nep-cba New Economics Papers
on Central Banking
Issue of 2021‒05‒24
thirty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy in the Next Recession? By Cecchetti, Stephen G; Feroli, Michael; Kashyap, Anil K; Mann, Catherine L; Schoenholtz, Kermit
  2. Monetary-Fiscal Crosswinds in the European Monetary Union By Lucrezia Reichlin; Giovanni Ricco; Matthieu Tarbé
  3. Monetary Policy with a Central Bank Digital Currency: The Short and the Long Term By Böser, Florian; Gersbach, Hans
  4. Unemployment risk, liquidity traps and monetary policy By Bonciani, Dario; Oh, Joonseok
  5. On the optimal control of interbank contagion in the euro area banking system By Fukker, Gábor; Kok, Christoffer
  6. A Simple Model of Monetary Policy under Phillips-Curve Causal Disagreements By Ran Spiegler
  7. Expectations-driven liquidity traps: Implications for monetary and fiscal policy By Nakata, Taisuke; Schmidt, Sebastian
  8. Funding behaviour of debt management offices and the ECB’s Public Sector Purchase Programme By Plessen-Mátyás, Katharina; Kaufmann, Christoph; von Landesberger, Julian
  9. A toolkit for computing Constrained Optimal Policy Projections (COPPs) By de Groot, Oliver; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
  10. Rise of the central bank digital currencies: drivers, approaches and technologies By Auer, Raphael; Cornelli, Giulio; Frost, Jon
  11. How to Escape from the Debt Trap: Lessons from the Past By Thomas Mayer; Gunther Schnabl
  12. Financial Stability with Fire Sale Externalities By Ryuichiro Izumi; Yang Li
  13. A historical perspective on prudential regulation, currency mismatches and exchange rates in Latin America and the Caribbean By Martín Tobal; Renato Yslas
  14. The disciplining effect of supervisory scrutiny in the EU-wide stress test By Kok, Christoffer; Müller, Carola; Ongena, Steven; Pancaro, Cosimo
  15. The impact of macroprudential policies on capital flows in CESEE By Eller, Markus; Hauzenberger, Niko; Huber, Florian; Schuberth, Helene; Vashold, Lukas
  16. Policies in support of lending following the coronavirus (COVID 19) pandemic By Budnik, Katarzyna; Dimitrov, Ivan; Groß, Johannes; Jančoková, Martina; Lampe, Max; Sorvillo, Bianca; Stular, Anze; Volk, Matjaz
  17. Heterogeneous Effects of Macroprudential Policies on Firm Leverage and Value By Hyunduk Suh; Jin Young Yang
  18. A Quest for Monetary Policy Shocks in Japan by High Frequency Identification By Fumitaka Nakamura; Nao Sudo; Yu Sugisaki
  19. Financial Policymaking after Crises: Public vs. Private Interest By De Grauwe, Paul; Ji, Yuemei; Saka, Orkun
  20. FX policy when financial markets are imperfect By Matteo Maggiori
  21. Inflation and Unemployment, new insights during the EMU accession By Jean-Louis Combes; Pierre Lesuisse
  22. Money, Banking, and Old-School Historical Economics By Monnet, Eric; Velde, François R.
  23. Fragmentation in the European Monetary Union: Is it really over? By Bertrand Candelon; Angelo Luisi; Francesco Roccazzella
  24. A risk management perspective on macroprudential policy By Chavleishvili, Sulkhan; Fahr, Stephan; Kremer, Manfred; Manganelli, Simone; Schwaab, Bernd
  25. Effectiveness of expectations channel of monetary policy transmission: Evidence from India By Ashima Goyal; Prashant Parab
  26. On the Weakness of the Swedish Krona By Bacchetta, Philippe; Chikhani, Pauline
  27. Institutional Framework of Central Bank Independence: Revisited By Jacek Lewkowicz; Michał Woźniak; Michał Wrzesiński
  28. 'Quantitative Easing' and central bank asset purchases in South Africa: A DSGE approach By Cobus Vermeulen
  29. The Economics of Currency Risk By Hassan, Tarek Alexander; Zhang, Tony
  30. The Financial (In)Stability Real Interest Rate, R** By Akinci, Ozge; Benigno, Gianluca; Del Negro, Marco; Queralto, Albert
  31. Debt Sustainability in a Low Interest Rate World By Mehrotra, Neil; Sergeyev, Dmitriy

  1. By: Cecchetti, Stephen G; Feroli, Michael; Kashyap, Anil K; Mann, Catherine L; Schoenholtz, Kermit
    Abstract: In many advanced countries, lowering the policy rate to zero probably will be insufficient to counter the next conventional recession. We explore a range of new monetary policy (NMP) tools including forward guidance, balance sheet tools and negative interest rates. Reflecting the complex transmission of monetary policy, we examine each NMP's impact on financial conditions indexes (FCIs) in eight advanced economies. We find: (1) the global component of financial conditions is quite important; (2) state-contingent forward guidance is the tool most associated with improved conditions; (3) policymakers typically implemented NMPs during stress periods, and this endogenous usage pattern makes any econometric assessment difficult; (4) NMPs generally were not sufficient to overcome the headwinds already present. This leads us to conclude that, while central bankers should work to incorporate NMP tools into their reaction function, they should be humble about their likely effectiveness.
    Keywords: financial conditions; Financial conditions index; forward guidance; maturity extension; monetary policy; Negative Interest Rates; Quantitative easing; Stabilization Policy; Unconventional Monetary Policy
    JEL: E32 E52 E58
    Date: 2020–10
  2. By: Lucrezia Reichlin; Giovanni Ricco; Matthieu Tarbé
    Abstract: We study the monetary-fiscal mix in the European Monetary Union. The medium and long-run effects of conventional and unconventional monetary policy can be analysed by combining monetary policy shocks identified in a Structural VAR, and the general government budget constraint featuring a single central bank and multiple fiscal authorities. In response to a conventional easing of the policy rate, the real discount rate declines, absorbing the increase in deficit due to the fiscal policy leaning towards the easing. Conversely, in response to an unconventional easing of the long end of the yield curve, the discount rate declines strongly, while the primary fiscal surplus barely moves. The long-run effect of unconventional monetary easing on inflation is about half than that of conventional, a result which is also consistent with the muted response of fiscal policy. Results do not point to large differences across countries.
    Keywords: monetary-fiscal interaction, fiscal policy, monetary policy, intertemporal government budget constraint
    JEL: E31 E63 E52
    Date: 2021–05
  3. By: Böser, Florian; Gersbach, Hans
    Abstract: We examine how the introduction of an interest-bearing central bank digital currency (CBDC) impacts bank activities and monetary policy. Depositors can switch from bank deposits to CBDC as a safe medium of exchange at any time. As banks face digital runs, either because depositors have a preference for CBDC or fear bank insolvency, monetary policy can use collateral requirements (and default penalties) to initially increase bankers' monitoring incentives. This leads to higher aggregate productivity. However, the mass of households holding CBDC will increase over time, causing additional liquidity risk for banks. After a certain period, monetary policy with tight collateral requirements generating liquidity risk for banks and exposing bankers to default penalties would render banking non-viable and prompt the central bank to abandon such policies. Under these circumstances, bankers' monitoring incentives will revert to low levels. Accordingly, a CBDC can at best yield short-term welfare gains.
    Keywords: Central bank digital currency - Monetary policy - Banks - Deposits
    JEL: E42 E52 E58 G21 G28
    Date: 2020–09
  4. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: When the economy is in a liquidity trap and households have a precautionary motive to save against unemployment risk, adverse demand shocks cause severe deflationary spirals and output contractions. In this context, we study the implications of optimal monetary policy, which consists of keeping the nominal rate at zero longer than implied by current macroeconomic conditions. Under such policy and incomplete markets, expected improvements in labour market conditions mitigate the rise in unemployment risk and decline in demand. As a result, market incompleteness may alleviate contractions in output and inflation during a liquidity trap. However, reducing market incompleteness mitigates the fall in demand under realistic monetary policy rules.
    Keywords: Unemployment risk; Liquidity trap; Zero lower bound; Monetary policy
    JEL: E21 E24 E32 E52 E61
    Date: 2021–05–14
  5. By: Fukker, Gábor; Kok, Christoffer
    Abstract: In this paper we present a methodology of model-based calibration of additional capital needed in an interconnected financial system to minimize potential contagion losses. Building on ideas from combinatorial optimization tailored to controlling contagion in case of complete information about an interbank network, we augment the model with three plausible types of fire sale mechanisms. We then demonstrate the power of the methodology on the euro area banking system based on a network of 373 banks. On the basis of an exogenous shock leading to defaults of some banks in the network, we find that the contagion losses and the policy authority's ability to control them depend on the assumed fire sale mechanism and the fiscal budget constraint that may or may not restrain the policy authorities from infusing money to halt the contagion. The modelling framework could be used both as a crisis management tool to help inform decisions on capital/liquidity infusions in the context of resolutions and precautionary recapitalisations or as a crisis prevention tool to help calibrate capital buffer requirements to address systemic risks due to interconnectedness. JEL Classification: C61, D85, G01, G18, G21, G28, L14
    Keywords: contagion, fire sales, interbank networks, macroprudential policy, optimal control, stress testing
    Date: 2021–05
  6. By: Ran Spiegler
    Abstract: I study a static textbook model of monetary policy and relax the conventional assumption that the private sector has rational expectations. Instead, the private sector forms inflation forecasts according to a misspecified subjective model that disagrees with the central bank's (true) model over the causal underpinnings of the Phillips Curve. Following the AI/Statistics literature on Bayesian Networks, I represent the private sector's model by a direct acyclic graph (DAG). I show that when the private sector's model reverses the direction of causality between inflation and output, the central bank's optimal policy can exhibit an attenuation effect that is sensitive to the noisiness of the true inflation-output equations.
    Date: 2021–05
  7. By: Nakata, Taisuke; Schmidt, Sebastian
    Abstract: We study optimal time-consistent monetary and fiscal policy in a New Keynesian model where occasional declines in agents' confidence give rise to persistent liquidity trap episodes. Insights from widely-studied fundamental-driven liquidity traps are not a useful guide for enhancing welfare in this model. Raising the inflation target, appointing an inflation-conservative central banker, or allowing for the use of government spending as an additional stabilization tool can exacerbate deflationary pressures and demand deficiencies during the liquidity trap episodes. However, appointing a policymaker who is sufficiently less concerned with government spending stabilization than society eliminates expectations-driven liquidity traps.
    Keywords: discretion; effective lower bound; Fiscal policy; monetary policy; Policy Delegation; Sunspot equilibria
    JEL: E52 E61 E62
    Date: 2020–11
  8. By: Plessen-Mátyás, Katharina; Kaufmann, Christoph; von Landesberger, Julian
    Abstract: This paper investigates whether the funding behaviour of euro area debt management offices (DMOs) changed with the start of the ECB’s Public Sector Purchase Programme (PSPP). Our results show that (i) lower yield levels and (ii) PSPP purchases supported higher maturities at issuance. The former indicates a behaviour of “locking in low rates for longer”, while the latter suggests the existence of an additional “demand effect” of the PSPP on DMO strategies beyond the PSPP’s effect via yields. The combined impact of the PSPP via these channels amounts to maturity extensions at issuance of about one year in our estimation, which compares to the average issuance maturity for Germany, France, Italy and Spain before the PSPP of four years. Our finding that DMOs extend maturities when funding conditions ease invites further work on the economic implications of public debt management during the PSPP and its relevance for monetary policy transmission. JEL Classification: E52, E58, E63, H63
    Keywords: central bank asset purchases, public debt management, sovereign debt maturity structure, unconventional monetary policy
    Date: 2021–05
  9. By: de Groot, Oliver; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka
    Abstract: This paper presents a toolkit for generating optimal policy projections. It makes five contributions. First, the toolkit requires a minimal set of inputs: only a baseline projection for target and instrument variables and impulse responses of those variables to policy shocks. Second, it solves optimal policy projections under commitment, limited-time commitment, and discretion. Third, it handles multiple policy instruments. Fourth, it handles multiple constraints on policy instruments such as a lower bound on the policy rate and an upper bound on asset purchases. Fifth, it allows alternative approaches to address the forward guidance puzzle. The toolkit that accompanies this paper is Dynare compatible, which facilitates its use. Examples replicate existing results in the optimal monetary policy literature and illustrate the usefulness of the toolkit for highlighting policy trade-offs. We use the toolkit to analyse US monetary policy at the height of the Great Financial Crisis. Given the Fed’s early-2009 baseline macroeconomic projections, we find the Fed’s planned use of the policy rate was close to optimal whereas a more aggressive QE program would have been beneficial. JEL Classification: C61, C63, E52, E58
    Keywords: asset purchases, commitment vs. discretion, forward guidance puzzle, lower bound, optimal monetary policy
    Date: 2021–05
  10. By: Auer, Raphael; Cornelli, Giulio; Frost, Jon
    Abstract: Central bank digital currencies (CBDCs) are receiving more attention than ever before. Yet the motivations for issuance vary across countries, as do the policy approaches and technical designs. We investigate the economic and institutional drivers of CBDC development and take stock of design efforts. We set out a comprehensive database of technical approaches and policy stances on issuance, relying on central bank speeches and technical reports. Most projects are found in digitised economies with a high capacity for innovation. Work on retail CBDCs is more advanced where the informal economy is larger. We next take stock of the technical design options. More and more central banks are considering retail CBDC architectures in which the CBDC is a direct cash-like claim on the central bank, but where the private sector handles all customer-facing activity. We conclude with an in-depth description of three distinct CBDC approaches by the central banks of China, Sweden and Canada.
    Keywords: CBDC; Central bank digital currency; central banks; digital currency; distributed ledger technology; international payments; monetary policy; Payments; technology
    JEL: E42 E44 E51 F31 G21 G28
    Date: 2020–10
  11. By: Thomas Mayer; Gunther Schnabl
    Abstract: Rising public debt everywhere has raised the question of how to reduce debt again in the future. High public debt also seems to be an impediment for the exit of central banks from ultra-low interest rates and quantitative easing. Historical precedents and proposals have included austerity, haircuts and the generation of inflation. Each way has advantages and disadvantages, including uncertainty about effects and side-effects. We approach the issue from an historical perspective, based on case studies of prominent approaches to debt reduction. We analyze debt reduction through economic austerity in Italy, hyperinflation in Germany after World War I, inflation in Argentina since the 1980s, currency reform in Germany after WW II, and financial repression in the United States and the United Kingdom after WW II. Finally, we discuss Ronald McKinnon’s order of economic and financial liberalization as well as the Chicago Plan combined with the introduction of central bank digital currencies as an option for the future.
    Keywords: low-interest trap, over-indebtness, public debt, hyperinflation, monetary reform, economic reform, inflation, public debt relief
    JEL: H12 H63 P26
    Date: 2021
  12. By: Ryuichiro Izumi (Department of Economics, Wesleyan University); Yang Li (Nankai University)
    Abstract: Do policies that aim to mitigate firre sale externalities improve financial stability? We study this question in a model of financial intermediation where banks may sell long-term assets in financial markets subject to cash-in-the-market pricing and bank runs. In the absence of interventions, banks hold more long-term assets than is socially optimal, leading to ineciently large fire sales in a crisis. Regulating banks' short-term liabilities and portfolio choices can mitigate this externality. We show, however, that in economies with high market liquidity, such interventions actually increase financial fragility. In such a case, policymakers must balance the desire to mitigate the externality with financial stability considerations.
    Keywords: Fire sale, Pecuniary externalities, Macroprudential policies, Financial fragility
    JEL: G21 G28 E44
    Date: 2021–05
  13. By: Martín Tobal (Banco de México); Renato Yslas (Banco de México)
    Abstract: This paper runs a survey across seventeen countries from Latin American and the Caribbean about the use, implementation characteristics and policy motivations of limits and requirements on FX positions, as well as the exchange rate regimes of these economies over 1992-2012. Among other novel stylized facts, we show that when referring to policy motivations, national authorities linked their regulatory measures mostly to currency mismatches and fluctuations of the exchange rate, and this pattern was clearer for the more flexible exchange rate regimes adopted in the aftermath of the currency crisis of the 1990s and early 2000s. Thus, we use the survey and the synthetic control method to show that changes in limits and requirements on FX positions affected fluctuations of the exchange rate.
    Keywords: Prudential Regulation; Exchange Rate Regimes; Foreign Currency Positions
    JEL: E58 F31
    Date: 2021–05
  14. By: Kok, Christoffer; Müller, Carola; Ongena, Steven; Pancaro, Cosimo
    Abstract: Using a difference-in-differences approach and relying on confidential supervisory data and an unique proprietary data set available at the European Central Bank related to the 2016 EU-wide stress test, this paper presents novel empirical evidence that supervisory scrutiny associated to stress testing has a disciplining effect on bank risk. We find that banks that participated in the 2016 EU-wide stress test subsequently reduced their credit risk relative to banks that were not part of this exercise. Relying on new metrics for supervisory scrutiny that measure the quantity, potential impact, and duration of interactions between banks and supervisors during the stress test, we find that the disciplining effect is stronger for banks subject to more intrusive supervisory scrutiny during the exercise. JEL Classification: G11, G21, G28
    Keywords: banking regulation, banking supervision, credit risk, internal models, stress testing
    Date: 2021–05
  15. By: Eller, Markus; Hauzenberger, Niko; Huber, Florian; Schuberth, Helene; Vashold, Lukas
    Abstract: In line with the recent policy discussion on the use of macroprudential measures to respond to cross-border risks arising from capital flows, this paper tries to quantify to what extent macroprudential policies (MPPs) have been able to stabilize capital flows in Central, Eastern and Southeastern Europe (CESEE) – a region that experienced a substantial boom-bust cycle in capital flows amid the global financial crisis and where policymakers had been quite active in adopting MPPs already before that crisis. To study the dynamic responses of capital flows to MPP shocks, we propose a novel regime-switching factor-augmented vector autoregressive (FAVAR) model. It allows to capture potential structural breaks in the policy regime and to control – besides domestic macroeconomic quantities – for the impact of global factors such as the global financial cycle. Feeding into this model a novel intensity-adjusted macroprudential policy index, we find that tighter MPPs may be effective in containing domestic private sector credit growth and the volumes of gross capital inflows in a majority of the countries analyzed. However, they do not seem to generally shield CESEE countries from capital flow volatility. JEL Classification: C38, E61, F44, G28
    Keywords: capital flows, CESEE, global factors, macroprudential policy, regime-switching FAVAR
    Date: 2021–05
  16. By: Budnik, Katarzyna; Dimitrov, Ivan; Groß, Johannes; Jančoková, Martina; Lampe, Max; Sorvillo, Bianca; Stular, Anze; Volk, Matjaz
    Abstract: This paper looks at the impact of mitigation policies implemented by supervisory and macroprudential authorities as well as national governments in the euro area during the coronavirus (COVID-19) pandemic to support lending to the real economy. The impact assessment concerns joint, and individual, effect of supervisory measures introduced by the ECB Banking Supervision, a reduction in macroprudential buffers put forward by national macroprudential authorities, and public moratoria and guarantee schemes. The analysis has been conducted in the first half of 2020, in a situation of high uncertainty about how the crisis will develop in the future. Against this backdrop, it proposes a method of addressing such uncertainty by assessing the impact of policies across a full range of scenarios. We find that the supervisory, macroprudential and government policies should have helped to maintain higher lending to the non-financial private sector (around 5% higher than lending in the absence of policy measures) and, in particular, to non-financial corporations (12% higher than lending in the absence of policy measures), preventing further amplification of the recession via the banking sector. The national and supervisory and macroprudential actions have reinforced each other, and have been jointly able to affect a broader share of the banking sector. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector, COVID-19, impact assessment, real-financial feedback mechanism
    Date: 2021–05
  17. By: Hyunduk Suh (Inha University); Jin Young Yang (Zayed University)
    Abstract: We empirically investigate the effect of financial institution-targeted macroprudential policies on firms, using a comprehensive macroprudential policy dataset and corporate panel data across 29 countries. We find that the tightening of macroprudential measures persistently curbs the leverage growth of firms, while there is no indication that the loosening of the measures is related to the increase in leverage growth. We also find that this effect on leverage is heterogeneous across firms, as net macroprudential policy actions reduce the procyclicality of leverage more significantly for small firms and firms with high leverage. Also, we estimate the effect of macroprudential policies on firm value to evaluate potential policy trade-offs as the policies restrict the firms' access to credit during economic booms while protecting them from future financial crises. The effect of macroprudential policies on firm value is generally positive despite the policies' restrictive nature. Further, the effect on firm value is heterogeneous depending on firm characteristics: the positive effect becomes stronger as firms are less leveraged; but this positive effect is weaker for firms that grow faster, suggesting potential costs of macroprudential policies for these firms.
    Keywords: Macroprudential policy, Firm heterogeneity, Leverage, Tobin’s Q
    JEL: E51 E58 G18
    Date: 2021–04
  18. By: Fumitaka Nakamura (Deputy Director and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Nao Sudo (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Yu Sugisaki (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: The use of changes in short-term interest rates (STIRs) within a 30-minute window around monetary policy announcements has been increasingly adopted in empirical studies. However, variations of STIRs within such a narrow window may be too small under the effective lower bound (ELB). To address the issue, this paper constructs a measure of monetary policy shocks using STIR futures in Japan, where the policy interest rate has been close to the ELB for an exceptionally long period. We show that (i) variations within a 30-minute window are closely correlated with key financial variables while those outside the window are correlated less, suffering from noise, (ii) expansionary shocks with respect to unconventional measures have continued to lower the long-term yield, and (iii) the impulses of macroeconomic variables to the shocks agree with what conventional theory predicts overall.
    Keywords: Monetary policy shocks, high frequency identification, effective lower bound
    JEL: E32 E44 E52
    Date: 2021–04
  19. By: De Grauwe, Paul; Ji, Yuemei; Saka, Orkun
    Abstract: What drives actual government policies after financial crises? In this paper, we fi rst present a simple model of post-crisis policymaking driven by both public and private interests. Using the most comprehensive dataset available on de-facto financial liberalization over seven policy domains across 94 countries between 1973 and 2015, we then establish that fi nancial crises can lead to more government intervention and a process of re-regulation in financial markets. Consistent with a demand channel from public (interests) to policymakers, we fi nd that post-crisis interventions are common only in democratic countries. However, by using a plausibly exogenous political setting -i.e., term limits- muting policymakers' accountability, we show that democratic leaders who do not have re-election concerns are substantially more likely to intervene in financial markets after crises, in ways that promote their private interests. These privately-motivated interventions cannot be associated with immediate crisis response, operate via controversial policy domains and favour incumbent banks in countries with more revolving doors between political and financial institutions.
    Date: 2020–10
  20. By: Matteo Maggiori
    Abstract: In the last 15 years, central banks have purchased securities at unprecedented levels via quantitative easing and foreign exchange intervention. These policies have constituted the core response to crises such as the 2008–09 Great Financial Crisis, the 2011–12 European sovereign debt crisis and the ongoing Covid-19 pandemic. In many cases, policymakers have resorted to these policies as traditional monetary policy was constrained by the zero lower bound. In this paper, I review recent advances in open economy analysis with financial frictions. This type of analysis offers a different take on exchange rates compared with their traditional role as shock absorbers. When international financial intermediation is imperfect, the exchange rate is pinned down by imbalances in the demand and supply of assets in different currencies and, crucially, by the limited risk-bearing capacity of the financial intermediaries that absorb these imbalances. Exchange rates are distorted by financial forces and can be a source of shocks to the real economy rather than a re-equilibrating mechanism.
    JEL: E44 F31 F32 F41 G15
    Date: 2021–05
  21. By: Jean-Louis Combes (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne); Pierre Lesuisse (CERDI - Centre d'Études et de Recherches sur le Développement International - CNRS - Centre National de la Recherche Scientifique - UCA - Université Clermont Auvergne)
    Abstract: In the process of EU integration, toward the EA accession, we try to understand, how changes in exchange rate regime, attributed to the switch through the ERM-II and to the EA accession, influence the dynamic between inflation and unemployment, i.e., shock on the Phillips curve coefficient. We look at a panel of countries, in the CEECs over the last twenty years, using a recent work from McLeay and Tenreyro (2020), to clarify the impact of loosing the monetary autonomy. Being under a pegged regime is not associated with a flattened Phillips curve. However, after the EA accession, the Phillips curve coefficient becomes not significant. This result is confirmed, looking at other small EA countries; while "economic leaders" tend to maintain a significant trade-off between inflation and unemployment. Using recent work from
    Keywords: Phillips curve,European Monetary Union,Panel
    Date: 2021–05–04
  22. By: Monnet, Eric; Velde, François R.
    Abstract: We review developments in the history of money, banking, and financial intermediation over the last twenty years. We focus on studies of financial development, including the role of regulation and the history of central banking. We also review the literature of banking and financial crises. This area has been largely unaffected by the so-called new econometric methods that seek to prove causality in reduced form settings. We discuss why historical macroeconomics is less amenable to such methods, discuss the underlying concepts of causality, and emphasize that models remain the backbone of our historical narratives.
    Keywords: Banking; Causality; Financial Intermediation; historical macroeconomics; money
    JEL: N01 N10 N20
    Date: 2020–10
  23. By: Bertrand Candelon (Université catholique de Louvain); Angelo Luisi (Université catholique de Louvain); Francesco Roccazzella (Université catholique de Louvain)
    Abstract: Sovereign bond market fragmentation represents one of the major challenges European authorities have had to tackle since the outburst of the euro area debt crisis in 2010. By investigating the inter-country shock transmission through a new methodology that reconciles Factor and Global Vector Autoregressive models, we first show that fragmentation risk well preceded the sovereign debt crisis outburst. Most importantly, by analyzing the recent period, we document a rise in fragmentation risk in the euro area during the COVID pandemic. This rise, connected to the pressure on public debts and deficits due to the pandemic period, questions the European integration process and calls for early measures to avoid a new sovereign debt crisis.
    Keywords: Euro Area, Sovereign bond, Fragmentation, COVID
    JEL: F36 F37 G12 H63
    Date: 2021–05–14
  24. By: Chavleishvili, Sulkhan; Fahr, Stephan; Kremer, Manfred; Manganelli, Simone; Schwaab, Bernd
    Abstract: Macroprudential policymakers assess medium-term downside risks to the real economy arising from financial imbalances and implement policies aimed at managing those risks. In doing so, they face an inherent intertemporal trade-off between the expected growth and downside risks. This paper reviews the literature on Growth-at-Risk, embeds it in the wider literature on macroprudential policy, and proposes an empirical risk management framework that combines insights from the two literatures, by forecasting the entire real GDP growth distribution with a structural quantile vector autoregressive model. It accounts for direct and indirect interactions between financial vulnerabilities, financial stress and real GDP growth and allows for potential non-linear amplification effects. The framework provides policymakers with a macro-financial stress test to monitor downside risks to the economy and a macroprudential stance metric to quantify when interventions may be beneficial. JEL Classification: G21, C33
    Keywords: financial conditions, growth-at-risk, macroprudential policy, quantile vector autoregression, stress testing
    Date: 2021–05
  25. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: We examine the efficacy of expectations channel of monetary policy transmission in India using survey-based expectations of households and professional forecasters in a Structural Vector Auto Regression (SVAR) framework. To analyse the fixed point between inflation and inflation expectations, we estimate how expectations shocks feed into the dynamics of macroeconomic aggregates. Second, we find the shocks affecting these expectations. Third, we estimate shocks influencing core inflation. SPF expectations shocks affect headline and food inflation and RBI projections. Petrol price shocks, RBI projection shocks and supply shocks (headline inflation) affect household inflation expectations. Food inflation affects expectations in the short run while core inflation has long-run influence. 3-month-ahead SPF forecasts are influenced by supply-side shocks, monetary policy shocks and RBI projections. Results are robust to alternative identifications. In the early years of flexible inflation targeting that we cover the main interaction was between SPF forecasts and RBI projections on to core. The fixed point was stable because the response of each variable was less than unity. The evidence indicates the expectations channel of transmission was more effective than the aggregate demand channel.
    Keywords: Household expectations, Survey of professional forecasters, Central bank communications, Expectations channel, Structural vector auto regression
    JEL: D83 D84 E52 E58
    Date: 2021–04
  26. By: Bacchetta, Philippe; Chikhani, Pauline
    Abstract: The Swedish krona depreciated sharply between 2013 and early 2020 but standard models are unable to explain this depreciation. This paper reviews the experience of the krona. By estimating an "equilibrium" value for the real exchange rate, we confirm a growing undervaluation after 2014. The depreciation could initially be explained by a decline in interest rates and then by quantitative easing and the Riksbank communication regarding the krona. However, monetary policy cannot explain the extent of the depreciation nor the long depreciation period of seven years. We then review various complementary explanations proposed in the literature including, imperfect information, financial frictions, the role of financial shocks and the convenience yield. Many of these elements can plausibly explain the weakness of the krona, but cannot be quantified.
    Date: 2020–11
  27. By: Jacek Lewkowicz (Faculty of Economic Sciences, University of Warsaw); Michał Woźniak (Faculty of Economic Sciences, University of Warsaw); Michał Wrzesiński (Faculty of Economic Sciences, University of Warsaw)
    Abstract: The subject of central bank independence (CBI) and its consequences for monetary policy and economic development has been widely explored in public debate and research discourse. The main aim of the article is to analyze central bank independence, considering the institutional environment in a given country. Our primary focus is on the relevance of de jure provisions for de facto CBI, as well as on the importance of other structural factors. We rely on a dataset consisting of various novel indices to approximate these issues across multiple dimensions and apply advanced econometric tools to investigate our research tasks. The outcome of the study implies that the interrelationships between de jure and de facto CBI are observable. Thus, these conclusions may be successfully applied in institutional design and public policies regarding central banking.
    Keywords: central bank independence, uncertainty, political economy, law & economics, institutional economics
    JEL: E50 E58 K20 P48
    Date: 2021
  28. By: Cobus Vermeulen
    Abstract: This paper develops a small open-economy (SOE) dynamic stochastic general equilibrium (DSGE) model to evaluate the effect of the temporary emergency purchases of government bonds by the South African Reserve Bank (SARB) during 2020. The model is constructed in the portfolio balancing framework, in which the non-bank private sector holds a portfolio of imperfectly substitutable domestic government bonds of different maturities. This allows bond purchases by the central bank, through changing the composition of household bond portfolios, to influence the macroeconomy. The model is calibrated and simulated on South African data. Consistent with similar models of Quantitative Easing simulated for the US and the UK, the results here illustrate that bond purchases by the SARB could have a broader stimulatory macroeconomic impact, over and above the SARB’s primary objective of providing liquidity to domestic ï¬ nancial markets. This includes an expansion in the money supply, a fall in long-term government bond yields, and an increase in consumption, inflation and output. However, given the relatively small scale of the SARB’s bond purchases, the stimulus effect is modest.
    Keywords: open-economy DSGE, central bank asset purchases, quantitative easing, portfolio balance theory
    JEL: E12 E17 E44 E52
    Date: 2020–11
  29. By: Hassan, Tarek Alexander; Zhang, Tony
    Abstract: This article reviews the literature on currency and country risk with a focus on its macroeconomic origins and implications. A growing body of evidence shows countries with safer currencies enjoy persistently lower interest rates and a lower required return to capital. As a result, they accumulate relatively more capital than countries with currencies international investors perceive as risky. Whereas earlier research focused mainly on the role of currency risk in generating violations of uncovered interest parity and other financial anomalies, more recent evidence points to important implications for the allocation of capital across countries, the efficacy of exchange rate stabilization policies, the sustainability of trade deficits, and the spillovers of shocks across international borders.
    Keywords: Capital Flows; carry trade; Country risk; currency risk; Forward premium puzzle; uncovered interest parity
    Date: 2020–09
  30. By: Akinci, Ozge; Benigno, Gianluca; Del Negro, Marco; Queralto, Albert
    Abstract: We introduce the concept of financial stability real interest rate using a macroeconomic banking model with an occasionally binding financing constraint as in Gertler and Kiyotaki (2010). The financial stability interest rate, r**, is the threshold interest rate that triggers the constraint being binding. Increasing imbalances in the financial sector measured by an increase in leverage are accompanied by a lower threshold that could trigger financial instability events. We also construct a theoretical implied financial condition index and show how it is related to the gap between the natural and financial stability interest rates.
    Keywords: Financial Amplification; financial crises; Occasionally Binding Credit Constraint; R**
    JEL: E41 F3 G01
    Date: 2020–11
  31. By: Mehrotra, Neil; Sergeyev, Dmitriy
    Abstract: Conditions of secular stagnation-low output growth g and low interest rates r-have counteracting effects on the cost of servicing public debt, r â?? g. Using data for ad- vanced economies, we document that r is often less than g, but r â?? g exhibits substan- tial variability over the medium-term. We build a continuous-time model in which the debt-to-GDP ratio is stochastic and r
    Keywords: debt sustainability; government default; Low interest rates; public debt; secular stagnation
    JEL: E43 E62 H68
    Date: 2020–09

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