias is larger when inflation is above the target. These results hold even after accounting for errors in the external assumptions. We also find evidence of inefficiency, in the form of underreaction to news, but only when inflation is above the target. Our findings bear important implications for the ECB forecasting process and ultimately for its communication strategy.
    JEL: C12 C22 C53 E31 E52
    Date: 2021–04–29
  16. By: Francisco Arroyo Marioli; Juan Sebastián Becerra; Matías Solorza
    Abstract: In this paper, we estimate a semi-structural model with a banking sector for the Chilean economy. Our innovation consists of incorporating a system of equations that reflects the dynamics of credit, interest rate spreads and loan-loss provisions to the Central Bank of Chile’s semi-structural model “MSEP”. We estimate the model and analyze the macroeconomic effects of incorporating this sector. We find that the banking sector plays a role in accelerating the business cycle through lower spreads and procyclical credit supply, in contrast to the counter-cyclical role it has had in COVID-19 crisis. Additionally, we decompose the effects of this sector’s variables in the historical business cycle. We find that credit growth can explain on average about 0.3 pp of total output gap variation. Moreover, we find that in episodes of severe stress, this role can grow to 1.9 pp, as has been the case of the COVID-19 pandemic. This last fact is important, given that in many cases, monetary policy is faced with the challenge of implementing non-conventional measures, many of them through the commercial banking sector. We find that this specification allows the model to better quantify the impact of measures that have favored the flow of credit specially in periods of stress.
    Date: 2021–04
  17. By: Tanaka, Yasuhito
    Abstract: We present a game-theoretic analysis of fiscal policy under economic growth from the perspective of MMT using a simple two-periods overlapping generations (OLG) model. We show the following results. 1) Sustained budget deficits are necessary to maintain full-employment under economic growth driven by technological progress. 2) An excessive budget deficit triggers inflation, and after one period inflation full-employment is maintained by sustained budget deficits with constant price. 3) Insufficient government deficit causes involuntary unemployment, and we need extra budget deficit over its steady state value to recover full-employment. These budget deficits need not be, and must not be redeemed. Therefore, if it is institutionally and legally possible, they should be financed by seigniorage not by public debt.
    Keywords: Overlapping generations model, Full-employment, Budget deficit, Growth, MMT
    JEL: E12 E24
    Date: 2021–04–25
  18. By: Felix Ward (Erasmus University Rotterdam); Yao Chen (Erasmus University Rotterdam); Nuno Palma (University of Manchester)
    Abstract: How did the Spanish money supply evolve in the aftermath of the discovery of large amounts of precious metals in Spanish America? We synthesize the available data on the mining of precious metals and their international flow to estimate the money supply for Spain from 1492 to 1810. Our estimate suggests that the Spanish money supply increased more than ten-fold. Viewed through the equation of exchange this money supply increase can account for most of the price level rise in early modern Spain.
    Keywords: early modern period, equation of exchange, quantity theory of money
    JEL: E31 E51 N13
    Date: 2021–04–26
  19. By: Michael Ehrmann
    Abstract: Inflation targeting is implemented in different ways – most often by adopting point targets, by having tolerance bands around a point target, or by specifying target ranges. Using data for 20 economies, this paper tests whether the various target types affect the anchoring of inflation expectations at shorter horizons differently. It tests two contradictory hypotheses, namely that targets with intervals lead to (i) less anchoring, e.g. because they provide more flexibility to the central bank, or (ii) better anchoring, because they are missed less often, leading to an enhanced credibility. The evidence refutes the first hypothesis, and generally finds that target ranges or (in some cases) tolerance bands outperform the other types. However, the effects partially depend on the economic context and no target type consistently outperforms all others. This suggests that there are some benefits to adopting intervals, but the central bank can anchor inflation expectations also by other means.
    Keywords: inflation targeting, inflation expectations, point target, tolerance band, target range
    JEL: E52 E58 E31
    Date: 2021
  20. By: Marina Emiris (Economics and Research Department, NBB); François Koulischer (University of Luxembourg, Department of Finance)
    Abstract: We study how changes in interest rates affect the borrowing of households and the distribution of debt within the population. In a model of household borrowing with credit constraints and endogenous house prices, we show that less constrained households with more pre-existing housing wealth increase their borrowing most when interest rates fall. We then use unique loan level data on the universe of household credit in Belgium to document a shift in the distribution of debt over age, with older households borrowing more as interest rates fell in the last decade. First-time borrowers, who are more likely to be constrained, do not contribute to the rise in household debt. To identify the elasticity of household debt to the interest rate, we use regulatory data on foreign exposures of banks and on the location of bank branches. We find that a 1 percentage point fall in the interest rate is associated with a 15% growth in household debt.
    Keywords: Interest Rates, Household Debt, Mortgages, Credit Constraints
    JEL: D14 E43 E58 G51
    Date: 2021–03

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