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on Central Banking |
| By: | Josef Schroth |
| Abstract: | This paper studies monetary policy in an economy where banks make risky loans to firms and provide liquidity services in the form of deposits to households. For given bank equity, market discipline implies that banks can take more deposits when assets are safer or more profitable. Banks respond to loan losses by making their balance sheets safer—i.e., they reduce risky lending sharply and accumulate more safe bonds. In contrast, a social planner would respond by making banks temporarily more profitable such that a riskier balance sheet can be maintained. A planner would temporarily reduce the expansiveness of monetary policy to avoid bonds becoming too liquid in support of the liquidity premium banks earn via deposits. Specifically, when bank equity is low, then optimal monetary policy stabilizes output by supporting bank lending rather than employment. |
| Keywords: | Credit and credit aggregates; Financial stability; Financial system regulation and policies; Inflation targets; Monetary policy |
| JEL: | E60 G28 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-21&r= |
| By: | Oliver Pf\"auti |
| Abstract: | Based on a model of optimal information acquisition, I propose an approach to measure attention to inflation in the data. Applying this approach to US consumers and professional forecasters provides substantial evidence that attention to inflation in the US decreased significantly over the last five decades. Consistent with the theoretical model, attention is higher in times of volatile inflation. To examine the consequences of limited attention for monetary policy, I augment the standard New Keynesian model with a lower-bound constraint on the nominal interest rate and inflation expectations that are characterized by limited attention. Accounting for the lower bound fundamentally alters the normative implications of low attention. While lower attention raises welfare absent the lower-bound constraint, it decreases welfare when accounting for the lower bound. In the presence of the lower bound, limited attention can lead to inflation-attention traps: prolonged periods of a binding lower bound and low inflation due to slowly-adjusting inflation expectations. To prevent these traps, it is optimal to increase the inflation target as attention declines. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2105.05297&r= |
| By: | Md Gyasuddin Ansari (Indian Institute of Management Kozhikode); Rudra Sensarma (Indian Institute of Management Kozhikode) |
| Keywords: | Monetary policy transmission, Panel Threshold Regression, Liquidity, Bank Lending, Lending Channel. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:iik:wpaper:428&r= |
| By: | Jung, Alexander; Kühl, Patrick |
| Abstract: | This paper examines whether central bank communication stabilises euro area inflation expectations through the information and news channel. A novelty of the study is its use of data from Google Analytics on ECB website traffic as proxy for visitors’ attention to its communication. We conduct several econometric tests with daily data to measure the impact of ECB communication on the information demand of the public and ultimately on inflation expectations. Overall, this study shows that website attention, as captured by search volumes of visitors, influences euro area inflation expectations. We find that increased website attention contributes to narrowing the gap between market-based forecasts and (the mean of) longer-term professional inflation expectations. Our findings add to the theoretical evidence on the existence of an information and news channel. JEL Classification: C20, D80, E52, E58, G14 |
| Keywords: | forward guidance, high-frequency identification, information and news channel, information demand, website attention |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212547&r= |
| By: | Bonciani, Dario (Bank of England); Gauthier, David (Bank of England); Kanngiesser, Derrick (Bank of England) |
| Abstract: | Banking crises have severe short and long‑term consequences. We develop a general equilibrium model with financial frictions and endogenous growth in which macroprudential policy supports economic activity and productivity growth by strengthening bank’s resilience to adverse financial shocks. The improved intermediation capacity of a safer banking system leads to a higher steady state growth rate. The optimal bank capital ratio of 18% increases welfare by 6.7%, 14 times more than in the case without endogenous growth. When the economy enters a liquidity trap, the effects of financial disruptions and thus the benefits of macroprudential policy are even more significant. |
| Keywords: | Slow recoveries; endogenous growth; financial stability; macroprudential policy |
| JEL: | E32 E44 E52 G01 G18 |
| Date: | 2021–04–23 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0917&r= |
| By: | Martynova, Natalya; Vogel, Ursula |
| Abstract: | We investigate the relationship between bank complexity and bank risk-taking using German banking data over the period 2005-2017. We find that more complex banking organizations tend to take on more risk, but that this complexity-risk nexus decreases over time. We study how regulatory tightenings inherent in this period, and addressing systemically important banks (SIBs) in general and complexity more specifically, alter banks' choices of complexity and risk. Banks reduce their complexity in response to regulatory tightenings, as these increase the related regulatory costs. Surprisingly, for SIBs in particular, the reduction of regulatory costs is associated with an increase in diversification benefits. As a result, they are able to lower their idiosyncratic risk more than other banks. The overall complexity-risk nexus is lower after regulatory tightenings. Thus, our results indicate that post-crisis regulation is effective in reducing banks' complexity-risk nexus. |
| Keywords: | bank complexity,bank risk-taking,bank regulation,too-big-to-fail |
| JEL: | G21 G28 G30 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:142021&r= |
| By: | Reis, Ricardo |
| Abstract: | Expected long-run inflation is sometimes inferred using market prices, other times using surveys. The discrepancy between the two measures has large business-cycle fluctuations, is systematically correlated with monetary policies, and is mostly driven by disagreement, both between households and traders, and between different traders. A parsimonious model that captures both the dispersed expectations in surveys, and the trading of inflation risk in financial markets, can fit the data, and it provides estimates of the underlying expected inflation anchor. Applied to US data, the estimates suggest that inflation became gradually, but steadily, unanchored from 2014 onwards. The model detects this from the fall in cross-person expectations skewness, first across traders, then across people. In general equilibrium, when inflation and the discrepancy are jointly determined, monetary policy faces a trade-off in how strongly to respond to the discrepancy. |
| JEL: | D84 E31 E52 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15624&r= |
| By: | Md Gyasuddin Ansari (Indian Institute of Management Kozhikode); Rudra Sensarma (Indian Institute of Management Kozhikode) |
| Abstract: | In this paper we investigate the role of interbank liquidity in monetary policy transmission in India. We employ standard and dynamic panel regression methods to analyze data for 40 commercial banks during the period 1999-2018. We find a significant role of interbank liquidity in easing the negative impact of monetary policy tightening on bank lending. We also find heterogenous role of interbank liquidity in monetary policy transmission across public sector and private sector banks. The policy implication for the monetary authority in India is that managing net liquidity positions of banks is necessary to realize the desired effects of monetary policy. |
| Keywords: | Monetary policy transmission, Interbank Liquidity, Bank Lending. |
| Date: | 2021–03 |
| URL: | http://d.repec.org/n?u=RePEc:iik:wpaper:442&r= |
| By: | Heider, Florian; Saidi, Farzad; Schepens, Glenn |
| Abstract: | In this paper, we survey the nascent literature on the transmission of negative policy rates. We discuss the theory of how the transmission depends on bank balance sheets, and how this changes once policy rates become negative. We review the growing evidence that negative policy rates are special because the pass-through to banks’ retail deposit rates is hindered by a zero lower bound. We summarize existing work on the impact of negative rates on banks’ lending and securities portfolios, and the consequences for the real economy. Finally, we discuss the role of different “initial” conditions when the policy rate becomes negative, and potential interactions between negative policy rates and other unconventional monetary policies. JEL Classification: E44, E52, E58, G20, G21 |
| Keywords: | bank lending, bank risk taking, deposits, euro-area heterogeneity, negative interest rates, zero lower bound |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212549&r= |
| By: | Repullo, Rafael |
| Abstract: | Drechsler, Savov, and Schnabl (2017) claim that increases in the monetary policy rate lead to reductions in bank deposits, which account for the negative effect on bank lending. This paper reviews their theoretical analysis, showing that the relationship between the policy rate and the equilibrium amount of deposits is in fact U-shaped. Then, it constructs an alternative model, based on a simple microfoundation for the households' demand for deposits, where an increase in the policy rate always increases the equilibrium amount of deposits. These results question the theoretical underpinnings of the "deposits channel" of monetary policy transmission. |
| Keywords: | banks' market power; deposits channel; monetary policy transmission |
| JEL: | E52 G21 L13 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15553&r= |
| By: | Allen, Jason; Bateman, Will; Gleeson, Simon; Kumhof, Michael; Lastra, Rosa M; Omarova, Saule |
| Abstract: | Based on legal arguments, we advocate a conceptual and normative shift in our understanding of the economic character of central bank money (CBM). The widespread treatment of CBM as a central bank liability goes back to the gold standard, and uses analogies with commercial bank balance sheets. However, CBM is sui generis and legally not comparable to commercial bank money. Furthermore, in modern economies, CBM holders cannot demand repayment of CBM in anything other than CBM. CBM is not an asset of central banks either, and it is not central bank shareholder equity because it does not confer the same ownership rights as regular shareholder equity. Based on comparisons across a number of legal characteristics of financial instruments, we suggest that an appropriate characterization of CBM is as 'social equity' that confers rights of participation in the economy's payment system and thereby its economy. This interpretation is important for macroeconomic policy in light of quantitative easing and potential future issuance of central bank digital currency (CBDC). It suggests that in robust economies with credible monetary institutions, and where demand for CBM is sufficiently and sustainably high, large-scale issuance such as under CBDC is not inflationary, and it does not weaken public sector finances. |
| Keywords: | Assets; central bank balance sheet; Central bank digital currency; Central bank money; central bank reserves; currency; equity; Government Debt; liabilities; Quantitative easing |
| JEL: | E41 E42 E44 E51 E52 E58 G21 H61 H63 K0 K11 K12 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15521&r= |
| By: | Ilzetzki, Ethan |
| Abstract: | We demonstrate a dramatic change over time in the international transmission of US monetary policy shocks. International spillovers from US interest rate policy have had a different nature since the 1990s than they did in post-Bretton Woods period. Our analysis is based on the a panel of 21 high income and emerging market economies. Prior to the 1990s, the US dollar appreciated, and ex-US industrial production declined, in response to increases in the US Federal Funds Rate, as predicted by textbook open economy models. The past decades have seen a shift, whereby increases in US interest rates depreciate the US dollar but stimulate the rest of the world economy. Results are robust to several identification methods. We sketch a simple theory of exchange rate determination in face of interest-elastic risk aversion that rationalizes these findings. |
| Keywords: | Exchange Rates; International Financial Intermediation; International spillovers; monetary |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15740&r= |
| By: | Niklas Amberg; Thomas Jansson; Mathias Klein; Anna Rogantini Picco |
| Abstract: | We use Swedish administrative individual-level data to document five facts about the distributional income effects of monetary policy. (i) The effects of monetary policy shocks are U-shaped with respect to the income distribution—i.e., expansionary shocks increase the incomes of high- and low-income individuals relative to middle-income individuals. (ii) The large effects in the bottom are accounted for by the labor-income response and (iii) those in the top by the capital-income response. (iv) The heterogeneity in the labor-income response is due to the earnings heterogeneity channel, whereas (v) that in the capital-income response is due to the income composition channel. |
| Keywords: | monetary policy, income inequality, heterogeneous agents, administrative data |
| JEL: | C55 E32 E52 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9062&r= |
| By: | Hoffmann, Mathias; Hürtgen, Patrick |
| Abstract: | According to the two-country full information New Keynesian model with flexible exchange rates, the real exchange rate appreciates in response to an asymmetric negative demand shock at the zero lower bound (ZLB) and exacerbates the adverse macroeconomic effects. This finding requires inflation expectations to adjust counterfactually large. When modeling inflation expectations consistent with survey expectations using imperfect information, we find that exchange rates can absorb demand shocks at the ZLB. In sharp contrast to the full information model: (i) A negative demand shock concentrated in the home country causes a real exchange rate depreciation that partially absorbs the demand shock. (ii) A VAR with an identified demand shock via sign restrictions is consistent with a real exchange rate depreciation at the ZLB. (iii) When the ZLB is binding in the home country, it is optimal for the foreign policymaker to reduce rather than increase foreign interest rates. (iv) Forward guidance that reveals the true state of the economy exacerbates the negative output gap in the two countries. |
| Keywords: | monetary policy,inflation expectations,imperfect information,real exchange rates |
| JEL: | F33 E31 E32 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:132021&r= |
| By: | Federico Di Pace (Bank of England); Christoph Gortz (University of Birmingham) |
| Abstract: | Using a structural vector autoregression, we document that a contractionary monetary policy shock triggers a decline in durable and non-durable outputs as well as a contraction in bank equity and a rise in the excess bond premium. The latter points to an important transmission channel of monetary policy via financial markets. It has long been recognized that a standard two-sector New Keynesian model, where durable goods prices are flexible and prices of non-durables and services sticky, does not generate the empirically observed sectoral co-movement across expenditure categories in response to a monetary policy shock. We show that introducing frictions in financial markets in a two-sector New Keynesian model can resolve its disconnect with the empirical evidence - a monetary tightening generates not only co-movement, but also a rise in credit spreads and a deterioration in bank equity. |
| Keywords: | financial intermediation, sectoral comovement, monetary policy, financial frictions, credit spreads. |
| JEL: | E22 E32 E44 E52 |
| Date: | 2021–04 |
| URL: | http://d.repec.org/n?u=RePEc:bir:birmec:21-07&r= |
| By: | Alexander Chaudhry; Anneke Kosse; Karen Sondergard |
| Abstract: | The Large Value Transfer System (LVTS) is Canada’s electronic funds transfer system for large-value and time-critical payments. It forms the backbone of the Canadian financial system. If the payments in the LVTS were to come to a halt, this would have a systemic impact on overall economic activity and affect the stability of the Canadian financial system. In this note we discuss the role that the LVTS has played during the onset of the Covid-19 pandemic and we evaluate the stress experienced in the system in 2020. In particular, we examine the number and value of rejected and delayed payments, the proportion of Tranche 2 transactions and intraday bilateral credit limit adjustments. We show that lessons learned from the 2008–09 global financial crisis in terms of the timing and effectiveness of specific Bank of Canada policy measures have helped avoid potential liquidity stresses in the LVTS in 2020. |
| Keywords: | Coronavirus disease (COVID-19); Financial institutions; Financial stability; Payment clearing and settlement systems |
| JEL: | E65 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocsan:21-7&r= |
| By: | Kamalyan, Hayk |
| Abstract: | This paper evaluates the effects of monetary policy volatility by fully accounting for real-time nature of policy setting. The empirical analysis shows that the impact of real-data volatility on output is about two times lower compared to that of final data volatility. Qualitatively, the effects of the two measures of volatility are similar. These findings suggest that the business cycle implications of policy-related volatility may possibly be overstated. |
| Keywords: | Final Data, Real-Time Data, Monetary Policy Volatility |
| JEL: | E32 E52 E58 |
| Date: | 2021–01–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:107581&r= |
| By: | Vo, Quynh-Anh (Bank of England) |
| Abstract: | One prominent feature of the regulatory framework put in place after the global financial crisis of 2008 is its reliance on multiple regulatory metrics, which has prompted new research on the interactions between them. This paper reviews the growing literature on the interactions between capital and liquidity requirements – the two primary requirements of the Basel III framework – with the focus on what the literature conveys on the extent to which capital and liquidity requirements are substitutes or complements. The paper also identifies gaps for further research. |
| Keywords: | Capital requirements; liquidity requirements; substitutability; complementarity |
| JEL: | G21 G28 |
| Date: | 2021–04–16 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0916&r= |
| By: | Boikos, Spyridon; Bournakis, Ioannis; Christopoulos, Dimitris; McAdam, Peter |
| Abstract: | We develop a horizontal R&D growth model that allows us to investigate the different channels through which financial reforms affect R&D investment and patent activity. First, a “micro” reform that abolishes barriers to entry in the banking sector produces a straightforward result: a decrease in lending rates which stimulates R&D investment and economic growth. Second, a “macro” reform that removes restrictions on banks’ reserves and credit controls. While this reform increases liquidity, it also increases the risk of default, potentially raising the cost of borrowing. This we dub the “reserves paradox” – this makes banks offset the rise in the default rate with a higher spread between loans and deposit rates. Thus our model suggests that whilst micro reforms boost innovation, macro reforms may appear negative. We test and find empirical support for these propositions using a sample of 21 OECD countries. JEL Classification: G2, C23, E44, O43 |
| Keywords: | estimation, finance, growth, monitoring, patents, reserves paradox |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212544&r= |
| By: | di Iasio, Giovanni; Kryczka, Dominika |
| Abstract: | We build a three-period model to investigate market failures in the market-based financial system. Institutional investors (IIs), such as insurance companies and pension funds, have liabilities offering guaranteed returns and operate under a risk-sensitive solvency constraint. They seek to allocate funds to asset managers (AMs) that provide diversification when investing in risky assets. At the interim date, AMs that run investment funds face investor redemptions and liquidate risky assets and/or deplete cash holdings, if available. Dealer banks can purchase risky assets, thus providing market liquidity. The latter ultimately determines equilibrium allocations. In the competitive equilibrium, AMs suffer from a pecuniary externality and hold inefficiently low amounts of cash. Asset fire sales increase the overall cost of meeting redemptions and depress risk-adjusted returns delivered by AMs to IIs, forcing the latter to de-risk. We show that a macroprudential approach to (i) the liquidity regulation of AMs and (ii) the solvency regulation of IIs can improve upon the competitive equilibrium allocations. JEL Classification: D62, G01, G23, G38 |
| Keywords: | insurance companies and pension funds, investment funds, market-based finance, market liquidity, regulation |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212545&r= |
| By: | Le, Vo Phuong Mai; Meenagh, David; Minford, Patrick |
| Abstract: | Strong evidence exists that price/wage durations are dependent on the state of the economy, especially inflation. We embed this dependence in a macro model of the US that otherwise does well in matching the economy's behaviour in the last three decades; it now also matches it over the whole post-war period. This finding implies a major new role for monetary policy: besides controlling inflation it now determines the economy's price stickiness. We find that, when backed by fiscal policy in preventing a ZLB, by targeting nominal GDP monetary policy can achieve high price stability and avoid large cyclical output fluctuations. |
| Keywords: | Crises; New keynesian; Nominal GDP; price stability; Rational Expectations; State-Dependence |
| JEL: | E2 E3 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15551&r= |
| By: | Chen, Yao; Palma, Nuno Pedro G.; Ward, Felix |
| 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 monetary 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. This monetary expansion can account for most of the price level rise in early modern Spain. In its absence, Spain would have required substantial deflation to accommodate its early modern output gains. |
| Keywords: | Early Modern Period; equation of exchange; Quantity Theory of Money |
| JEL: | E31 E51 N13 |
| Date: | 2020–12 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15509&r= |
| By: | Bofinger, Peter; Haas, Thomas |
| Abstract: | The discussion about central bank digital currencies (CBDC) has gained an impressive momentum. So far, however, the main focus has been on the macroeconomic implications of CBDCs and the narrow perspective of developing a digital substitute for cash. This paper adds a microeconomic dimension of CBDC to the discussion. We provide an overview of the existing payment ecosystem and derive a systemic taxonomy of CBDCs that distinguishes between new payment objects and new payment systems. Using our systemic taxonomy, we are able to categorize different CBDC proposals. In order to discuss and evaluate the different CBDC design options, we develop two criteria: allocative efficiency, i.e. whether a market failure can be diagnosed that justifies a government intervention, and attractiveness for users, i.e. whether CBDC proposals constitute attractive alternatives for users compared to existing payment objects and payment systems. Our analysis shows that there is no justification for digital cash substitutes from the point of view of allocative efficiency and the user perspective. Instead, our analysis opens the perspective for a retail payment system organized or orchestrated by the central bank without a new, independent payment object. |
| Keywords: | Central bank digital currency; central banks; international payments; Payment systems |
| JEL: | E42 E44 E52 E58 G21 G28 |
| Date: | 2020–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15489&r= |
| By: | Giannetti, Mariassunta; Jang, Yeejin |
| Abstract: | We show that foreign lenders and low market share lenders extend more credit in comparison to other lenders during lending booms leading to banking crises, but not during other credit expansions. Less established lenders also increase the amount of credit they extend to riskier borrowers, without asking for collateral or imposing covenants and higher interest rates. Our results suggest that taking lenders' characteristics into account could provide an indicator for how much risk an economy is accumulating and be a useful barometer for macroprudential policies. |
| Keywords: | Credit Booms; Crises; foreign banks |
| JEL: | F3 G21 |
| Date: | 2021–01 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:15737&r= |
| By: | Nils Gornemann (Board of Governors of the Federal Reserve System, International Finance Division, Washington, D.C. 20551); Keith Kuester (University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany); Makoto Nakajima (Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106-1574) |
| Abstract: | We build a New Keynesian business-cycle model with rich household heterogeneity. In the model, systematic monetary stabilization policy affects the distribution of income, income risks, and the demand for funds and supply of assets: the demand, because matching frictions render idiosyncratic labor-market risk endogenous; the supply, because markups, adjustment costs, and the tax system mean that the average profitability of firms is endogenous. Disagreement about systematic monetary stabilization policy is pronounced. The wealth rich or retired tend to favor inflation targeting. The wealth-poor working class, instead, favors unemployment-centric policy. One- and two-agent alternatives can show unanimous disapproval of inflation-centric policy, instead. We highlight how the political support for inflation-centric policy depends on wage setting, the tax system, and the portfolio that households have. |
| Keywords: | Monetary Policy, Unemployment, Search and Matching, Heterogeneous Agents, General Equilibrium, Dual Mandate |
| JEL: | E12 E21 E24 E32 E52 J64 |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:089&r= |