nep-cba New Economics Papers
on Central Banking
Issue of 2021‒05‒31
seventeen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. A dilemma between liquidity regulation and monetary policy: some history and theory By Monnet, Eric; Vari, Miklos
  2. COVID-19 and Monetary Policy with Zero Bounds: A Cross-Country Investigation By Hakan Yilmazkuday
  3. Is It Time to Reassess the Focal Role of Core PCE Inflation? By Randal Verbrugge
  4. How Does U.S. Monetary Policy Affect Emerging Market Economies? By Ozge Akinci; Albert Queraltó
  5. Bubbles against Financial Repression By Plantin, Guillaume
  6. Systemic Risk Spillovers Across the EURO Area By Alexandros Skouralis
  7. How “Monetization” Really Works—Examples from Nations’ Policy Responses to COVID-19 By Felipe, Jesus; Fullwiler, Scott; Estrada, Gemma; Jaber, Maria Hanna; Magadia, Mary Ann; Patagan, Remrick
  8. The Inflation Expectations of U.S. Firms: Evidence from a new survey By Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
  9. Lessons from early central banking for today By Bindseil, Ulrich
  10. Tiers of joy? Reserve tiering and bank behavior in a negative-rate environment By Andreas Fuster; Tan Schelling; Pascal Towbin
  11. When Does Monetary Policy Sway House Prices? A Meta-Analysis By Ehrenbergerova, Dominika; Bajzik, Josef; Havranek, Tomas
  12. Central Bank Communication: One Size Does Not Fit All By Joan Huang; John Simon
  13. Real Exchange Rate Misalignment : concepts and measurement in the context of coronavirus crisis for developing countries as central African Republic knowing civil war By Kuikeu, Oscar
  14. Free Banking in Sweden: The Case of Private Bank Notes, 1831-1902 By Jonung, Lars
  15. Stock Market Spillovers via the Global Production Network: Transmission of U.S. Monetary Policy By Julian di Giovanni; Galina Hale
  16. Debt Buildup and Currency Vulnerability: Evidence from Global Markets By Park , Donghyun; Ramayandi , Arief; Tian, Shu
  17. Exchange rate misalignments and current accounts in BRICS countries By Rikhotso, Prayer; Bonga-Bonga, Lumengo

  1. By: Monnet, Eric; Vari, Miklos
    Abstract: History suggests a conflict between current Basel III liquidity ratios and monetary policy, which we call the liquidity regulation dilemma. Although forgotten, liquidity ratios, named "securities-reserve requirements", were widely used historically, but for monetary policy (not regulatory) reasons, as central bankers recognized the contractionary effects of these ratios. We build a model rationalizing historical policies: a tighter ratio reduces the quantity of assets that banks can pledge as collateral, thus increasing interest rates. Tighter liquidity regulation paradoxically increases the need for central bank's interventions. Liquidity ratios were also used to keep yields on government bonds low when monetary policy tightened
    Keywords: Basel III; central bank history; Liquidity coverage ratio (LCR); liquidity ratios; Monetary policy implementation; reserve requirements
    JEL: E43 E52 E58 G28 N10 N20
    Date: 2020–07
  2. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: Using daily data on policy rates from 28 advanced economies and 32 emerging markets, this paper investigates the monetary policy reaction function of central banks during the Coronavirus Disease 2019 (COVID-19) outbreak. The results show that emerging markets or countries without a zero bound on their interest rates were able to reduce interest rates as a reaction to reduced economic activity and to the volatility in their exchange rates, whereas advanced economies or countries with a zero bound on their interest rates were not. Several policy implications follow for countries with a zero bound on their interest rates amid COVID-19.
    Keywords: COVID-19, Coronavirus, Monetary Policy, Reaction Function, Google Mobility, Exchange Rate
    JEL: E52 E58
    Date: 2021–05
  3. By: Randal Verbrugge
    Abstract: In this paper, I review the history of “core” PCE inflation and its rationale: remove volatile items with transitory shocks to better highlight the trend in inflation. Structural changes in the inflation process imply that, on a “reducing volatility” basis, the list of items excluded from the “core” inflation basket (aside from gasoline) is far from optimal. This is true whether one assesses volatility on the basis of a weighted component monthly, or an index monthly, or a 12-month index, or a 5-year index. In addition, I demonstrate other deficiencies of exclusion indexes. Excluded items do not just experience transitory shocks, but also have persistent trends; thus excluding them imparts a significant time-varying bias to core inflation. Meanwhile, items that are not excluded can experience volatility and moreover can cause core inflation to depart notably from trend inflation, sometimes at crucial moments. Two other prominent trend inflation measures, trimmed mean PCE inflation and median PCE inflation, gracefully address these issues, but themselves have notable time-varying bias. I discuss the source of the bias in these other measures and how to correct for bias in real time. I then summarize and extend a wide variety of evidence comparing these three trend measures. I conclude that, for a variety of considerations that are relevant for monetary policy deliberations and communication, either trimmed mean PCE inflation or median PCE inflation are superior measures.
    Keywords: core inflation; forecasting; monetary policy; trimmed mean; median
    JEL: E0 E31 E37 E52 C8
    Date: 2021–05–18
  4. By: Ozge Akinci; Albert Queraltó
    Abstract: The question of how U.S. monetary policy affects foreign economies has received renewed interest in recent years. The bulk of the empirical evidence points to sizable effects, especially on emerging market economies (EMEs). A key theme in the literature is that these spillovers operate largely through financial channels—that is, the effects of a U.S. policy tightening manifest themselves abroad via declines in international risky asset prices, tighter financial conditions, and capital outflows. This so-called Global Financial Cycle has been shown to affect EMEs more forcefully than advanced economies. It is because higher U.S. policy rates have a disproportionately larger impact on rates in EMEs. In our recent research, we develop a model with cross-border financial linkages that provides theoretical foundations for these empirical findings. In this Liberty Street Economics post, we use the model to illustrate the spillovers from a tightening of U.S. monetary policy on credit spreads and on the uncovered interest rate parity (UIP) premium in EMEs with dollar-denominated debt.
    Keywords: financial frictions; U.S. monetary policy spillovers; currency premium; financial conditions
    JEL: E52 F00
    Date: 2021–05–17
  5. By: Plantin, Guillaume
    Abstract: During a financial crisis, a central bank temporarily subsidizes the interest rate so as to maintain borrowing at normal levels. Savers may search for yield and blow rational stochastic bubbles that generate a higher expected return than the policy rate before bursting at the end of monetary easing. Unlike standard rational bubbles, that are not monetary phenomena, these bubbles are "bad" in the sense that they crowd out investments that would otherwise generate a higher expected return than that on the bubbles.
    Date: 2020–08
  6. By: Alexandros Skouralis
    Abstract: The high degree of financial contagion across the Euro area during the sovereign debt crisis highlighted the importance of systemic risk. In this paper we employ a Global VAR (GVAR) model to analyse the systemic risk spillovers across the Euro area and to assess their role in the transmission of monetary policy. The results indicate a strong interconnectedness among core countries and also that peripheral economies have a disproportionate importance in spreading systemic risk. A systemic risk shock results in economic slowdown domestically and causes negative spillovers to the rest of the EMU economies. To examine how monetary policy impacts systemic risk, we incorporate high-frequency monetary surprises into the model. We find evidence of the risk-taking channel during normal times, whereas the relationship is reversed in the period of the ZLB with expansionary shocks to result in a more stable financial system. Our findings indicate that the signalling channel is the main driver of this effect and that the initiation of the QE program boosts the economic activity but results in higher systemic risk. Finally, our results suggest that spillovers play an important role in the transmission of the monetary policy and that there is evidence of significant heterogeneity amongst countries’ responses with core countries to benefit the most from changes in monetary policy.
    Keywords: Systemic risk, Global VAR model, Eurozone, High-frequency monetary policy shocks
    JEL: C32 E44 F36 F45
    Date: 2021
  7. By: Felipe, Jesus (Asian Development Bank); Fullwiler, Scott (University of Missouri-Kansas City); Estrada, Gemma (Asian Development Bank); Jaber, Maria Hanna (Asian Development Bank); Magadia, Mary Ann (Asian Development Bank); Patagan, Remrick (Asian Development Bank)
    Abstract: The severe economic downturn caused by the coronavirus disease (COVID-19) pandemic has forced governments worldwide to increase spending while tax revenues simultaneously collapsed. Concurrent with this, central banks in several of these countries are financing a significant percent of their direct income support through direct lending or purchases of government bonds in primary and/or secondary markets. Many oppose this for their alleged negative consequences on the economy, inflation in particular. This paper describes the actual workings of what most people (including many economists) often call monetization of government debt and its major implication, namely, that it leads to printing money and, consequently, to inflation. We show that the reality is very different: once one knows how modern central banks manage monetary policy (i.e., through a corridor interest rate targeting system), and how they coordinate their daily operations with their treasuries, monetization does not occur as it is often described, and it is not nearly as dangerous as its critics argue (and not as useful as its supporters claim). The examples of the People’s Republic of China, the Philippines, Singapore, and the United States clarify this.
    Keywords: central bank; corridor system; inflation; monetization; printing money
    JEL: E42 E52 E58
    Date: 2020–12–10
  8. By: Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
    Abstract: Introducing a new survey of U.S. firms’ inflation expectations, we document key stylized facts involving what U.S. firms know and expect about inflation and monetary policy. The resulting time series of firms’ inflation expectations displays unique dynamics, distinct from those of households and professional forecasters. By any typical definition of “anchored” expectations, the inflation expectations of U.S. managers appear far from anchored, much like those of households. And like households, U.S. managers are largely uninformed about recent aggregate inflation dynamics or monetary policy. These results complement existing evidence on firms’ inflation expectations from other countries and confirm that inattention to inflation and monetary policy is pervasive among U.S. firms as well.
    JEL: E3 E4 E5
    Date: 2021–05
  9. By: Bindseil, Ulrich
    Abstract: Contrary to popular belief, the history of central banking begins much earlier than 1800. Many current issues of central bank policy can be traced back to the public giro banks of the 15th century, and have been discussed in numerous essays at least since the 17th century. Are the same debates merely repeating themselves in new shapes? And, more importantly, what can we learn today from those first four centuries of central bank history and debates? This paper argues that despite the end of convertibility into precious metal of central bank money, relevant lessons can be derived from early central banking for today, and develops this around five concrete themes.
    JEL: E5 N2
    Date: 2021
  10. By: Andreas Fuster; Tan Schelling; Pascal Towbin
    Abstract: As negative interest rates exert pressure on bank profitability, several central banks have introduced reserve tiering systems to lessen the burden. Reserve tiering means that banks are only charged the negative policy rate above a certain threshold of reserves. Altering the threshold affects bank profits and therefore has potential effects on the macroeconomy and financial stability. However, assessing these effects is challenging, because the introduction or modification of reserve tiers has usually been accompanied by other monetary policy actions, such as rate changes or quantitative easing measures. We are able to circumvent these issues by exploiting an unexpected decision by the Swiss National Bank in September 2019 to change the threshold calculation without taking any other policy actions. This change led to a large increase in overall exemptions, but with variation across banks. Using a difference-in-differences approach, we find that banks that experience a larger increase in their exemption threshold tend to raise their SNB sight deposit holdings, funded through more interbank borrowing and more customer deposits. The interbank market is important for the funding choice: banks with low collateral holdings (a proxy for market access) use less interbank borrowing and instead grow their customer deposits; they also pass on negative rates on a smaller share of their deposits. Effects on bank lending behavior are moderate; if anything, banks that benefit from a larger increase in the exemption threshold tend to charge higher spreads and take less risk.
    Keywords: Reserve tiering, negative interest rates, banking, risk-taking channel
    JEL: E52 G21
    Date: 2021
  11. By: Ehrenbergerova, Dominika; Bajzik, Josef; Havranek, Tomas
    Abstract: Several central banks have leaned against the wind in the housing market by increasing the policy rate preemptively to prevent a bubble. Yet the empirical literature provides mixed results on the impact of short-term interest rates on house prices: the estimated semi-elasticities range from -12 to positive values. To assign a pattern to these differences, we collect 1,447 estimates from 31 individual studies that cover 45 countries and 69 years. We then relate the estimates to 39 characteristics of the financial system, business cycle, and estimation approach. Our main results are threefold. First, the mean reported estimate is exaggerated by publication bias, because insignificant results are underreported. Second, omission of important variables (liquidity and long-term rates) likewise exaggerates the effects of short-term rates on house prices. Third, the effects are stronger in countries with more developed mortgage markets and generally later in the cycle when the yield curve is flat and house prices enter an upward spiral.
    Keywords: interest rates,house prices,monetary policy transmission,meta-analysis,publication bias,Bayesian model averaging
    JEL: C83 E52 R21
    Date: 2021
  12. By: Joan Huang (Reserve Bank of Australia); John Simon (Reserve Bank of Australia)
    Abstract: High-quality central bank communication can improve the effectiveness of monetary policy and is an essential element in providing greater central bank transparency. There is, however, no agreement on what high-quality communication looks like. To shed light on this, we investigate 3 important aspects of central bank communication. We focus on how different audiences perceive the readability and degree of reasoning within various economic publications; providing the reasons for decisions is a critical element of transparency. We find that there is little correlation between perceived readability and reasoning in the economic communications we analyse, which highlights that commonly used measures of readability can miss important aspects of communication. We also find that perceptions of communication quality can vary significantly between audiences; one size does not fit all. To dig deeper we use machine learning techniques and develop a model that predicts the way different audiences rate the readability of and reasoning within texts. The model highlights that simpler writing is not necessarily more readable nor more revealing of the author's reasoning. The results also show how readability and reasoning vary within and across documents; good communication requires a variety of styles within a document, each serving a different purpose, and different audiences need different styles. Greater central bank transparency and more effective communication require an emphasis not just on greater readability of a single document, but also on setting out the reasoning behind conclusions in a variety of documents that each meet the needs of different audiences.
    Keywords: central bank communications; machine learning; natural language processing; readability; central bank transparency
    JEL: C61 C83 D83 E58 Z13
    Date: 2021–05
  13. By: Kuikeu, Oscar
    Abstract: One of the most relevant economic subject during these last decades especially accompagned with the publication of Hinkle and Montiel (1999) on the related subject of Real Exchange Rate Misalignment has been the Operationalization of a well concept and Method to assess the effective size of Over/undervalued currency called in general Real Exchange Rate Misalignment. This assessment is Relevant in particular for selected African countries labelled as cfa franc area considering the influence and intense debate that accompagned the lessons learned from the collapse of an Oldest arrangement concerning currencies namely the fixed exchange rate system of Bretton Woods. Considering that since the Rejection of the ppp as norm for the RER the upcoming event of covid-19 crisis have necessarily engaged new prospect concerning the effectiveness of this measure this by weighting relatively some of fundamentals of the economy comparatively to the others, in the sense that the works of Edwards (1989) have demonstrated that the RER is well governed by economic phenomenom called fundamentals the aim of the present study is to show how the current covid-19 crisis have give new emphasis to the measurement of Real Exchange Rate Misalignment especially for the selected countries in the cfa franc area.
    Keywords: Real Exchange Rate Fundamentals Misalignment Coronavirus civil war
    JEL: C32 F33
    Date: 2021–05–16
  14. By: Jonung, Lars (Department of Economics, Lund University)
    Abstract: This paper examines the Swedish record of competition in the supply of bank notes in the 19th century. Between 1831 and 1902, private commercial banks, organized as partnerships with unlimited liability for their owners, issued notes competing with the notes of the Riksbank, the bank owned by the Riksdag, the Swedish parliament. The private banks turned out to be competitive in this market despite several legal obstacles, most notably that private notes were never legal tender – only Riksbank notes were. The private note-issuing banks developed techniques to increase the distribution of their notes. No case of an overissue of notes or of runs by the public on private note banks occurred. No private bank failed to redeem its notes into Riksbank notes. Opinion in the Riksdag remained hostile to private bank notes, reflected in the gradual restriction of the denominations of the notes issued by private banks and in rising taxes on private notes. Eventually, the Riksdag gave its bank, the Riksbank, a monopoly of note issue in Sweden. The evidence from the Swedish experience of free banking suggests that the design of the legal system was the prime explanation for the successful performance of private notes.
    Keywords: Free banking; central banking; private bank notes; unlimited liability; currency competition; Riksbank; Sweden
    JEL: E42 E51 E58 G21 K20 N13 N23
    Date: 2021–05–11
  15. By: Julian di Giovanni; Galina Hale
    Abstract: We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks to stock returns across countries and sectors using a newly constructed dataset. Our estimation strategy is based on a standard open-economy production network model that delivers a spillover pattern consistent with a spatial autoregression (SAR) process. We use the SAR model to decompose the overall impact of U.S. monetary policy on global stock returns into a direct and a network effect. We find that nearly 70% of the total impact of U.S. monetary policy shocks on country-sector stock returns are due to the network effect of global production linkages. Our results are robust to changes in the definitions of stock returns and monetary policy shocks, to controlling for correlates of the global financial cycle, foreign monetary policy shocks, and to alternative empirical specifications.
    JEL: F10 F36 G15
    Date: 2021–05
  16. By: Park , Donghyun (Asian Development Bank); Ramayandi , Arief (Asian Development Bank); Tian, Shu (Asian Development Bank)
    Abstract: In this study, we examine how public and private debt buildup is related to currency depreciation pressure. Our empirical analysis of a panel dataset of 59 advanced and emerging markets reveals that both private and public debt exacerbate currency vulnerability. However, the evidence of a significant effect on currency depreciation pressure is more robust and consistent for private debt than public debt. Furthermore, we find that excessive private debt buildup can be particularly harmful in emerging markets. In addition, our evidence suggests that greater dependence on external financing exacerbates the impact of debt buildup on currency stress. Overall, the evidence highlights the importance of a comprehensive debt surveillance framework which monitors both public and private debt buildup, especially in emerging markets.
    Keywords: currency stress; exchange rate; financial vulnerability; private debt; public debt
    JEL: E44 E50 F31 G15
    Date: 2020–10–20
  17. By: Rikhotso, Prayer; Bonga-Bonga, Lumengo
    Abstract: This paper assesses the impact of misalignment on the current accounts of BRICS countries using the empirical approaches that address the issue of model uncertainty and asymmetry. The results of the empirical analysis empirical confirm that the relationship between misalignment and current account is asymmetric in that overvaluation of BRICS currencies deteriorate the current account and undervaluation does improve it. Moreover, the results of the empirical analysis advocate the use of real effective exchange rate as an effective macroeconomic policy instrument to enhance relative export competitiveness in BRICS. Further studies in this area should examine the impact of marginal propensity to import and how each country’s propensity to import affects the current balance given episodes of overvaluation and undervaluation.
    Keywords: currency misalignment, current account, feasible generalised least square
    JEL: C11 C5 C51 F14 F32
    Date: 2021–05–12

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