nep-cba New Economics Papers
on Central Banking
Issue of 2021‒05‒10
thirty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Who Talks During Monetary Policy Quiet Periods, and Why? Evidence from the European Central Bank's Governing Council By Gnan, Phillipp; Rieder, Kilian
  2. On the Evolution of the Rules versus Discretion Debate By Dellas, Harris; Tavlas, George
  3. Ease on the Cannons, Tighten on the Trumpets: Geopolitical Risk and the Transmission of Monetary Policy Shocks By Jochen Güntner„; Johannes Henßler
  4. Credit, capital and crises: a GDP-at-Risk approach By Aikman, David; Bridges, Jonathan; Hacioglu Hoke, Sinem; O'Neill, Cian; Raja, Akash
  5. The State-Dependent Effects of Monetary Policy By Kamalyan, Hayk
  6. Asymmetries in Monetary Policy By Benigno, Pierpaolo; Rossi, Lorenza
  7. Monetary Transmission Mechanism in the Philippines: A VAR Approach By Vargas, Jerrick Jan
  8. The effectiveness and risks of loose monetary policy under financialisation By Feiner Solís, Sara
  9. The Expectations Channel of Climate Change: Implications for Monetary Policy By Dietrich, Alexander; Müller, Gernot; Schoenle, Raphael
  10. Will the Pandemic Bulge in Money Cause High Inflation? By Hetzel, Robert
  11. Capital Flows at Risk: Taming the Ebbs and Flows By Gelos, Gaston; Gornicka, Lucyna; Koepke, Robin; Sahay, Ratna; Sgherri, Silvia
  12. The Role of Macroprudential Policy in Times of Trouble By Jagjit S. Chadha; Germana Corrado; Luisa Corrado; Ivan De Lorenzo Buratta
  13. Reset required: The euro area crisis management and deposit insurance framework By Huertas, Thomas F.
  14. The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models: A Reassessment By Kamalyan, Hayk
  15. Contingent Contracts in Banking: Insurance or Risk Magnification? By Gersbach, Hans
  16. One Ring to Rule Them All? New Evidence on World Cycles By Monnet, Eric; Puy, Damien
  17. Inflation and Investors' Behavior: Evidence from the German Hyperinflation By Braggion, Fabio; Meyerinck, Felix; Schaub, Nic
  18. The long-run effects of risk: an equilibrium approach By Madeira, João; Palma, Nuno Pedro G.; van der Kwaak, Christiaan
  19. Commodity Prices and Banking Crises By Eberhardt, Markus; Presbitero, Andrea
  20. What do Interest Rates Reveal about the Stock Market? A Noisy Rational Expectations Model of Stock and Bond Markets By Breugem, Matthijs; Buss, Adrian; Peress, Joël
  21. On the desirability of the West African monetary union By Carl Grekou; Cécile Couharde; Valérie Mignon
  22. Does the interest parity puzzle hold for Central and Eastern European economies? By Dąbrowski, Marek A.; Janus, Jakub
  23. The State-Dependent Effects of Monetary Policy: Calvo versus Rotemberg By Kamalyan, Hayk
  24. Liquidity Traps in a World Economy By Kollmann, Robert
  25. Sovereign Debt in the 21st Century: Looking Backward, Looking Forward By Mitchener, Kris James; Trebesch, Christoph
  26. International Co-movements of Inflation, 1851-1913 By Gerlach, Stefan; Stuart, Rebecca
  27. Financial Crises and Shadow Banks: A Quantitative Analysis By Matthias Rottner
  28. Speculative and Precautionary Demand for Liquidity in Competitive Banking Markets By Dietrich, Diemo; Gehrig, Thomas
  29. The Macroeconomics of Financial Speculation By Simsek, Alp
  30. Financial Repression And Transmission Of Macroeconomic Shocks In A DSGE Model With Financial Frictions By Mariia A. Elkina

  1. By: Gnan, Phillipp; Rieder, Kilian
    Abstract: This paper provides the first systematic analysis of individual monetary policy-makers' incentives to communicate during so called "quiet periods" in the run-up to policy meetings. We ask why and when monetary policy-makers breach quiet period rules. Based on proprietary compilations by the European Central Bank's (ECB) Directorate General Communications, we construct a novel statement-level data set documenting all public statements by ECB Governing Council members during the 116 quiet periods between October 2008 and January 2020. We describe the broad trends in quiet period communication since 2008. While career concerns and home bias do not explain breaching behavior, we find that members' policy-making experience and expertise are associated with explicit breaches of the quiet period. Following a statement-by-statement review of the ECB's classification of statements, we also provide an alternative series of quiet period breaches. We show that the difference between the original ECB series and our alternative series is driven by diverging records of explicit breaches by ECB Executive Board members before 2014. Finally, we exploit plausibly exogenous variation in the ECB rotational voting schedule to show that Governing Council members' communication behavior during the quiet period is consistent with the narrative of the ECB Governing Council as a collegial, consensus-seeking decision-making body. Our findings directly contribute to the growing literature on free-riding, career concerns and transparency in monetary policy-making. We also discuss several empirically founded policy implications of our paper relevant to the design of the quiet period in the euro area and monetary policy communication more generally.
    Keywords: career concerns; central bank communication; Central bank transparency; decision-making; European Central Bank; Home Bias; leaks; monetary policy; quiet period; rotational voting
    JEL: D82 D83 E52 E58 E61 G12
    Date: 2021–01
  2. By: Dellas, Harris; Tavlas, George
    Abstract: We discuss the evolution of the debate on policy rules vs discretion. Doctrinal historians place the starting point of the debate in the nineteenth-century controversy between the Currency and Banking Schools in Britain. We establish that this controversy was not about discretion but about the degree of activism under a single rule -- that of the gold standard. The rules vs discretion issue originated with Henry Simons and the Chicago School in the 1930s, and came to center stage following the Great Inflation in the 1970s. Both the 1930s and 1970s literatures were triggered by monetary-policy failures. The modern literature's main innovations concern its (1) comparison of discretion to optimal policy rather than just to rules, (2) shift of focus to benevolent governments that lack commitment, (3) demonstration of discretion's inefficiencies in both stochastic and deterministic environments, and (4) support of activistic policy rules.
    Keywords: Banking School; Chicago School; Currency School; Modern debate; monetary policy; Rules Versus Discretion
    JEL: B22 E52
    Date: 2021–03
  3. By: Jochen Güntner„; Johannes Henßler
    Abstract: Recent advances in the use of high-frequency external instruments to separate the signaling channel of monetary policy from exogenous interest rate changes have solved a number of puzzling responses to supposedly contractionary monetary policy shocks. We show that their effects on U.S. banks' balance sheets, asset markets, and economic activity hinge on the level of geopolitical risk at the time of the FOMC announcement. The S&P500 falls and credit spreads rise by more, while bank balance sheets contract, if geopolitical risk is above its sample median in the quarter or month of the shock. The state-dependent e ects are due to a tightening of credit- and risk-related national financial conditions and imply that, while preparing its monetary policy decisions, the Board of Governors should also keep track of the geopolitical environment.
    Keywords: C&I loans; Geopolitical risk; Monetary policy; State-dependent effects
    JEL: E43 E44 E51 E52
    Date: 2021–04
  4. By: Aikman, David; Bridges, Jonathan; Hacioglu Hoke, Sinem; O'Neill, Cian; Raja, Akash
    Abstract: Using quantile regressions applied to a panel dataset of 16 advanced economies, we examine how downside risk to growth over the medium term is affected by a set of macroprudential indicators. We find that credit and property price booms, and wide current account deficits increase downside risks 3 to 5 years ahead. However, such downside risks can be partially mitigated by increasing the capital ratio of the banking system. We show that GDP-at-Risk, defined as the the 5th quantile of the projected GDP growth distribution three years ahead, deteriorated in the US in the run-up to the Global Financial Crisis, driven by rapid growth in credit and house prices alongside a widening current account deficit. Our results suggest such indicators could provide useful information for the stance of macroprudential policy.
    Keywords: Financial Stability; GDP-at-Risk; local projections; macroprudential policy; quantile regressions
    JEL: G01 G18 G21
    Date: 2021–03
  5. By: Kamalyan, Hayk
    Abstract: This paper studies state-dependent effects of monetary policy shocks. I first consider state-dependence of policy actions in a simple static model. The model predicts that effectiveness of monetary policy is positively related to the level of output. I next use an estimated DSGE model to quantitatively assess asymmetries in policy transmission mechanism. Consistent with the intuition of the simple model, I find that the effects of monetary policy on output are less powerful in recessions compared to expansions. By contrast, inflation is more sensitive in recessionary states. The latter implies that the aggregate price flexibility is varying across the business cycle. In particular, prices are more flexible when the economy is in a recessionary state. Conversely, prices become more rigid in expansionary states.
    Keywords: Expansions, Recessions, State-Dependent Transmission Mechanism, New-Keynesian Model
    JEL: E31 E32 E37 E52 E58
    Date: 2021
  6. By: Benigno, Pierpaolo; Rossi, Lorenza
    Abstract: Nonlinearities embedded in the standard New-Keynesian model show that a welfare-maximizing policymaker should behave in line with a contractionary bias, fearing more expansions in output and inflation rather than contractions. On the contrary, the aggregate-supply equation implies that any upward pressure coming from real marginal costs does not necessarily push up inflation. Once these two forces are combined in the optimal policy, an overall expansionary bias emerges. The nonlinearities of the AS equation combined with changes in volatility can be responsible for a flattening in the estimated linear Phillips curve.
    Date: 2021–03
  7. By: Vargas, Jerrick Jan
    Abstract: It is necessary for policy makers to understand how the monetary policy is transmitted to the economy through different channels. This study focused on the reduced-form relationships between money, real output and price level and “channel” variables such as domestic credit, exchange rate and real lending interest rate and examined the monetary transmission mechanism in the Philippines, using the vector autoregression approach (VAR). The results derived from the forecast error variance decompositions analyses show that the main sources of variances in output and price level are their “own” shocks. The results of the impulse response functions indicate that monetary policy can affect output and price level and that the effect of monetary policy on output was strongest after two quarters. An expansionary monetary policy increases output in two quarters however; it has a weak effect on price level after two quarters. Furthermore, domestic credit has the most significant effect on output in the Philippines. Theories in monetary economics suggest that an expansionary monetary policy increases output and price level however, in the case of the Philippines, an expansionary monetary policy increases output but have a weak effect on inflation.
    Keywords: Monetary Policy, Vector Autoregression
    JEL: E52
    Date: 2021–05–02
  8. By: Feiner Solís, Sara
    Abstract: This paper incorporates low interest rates into a framework of Post-Keynesian theory of the firm under financialisation and uses Compustat data to provide an empirical analysis of firm behaviour in the Eurozone for the period 2000-2018. It reasons that loose monetary policy targeting low interest rates will only be effective in promoting investment in a scenario where shareholder value orientation (SVO) tightens the finance constraint on growth-maximising managers. In contrast, when shareholder value maximisation becomes the goal of the firm, loose monetary policy may not only be ineffective in promoting growth, but might actually be dangerous because it fosters financial fragility and promotes SVO. Data suggest that financialisation in the Eurozone represents a shift in the objectives of the firm towards maximising free cash flows. There is no evidence that loose monetary policy fostered leverage and an equity reduction in the Eurozone, which might be a consequence of its institutional context and ownership structures. Still, the analysis shows that low interest rates were largely ineffective in fostering investment during the period 2008-2018. Therefore, monetary policy seems insufficient to promote investment and growth. Both expansionary fiscal policy and legal reforms that control shareholder power are needed.
    Keywords: financialisation,shareholder value orientation,investment theory
    JEL: D21 D22 G30
    Date: 2021
  9. By: Dietrich, Alexander; Müller, Gernot; Schoenle, Raphael
    Abstract: Using a representative consumer survey in the U.S., we elicit beliefs about the economic impact of climate change. Respondents perceive a high probability of costly, rare disasters in the near future due to climate change, but not much of an impact on GDP growth. Salience of rare disasters through media coverage increases the disaster probability by up to 7 percentage points. We analyze these findings through the lens of a New Keynesian model with rare disasters. First, we illustrate how expectations of rare disasters impact economic activity. Second, we calibrate the model to capture the key aspects of the survey and quantify the expectation channel of climate change: disaster expectations lower the natural rate of interest by about 65 basis points and, assuming a conventional Taylor rule for monetary policy, inflation and the output gap by 0.3 and 0.2 percentage points, respectively. The effect is considerably stronger if monetary policy is constrained by the effective lower bound.
    Keywords: climate change; Disasters; Households Expectations; Media focus; monetary policy; Natural rate of interest; Paradox of Communication; survey
    JEL: E43 E52 E58
    Date: 2021–03
  10. By: Hetzel, Robert (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: The monetary aggregate M2 increased from $15,473 billion in February 2020 to $19,670 billion in February 2021, or by 27.1%. Real M2 (M2 deflated by the CPI) increased similarly by 25.3% ( This monetary acceleration, unprecedented outside of wartime, is apparent in a longer-run perspective. From the trough of the last business cycle in June 2009 through February 2020, annualized monthly growth rates for M2 averaged 5.9%. Over the interval March 2020 through June 2020, they averaged 65.6%. Although diminished, rapid M2 growth continued, averaging 12.9% from July 2020 through March 2021. Milton Friedman famously said that inflation is always and everywhere a monetary phenomenon. If he is right, should not this bulge in money lead to an undesirably high rate of inflation?
    Date: 2021–05
  11. By: Gelos, Gaston; Gornicka, Lucyna; Koepke, Robin; Sahay, Ratna; Sgherri, Silvia
    Abstract: The volatility of capital flows to emerging markets continues to pose challenges to policymakers. In this paper, we propose a new quantile regression framework to predict the entire future probability distribution of capital flows to emerging markets, based on changes in global financial conditions, domestic structural characteristics, and policies. The approach allows us to differentiate between short- and medium-term effects. We find that FX- and macroprudential interventions are effective in mitigating downside risks to portfolio flows stemming from adverse global shocks, while tightening of capital controls in response appears to be counterproductive. Good institutional frameworks are not able to shield countries from the increased volatility of portfolio flows in the immediate aftermath of global shocks. However, they do contribute to a more rapid bounce-back of foreign flows over the medium term.
    Keywords: capital controls; Capital Flows; emerging markets; foreign-exchange intervention; macroprudential policies
    JEL: E52 F32 F38 G28
    Date: 2021–02
  12. By: Jagjit S. Chadha; Germana Corrado; Luisa Corrado; Ivan De Lorenzo Buratta
    Abstract: We develop a DSGE model with heterogeneous agents, where savers own firms and riskpricing banks while borrowers require loans to establish their consumption plans. The bank lends at an external finance premium (EFP) over the policy rate as a function of the asset price, housing collateral, the demand for loans and their perceived riskiness. We suggest that the close relationship between aggregate consumption and house prices is related to collateral effects. We also outline the role of the EFP in determining consumption spillovers between borrowers and lenders. We solve the model with occasionally-binding constraints to examine the redistributive role of macro-prudential policies in terms of welfare. Countercyclical deployment of the loan-to-value constraint placed on borrowers can limit the scale of the downturn from a negative house price shock. Furthermore, when the zero lower bound acts to constrain monetary policy, looser macroprudential policies can act as an effective substitute for lower policy rates. Finally, we show that co-ordinated macroprudential and fiscal policies can also attenuate the welfare losses that arise from uncertainty banks may face about default probabilities.
    JEL: E32 E44 E58
    Date: 2021
  13. By: Huertas, Thomas F.
    Abstract: The crisis management and deposit insurance (CMDI) framework in the euro area requires a reset. Although its policy objectives remain valid, the means of achieving them do not. As the euro area comes the end of the long transition period taken to implement the BRRD/SRMR, it should take the opportunity to reset expectations about resolution. Above all, resolution should be for the many, not just the few. There should be a single presumptive path for dealing with failed banks: the use of bail-in to facilitate orderly liquidation under a solvent-wind down strategy. This will protect deposits and set the stage - together with the backstop that the European Stability Mechanism provides to the Single Resolution Fund (SRF) -- for the transformation of the SRF into the Single Deposit Guarantee Scheme (SDGS). To avoid forbearance, responsibility for emergency liquidity assistance (ELA) should rest, not with national central banks, but with the ECB as a single lender of last resort. Finally, national deposit guarantee schemes should function as institutional protection schemes and become investors of last resort in their member banks. Together, these measures would complete Banking Union, promote market discipline, avoid imposing additional burdens on taxpayers, help untie the doom loop between weak banks and weak governments, strengthen the euro and enhance financial stability.
    Keywords: Deposit Insurance,Crisis Management,BRRD,Resolution
    Date: 2021
  14. By: Kamalyan, Hayk
    Abstract: In ``The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models'' published in the American Economic Review, Steinsson (2008) argues that a baseline open economy sticky price model with real shocks can rationalize the real exchange rate persistence and hump-shaped dynamics observed in data. The current paper shows that i) the dynamics of the real exchange rate depend upon the parameter values of the Taylor rule, ii) the model cannot simultaneously match the observed dynamics of the real exchange rate and the close co-movement between the real and nominal currency returns. Thus, the baseline framework is not capable of fully capturing the real exchange rate adjustment process.
    Keywords: Real exchange rate adjustment, Nominal-real exchange rate co-movement, New Keynesian model, Monetary policy rule
    JEL: E52 E58 F31 F41
    Date: 2020–11–04
  15. By: Gersbach, Hans
    Abstract: What happens when banks compete with deposit and loan contracts contingent on macroeconomic shocks? We show that the private sector insures the banking system efficiently against banking crises through such contracts when banks focus on expected profit maximization and failing banks go bankrupt. When risks are large, banks may shift part of the risk to depositors who receive state-contingent contracts. Repackaging of the risk among depositors can improve welfare. In contrast, when failing banks are rescued, new phenomena such as risk creation or magnification emerge, which would not occur with non-contingent contracts. In particular, depositors receive non-contingent contracts with comparatively high interest rates, while entrepreneurs obtain loan contracts that demand high repayment in good times and low repayment in bad times. As a result, banks overinvest and generate large macroeconomic risks, even if the underlying productivity risk is small or zero.
    Keywords: Financial intermediation - Macroeconomics risks - State-contingent contracts - Banking regulation
    JEL: D41 E4 G2
    Date: 2021–03
  16. By: Monnet, Eric; Puy, Damien
    Abstract: We estimate world cycles using a new quarterly macro-financial dataset assembled using IMF archives, covering a large set of countries since 1950. World cycles, real and financial, exist and US shocks drive them. But their strength is modest for GDP and credit. Global financial cycles are much weaker for credit than for asset prices. We also challenge the view that synchronization has increased with globalization. Although this is true for prices (goods and assets), it is not for quantities (output and credit). World business and credit cycles were as strong during Bretton Woods (1950-1972) as during the Globalization period (1982-2006). We investigate the economic and financial forces driving our results, connect them to the existing literature and discuss important policy implications.
    Keywords: business cycles; financial cycles; Financial Integration; Globalization; trade integration; US Monetary Policy; World Cycles
    JEL: E32 F41 F42
    Date: 2021–03
  17. By: Braggion, Fabio; Meyerinck, Felix; Schaub, Nic
    Abstract: Inflation risk represents one of the most important economic risks faced by investors. In this study, we analyze how investors respond to inflation. We introduce a unique dataset containing local inflation and security portfolios of more than 2,000 clients of a German bank between 1920 and 1924, covering the famous German hyperinflation. We find that investors buy less (sell more) stocks when facing higher local inflation. This effect is more pronounced for less sophisticated investors. We also document a positive relation between local inflation and forgone returns following stock sales. Our findings are consistent with investors suffering from money illusion.
    Keywords: behavioral biases; Individual investors; inflation; Investor Behavior; Money illusion
    JEL: D14 E31 G11 G41 N14
    Date: 2021–03
  18. By: Madeira, João; Palma, Nuno Pedro G.; van der Kwaak, Christiaan
    Abstract: Advanced economies tend to have large but unstable intermediation sectors. We employ a DSGE model with banks featuring limited liability to investigate how risk shocks in the financial sector affect long-run macroeconomic outcomes. With full deposit insurance, banks expand balance sheets when risk increases, leading to higher investment and output. With no deposit insurance, we observe substantial drops in long-run credit provision, investment, and output. These differences provide a novel argument in favor of deposit insurance. Finally, our welfare analysis finds that increased risk reduces welfare, except when there is full deposit insurance and deadweight costs are small.
    Keywords: Costly state verification; deposit insurance; endogenous leverage; intermediation; investment; limited liability; Regulation; risk
    JEL: E22 E44 G21 O16
    Date: 2021–02
  19. By: Eberhardt, Markus; Presbitero, Andrea
    Abstract: Commodity prices are one of the most important drivers of output fluctuations in developing countries. We show that a major channel through which commodity price movements can affect the real economy is through their effect on banks' balance sheets and financial stability. Our analysis finds that the volatility of commodity prices is a significant predictor of banking crises in a sample of 60 low-income countries (LICs). In contrast to recent findings for advanced and emerging economies, credit booms and capital inflows do not play a significant role in predicting banking crises, consistent with a lack of de facto financial liberalization in LICs. We corroborate our main findings with historical data for 40 "peripheral" economies between 1848 and 1938. The effect of commodity price volatility on banking crises is concentrated in LICs with a fixed exchange rate regime and a high share of primary goods in production. We also find that commodity price volatility is likely to trigger financial instability through a reduction in government revenues and a shortening of sovereign debt maturity, which are likely to weaken banks' balance sheets.
    Keywords: banking crises; commodity prices; Low income countries; volatility
    JEL: F34 G01 Q02
    Date: 2021–03
  20. By: Breugem, Matthijs; Buss, Adrian; Peress, Joël
    Abstract: We propose a novel theory and provide supporting empirical evidence that lower long-term interest rates (e.g., because of ``quantitative easing'') harm informational and allocative efficiency. We develop a noisy rational expectations equilibrium model with an endogenous interest rate that investors use to update their beliefs about economic fundamentals. The interest rate reveals information about discount rates, allowing investors to extract more information about cashflows from stock prices. The precision of the interest-rate signal and, hence, stock-price informativeness increase in the interest rate. As a result, informational and allocative efficiency rise with bond and money supplies and with policy transparency.
    Keywords: (endogenous) interest rates; capital allocation efficiency; Informational efficiency; Rational Expectations; Unconventional Monetary Policy
    JEL: E43 E44 G11 G14
    Date: 2021–02
  21. By: Carl Grekou; Cécile Couharde; Valérie Mignon
    Abstract: In this paper, we investigate from a policy coordination viewpoint the desirability of the West African monetary union project, ECO. Our approach is built around the inclusion of national objectives in the regional integration perspective. Thanks to cluster analysis, we identify two groups of countries with relatively homogenous sustainable exchange rate paths in West Africa. We also find that no single currency peg nor a freely floating exchange rate regime would be preferable for any of the countries or groups of economies. Overall, our findings argue in favor of two ECOs —at least in a first step, i.e., one for each of the two identified zones. Each ECO would serve as a virtual anchor —with some flexibility— for the considered group, and would be determined by a basket of currencies mainly composed of euro and US dollar.
    Keywords: Monetary integration; West Africa; CFA franc zone; ECOWAS.
    JEL: F33 F45 C38 O55
    Date: 2021
  22. By: Dąbrowski, Marek A.; Janus, Jakub
    Abstract: This paper examines the uncovered interest parity (or forward premium) puzzle in four Central and Eastern European countries -- Czechia, Hungary, Poland, and Romania -- as well as their aggregates from 1999 to 2019. Because the interest parity is a foundation of open-macroeconomy analyses, with important implications for policymaking, especially central banking, more systematic evidence on interest parities in the CEE economies is needed. In this study, we not only address this need but also add to a broader discussion on the UIP puzzle after the global financial crisis. The UIP is verified vis-à-vis three major currencies: the euro, the U.S. dollar, and the Swiss franc. We start by providing a full set of baseline forward premium regressions for which we examine possible structural breaks and perform a decomposition of deviations from the UIP. Next, we explore augmented UIP models and introduce various factors which potentially account for the UIP puzzle, such as the realized volatility of the exchange rate, a volatility model of the excess returns, and international risk and business cycle measures. The study shows that the choice of the reference currency matters for the outcome of the interest parity tests in the CEE economies. The puzzle prevails for the EUR and the CHF but not for the USD, a regularity that has not been documented in previous studies. Second, we find that structural breaks in the time series used to test the UIP are not an essential reason for the general failure of the parity in the region. Third, we demonstrate that even though the risk-based measures largely improve the baseline testing regression, both from statistical and economic points of view, they do not alter the overall outcomes of our empirical models. Additionally, we show that the exchange rate peg of the Czech koruna to the euro from 2013 to 2017 had a significant impact on the UIP. A detailed case study on Poland, using granular survey data, indicates that the directly measured exchange rate expectations do not seem to be informed by the UIP relationship. Employing data on option-implied risk reversals, we reveal that the limited resilience of CEE economies to rare disasters may plausibly explain deviations from the UIP.
    Keywords: interest parity puzzle; forward premium puzzle; risk premium; Fama regression; Central and Eastern Europe
    JEL: F31 F41 G15
    Date: 2021–05–04
  23. By: Kamalyan, Hayk
    Abstract: This paper evaluates state-dependence in monetary policy transmission mechanism under Calvo and Rotemberg price adjustment schemes. Although the two models are equivalent to first order, they produce very different results once considered at a higher order. In particular, the Rotemberg model produces more state-dependence compared to the Calvo model. The result is reversed once the macroeconomic wedges are eliminated from the models.
    Keywords: State-Dependence, Calvo, Rotemberg, Monetary Policy
    JEL: E30 E32 E50 E52
    Date: 2021–04–02
  24. By: Kollmann, Robert
    Abstract: This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These "expectations-driven" liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a "fundamentals-driven" liquidity trap.
    Keywords: domestic and international shock transmission; Exchange rate; expectations-driven and fundamentals-driven liquidity traps; Net exports; terms of trade; zero lower bound
    JEL: E3 E4 F2 F3 F4
    Date: 2021–01
  25. By: Mitchener, Kris James; Trebesch, Christoph
    Abstract: How will sovereign debt markets evolve in the 21st century? We survey how the literature has responded to the eurozone debt crisis, placing "lessons learned" in historical perspective. The crisis featured: (i) the return of debt problems to advanced economies; (ii) a bank-sovereign "doom-loop" and the propagation of sovereign risk to households and firms; (iii) roll-over problems and self-fulfilling crisis dynamics; (iv) severe debt distress without outright sovereign defaults; (v) large-scale "sovereign bailouts" from abroad; and (vi) creditor threats to litigate and hold out in a debt restructuring. Many of these characteristics were already present in historical debt crises and are likely to remain relevant in the future. Looking forward, our survey points to a growing role of sovereign-bank linkages, legal risks, domestic debt and default, and of official creditors, due to new lenders such as China as well as the increasing dominance of central banks in global debt markets. Questions of debt sustainability and default will remain acute in both developing and advanced economies.
    Keywords: Bailouts; bank-sovereign doom loops; Eurozone Debt Crisis; official creditors; self-fulfilling crisis dynamics; Sovereign debt
    JEL: F30 F34 G12 G15 N10 N20
    Date: 2021–03
  26. By: Gerlach, Stefan; Stuart, Rebecca
    Abstract: We study co-movements of inflation in a group of 15 countries before and during the classical Gold Standard by fitting a generalisation of the Ciccarelli-Mojon (2010) model on annual data spanning 1851-1913. We find that international inflation functions as an "attractor" for domestic inflation rates. The cross-sectional dispersion of inflation declined gradually over the sample and Bai-Perron tests for structural breaks at unknown points in time suggest that there are breaks in six of reduced-form inflation equations. However, sub-sample estimates indicate that the overall finding that international inflation is an important influence on domestic inflation.
    Keywords: Factor Analysis; gold standard; international inflation; principal components
    JEL: E31 F40 N10
    Date: 2021–03
  27. By: Matthias Rottner
    Abstract: Motivated by the build-up of shadow bank leverage prior to the Great Recession, I develop a nonlinear macroeconomic model that features excessive leverage accumulation and show how this can cause a bank run. Introducing risk-shifting incentives to account for fluctuations in shadow bank leverage, I use the model to illustrate that extensive leverage makes the shadow banking system runnable, thereby raising the vulnerability of the economy to future financial crises. The model is taken to U.S. data with the objective of estimating the probability of a run in the years preceding the financial crisis of 2007-2008. According to the model, the estimated risk of a bank run was already considerable in 2004 and kept increasing due to the upsurge in leverage. I show that levying a leverage tax on shadow banks would have substantially lowered the probability of a bank run. Finally, I present reduced-form evidence that supports the tight link between leverage and the possibility of financial crises.
    Keywords: Financial crises, Shadow banks, Leverage, Credit booms, Bank runs
    Date: 2021
  28. By: Dietrich, Diemo; Gehrig, Thomas
    Abstract: We demonstrate that the co-existence of different motives for liquidity preferences profoundly affects the efficiency of financial intermediation. Liquidity preferences arise because consumers wish to take precautions against sudden and unforeseen expenditure needs, and because investors want to speculate on future investment opportunities. Without further frictions, the co-existence of these motives enables banks to gain efficiencies from combining liquidity insurance and credit intermediation. With standard financial frictions, banks cannot reap such economies of scope. Indeed, the co-existence of a precautionary and a speculative motive can cause efficiency losses which would not occur if there were only a single motive. Specifically, if the arrival of profitable future investment opportunities is sufficiently likely, such co-existence implies inefficient separation, pooling, or even non-existence of pure strategy equilibria. This suggests that policy implications derived solely from a single motive for liquidity demand can be futile.
    Keywords: competitive bank business models; expenditure needs; Investment opportunities; liquidity insurance; Penalty rates
    JEL: D11 D86 E21 E22 G21 L22
    Date: 2021–02
  29. By: Simsek, Alp
    Abstract: I review the literature on financial speculation driven by belief disagreements from a macroeconomics perspective. To highlight unifying themes, I develop a stylized macroeconomic model that embeds several mechanisms. With short-selling constraints, speculation can generate overvaluation and speculative bubbles. Leverage can substantially inflate speculative bubbles and leverage limits depend on perceived downside risks. Shifts in beliefs about downside tail scenarios can explain the emergence and the collapse of leveraged speculative bubbles. Speculative bubbles are related to rational bubbles, but they match better the empirical evidence on the predictability of asset returns. Even without short-selling constraints, speculation induces procyclical asset valuation. When speculation affects the price of aggregate assets, it also influences macroeconomic outcomes such as aggregate consumption, investment, and output. Speculation in the boom years reduces asset prices, aggregate demand, and output in the subsequent recession. Macroprudential policies that restrict speculation in the boom can improve macroeconomic stability and social welfare.
    Keywords: aggregate demand recessions; belief disagreements; business cycles; countercyclical risk premium; financial speculation; leverage; macroprudential policy; Rational bubbles; Short selling; Speculative bubbles
    JEL: E00 E12 E21 E22 E32 E44 E52 E70 G00 G01 G11 G12 G40
    Date: 2021–01
  30. By: Mariia A. Elkina (National Research University Higher School of Economics)
    Abstract: Financial repression (FR) allows the government to save on its interest rate payments. However, forcing financial intermediaries to increase the share of government debt in their portfolios can alter transmission of macroeconomic shocks. In this paper, we raise the question whether it is the case. Simulations of a DSGE model with financial frictions indicate that the presence of FR creates an additional link between changes in government fiscal position and dynamics of corporate credit terms. Holding regulatory environment constant, if government wishes to issue more debt, it has to offer higher return on its debt and reduce its FR revenues. Lower FR revenues translate into better borrowing terms for entrepreneurs and higher private investment. Hence, FR can either amplify or dampen output response to the shock, depending on whether this shock increases or decreases government financing needs
    Keywords: financial repression, business cycle, government debt, general equilibrium, financial frictions.
    JEL: E32 E60 H60
    Date: 2021

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