nep-cba New Economics Papers
on Central Banking
Issue of 2021‒06‒14
38 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Euro area sovereign bond risk premia during the Covid-19 pandemic By Corradin, Stefano; Grimm, Niklas; Schwaab, Bernd
  2. Monetary and Macroprudential Policies under Dollar-Denominated Foreign Debt By Hidehiko Matsumoto
  3. Capital Controls, Domestic Macroprudential Policy and the Bank Lending Channel of Monetary Policy By Andrea Fabiani; Martha López; José-Luis Peydró; Paul E. Soto
  4. A New Monetary Policy Shock with Text Analysis By Ochs, A. C.R.
  5. Shaping the future: Policy shocks and the GDP growth distribution By Francois-Michel Boire; Thibaut Duprey; Alexander Ueberfeldt
  6. Combining negative rates, forward guidance and asset purchases: identification and impacts of the ECB’s unconventional policies By Rostagno, Massimo; Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Saint Guilhem, Arthur
  7. Interest, Reserves, and Prices By Gianluca Benigno; Pierpaolo Benigno
  8. Should monetary policy lean against the wind in a small-open economy? Revisiting the Tinbergen rule By Rogelio De la Peña
  9. Fiscal and Monetary Anomie in Argentina: The Legacy of Endemic Populism By Emilio Ocampo
  10. Monetary Policy Announcements, Information Schocks, and Exchange Rate Dynamics By Daniel Gründler; Eric Mayer; Johann Scharler
  11. Cordon of Conformity:Why DSGE models Are Not the Future of Macroeconomics By Servaas Storm
  12. Capital Buffers in a Quantitative Model of Banking Industry Dynamics By Dean Corbae; Pablo D'Erasmo
  13. Measure for measure: evidence on the relative performance of regulatory requirements for small and large banks By Sanders, Austen; Willison, Matthew
  15. What drives euro area financial market developments? The role of US spillovers and global risk By Brandt, Lennart; Saint Guilhem, Arthur; Schröder, Maximilian; Van Robays, Ine
  16. Point targets, tolerance bands, or target ranges? Inflation target types and the anchoring of inflation expectations By Ehrmann, Michael
  17. On the effectiveness of macroprudential policy By Ampudia, Miguel; Lo Duca, Marco; Farkas, Mátyás; Perez-Quiros, Gabriel; Pirovano, Mara; Rünstler, Gerhard; Tereanu, Eugen
  18. Central bank digital currency: the quest for minimally invasive technology By Raphael Auer; Rainer Boehme
  19. Income Inequality as Long-term Conditioning Factor of Monetary Transmission to Bank Interest Rates in EA Countries By Tomas Domonkos; Boris Fisera; Maria Siranova
  20. A quantitative analysis of the countercyclical capital buffer By Faria-e-Castro, Miguel
  21. Using Conventional Monetary Policy Unconventionally: Overturning Inflation and Output Gap Dynamics Using a Super-Inertial Interest Rate Rule By Guy Segal
  22. Voting right rotation, behavior of committee members and financial market reactions: Evidence from the U.S. Federal Open Market Committee By Michael Ehrmann; Robin Tietz; Bauke Visser
  23. Emerging Economies' Vulnerability to Changes in Capital Flows: The Role of Global and Local Factors By Yoshihiko Norimasa; Kazuki Ueda; Tomohiro Watanabe
  24. US monetary policy and the financial channel of the exchange rate: evidence from India By Shesadri Banerjee; M S Mohanty
  25. "Another Bretton Woods Reform Moment: Let Us Look Seriously at the Clearing Union" By Jan Kregel
  26. The Relevance on assessing Real Exchange Rate Misalignment under lessons from covid-19 crisis By Kuikeu, Oscar
  27. Contagious zombies By Bittner, Christian; Fecht, Falko; Georg, Co-Pierre
  28. An Exploration of First Nations Reserves and Access to Cash By Heng Chen; Walter Engert; Kim Huynh; Daneal O’Habib
  29. Financial system regulation in a pandemic: Evidence from Nigeria By Uddin, Godwin
  30. The Covid pandemic in the market: infected, immune and cured bonds By Zaghini, Andrea
  31. Decomposing the Israeli Term Structure of Interests Rates By Daniel Nathan
  32. Sustainable finance, current and future implications for banks and monetary policy: assessing COVID impacts By Ojo/Roedl, Marianne
  33. Banks fearing the drought? Liquidity hoarding as a response to idiosyncratic interbank funding dry-ups By Littke, Helge; Ossandon Busch, Matias
  34. Around-the-Clock USD/MXN Volatility: Macroeconomic Announcement Spillovers and FX Market Intervention Mechanisms By Wilfrido Jurado Pedroza
  35. Estimating Shadow Policy Rates in a Small Open Economy and the Role of Foreign Factors By Jorge Fornero; Markus Kirchner; Carlos Molina
  36. Is housing still the business cycle? Perhaps not. By Richard K. Green
  37. CAROs: Climate Risk-Adjusted Refinancing Operations By Florian B\¨oser; Chiara Colesanti Senni
  38. "A Keynesian Approach to Modeling the Long-Term Interest Rate" By Tanweer Akram

  1. By: Corradin, Stefano; Grimm, Niklas; Schwaab, Bernd
    Abstract: We decompose euro area sovereign bond yields into five distinct components: i) expected future short-term risk-free rates and a term premium, ii) default risk premium, iii) redenomination risk premium, iv) liquidity risk premium, and a v) segmentation (convenience) premium. Identification is achieved by considering sovereign bond yields jointly with other rates, including sovereign credit default swap spreads with and without redenomination as a credit event feature. We apply our framework to study the impact of European Central Bank (ECB) monetary policy and European Union (E.U.) fiscal policy announcements during the Covid-19 pandemic recession. We find that both monetary and fiscal policy announcements had a pronounced effect on yields, mostly through default, redenomination, and segmentation premia. While the ECB's unconventional monetary policy announcements benefited some (vulnerable) countries more than others, owing to unprecedented flexibility in implementing bond purchases, the E.U.’s fiscal policy announcements lowered yields more uniformly. JEL Classification: C22, G11
    Keywords: ECB, event study, Kalman filter, sovereign bond yields
    Date: 2021–05
  2. By: Hidehiko Matsumoto (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Assistant Professor, National Graduate Institute for Policy Studies, E-mail:
    Abstract: This paper studies the optimal monetary and macroprudential policies in a small open economy that borrows from abroad in foreign currency. The model features a novel mechanism in which sudden stops due to an occasionally binding borrowing constraint trigger a sharp currency depreciation through balance of payments adjustments, thereby increase the domestic-currency value of foreign debt and cause severe economic downturns. A policy analysis shows that a contractionary monetary policy mitigates depreciation during a crisis, but the anticipation of policy interventions during the crisis induces larger borrowings ex ante and destabilizes the economy. A combination of an ex ante macroprudential tax on foreign borrowing and ex post monetary policy interventions can stabilize the economy and improve social welfare.
    Keywords: Exchange rate, Balance of payments, Sudden stops, Monetary policy, Macroprudential policy
    JEL: F31 F32 F38 F41
    Date: 2021–05
  3. By: Andrea Fabiani; Martha López; José-Luis Peydró; Paul E. Soto
    Abstract: We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels. **** RESUMEN: Estudiamos cómo los controles de capital y la política macroprudencial doméstica controlan el auge de la oferta de crédito, específicamente la deuda bancaria local y extranjera. Para lograr identificación, aprovechamos los datos del registro de crédito y los balances de los bancos, y la introducción simultánea de controles de capital en las entradas de deuda en moneda extranjera y un aumento de los requerimientos de reserva sobre los depósitos bancarios nacionales en Colombia durante un fuerte auge de crédito. Nuestros resultados sugieren que, en primer lugar, un aumento en la tasa de política monetaria local, que eleva la diferencial de la tasa de interés con Estados Unidos, permite que más bancos endeudados en moneda extranjera realicen operaciones con fondos cambiarios baratos con préstamos en pesos más caros, especialmente hacia empresas opacas y más riesgosas. Los controles de capitales gravan la deuda en moneda extranjera y rompen el carry trade. En segundo lugar, el aumento de los requerimientos de reserva sobre los depósitos internos reduce directamente la oferta de crédito, y más aún para las empresas opacas y más riesgosas, en lugar de mejorar la transmisión de las tasas monetarias sobre la oferta de crédito. Es importante destacar que diferentes bancos financian el crédito durante el auge con financiación nacional o extranjera. Por lo tanto, los controles de capital y la política macroprudencial interna mitigan de manera complementaria el auge y la asunción de riesgos asociada a través de dos canales distintos.
    Keywords: Capital controls, Macroprudential and monetary policy, Carry trade, Credit supply, Risk-taking, Controles de capital, políticas macroprudencial y monetaria, Carry trade, oferta de crédito, toma de riesgo
    JEL: E52 E58 F34 F38 G21 G28
    Date: 2021–06
  4. By: Ochs, A. C.R.
    Abstract: Measures of monetary shocks commonly give rise to the puzzling result where a monetary tightening has an expansionary effect. A possible reason is that agents may believe that monetary shocks contain information regarding the central bank’s assessment of the economic environment (Nakamura and Steinsson, 2018). Under this hypothesis, the estimated response to monetary policy shocks would contain two conflating effects: the actual effect of monetary policy and the reaction of private agents to the newly acquired information. This paper overcomes this problem by extracting a novel series of monetary shocks using text analysis methods on central bank documents. The resulting text-based variables contain the informational content from changes in the policy rate. Thus, they can be used to extract exogenous changes in monetary policy that are orthogonal to any central bank information. Using this information-free measure of monetary policy shocks reveals that a monetary tightening is not expansionary, even when estimated on more recent periods.
    Date: 2021–06–09
  5. By: Francois-Michel Boire; Thibaut Duprey; Alexander Ueberfeldt
    Abstract: We incorporate quantile regressions into a structural vector autoregression model to empirically assess how monetary and fiscal policy influence risks around future GDP growth. Using a panel of six developed countries, we find that both policy instruments affect the location of the distribution of future GDP growth, whereas fiscal shocks also impact the shape of the distribution. Fiscal stimulus generates upside risk, paving the path to a faster recovery, especially when the policy rate is constrained by the zero lower bound (ZLB). Unconventional monetary policy during ZLB episodes has a comparable effect on future GDP growth as conventional monetary policy.
    Keywords: Central bank research; Econometric and statistical methods; Financial stability; Fiscal policy; Monetary policy
    JEL: C53 E62
    Date: 2021–05
  6. By: Rostagno, Massimo; Altavilla, Carlo; Carboni, Giacomo; Lemke, Wolfgang; Motto, Roberto; Saint Guilhem, Arthur
    Abstract: This paper provides new empirical evidence that bears on the efficacy of unconventional monetary policies when the main policy rate is negative. When a negative interest rate policy (NIRP) is deployed in concert with rate forward guidance (FG) and quantitative easing (QE), the identification of the impacts of these unconventional instruments of monetary policy is challenging. We propose a novel identification approach that seeks to overcome this challenge by combining a dense, controlled event study with forward curve counterfactuals that we construct using predictive rate densities derived from rate options. We find that NIRP has exerted a sizeable influence on the term structure of interest rates throughout maturities while, on net, the impact of rate FG has been more muted. QE explains the lion’s share of yield effects, particularly over the back end of the yield curve. We then feed these rate counterfactuals into a large-scale Bayesian VAR and generate alternative histories for the euro area macro-economy that one would likely have observed between 2013 and 2020 in no-NIRP (with or without FG) and in no-QE regimes. According to this conditional forecasting exercise, in 2019 GDP growth and annual inflation would have been 1.1 p.p. and 0.75 p.p. lower, respectively, and the unemployment rate 1.1 p.p. higher than they actually were, had the ECB abstained from using NIRP, FG and QE over the previous six years or so. JEL Classification: C32, C54, C58, E50, E51, E52
    Keywords: forward curve, forward guidance, large-scale asset purchases, monetary policy, negative interest rates, rate options, yield curve
    Date: 2021–06
  7. By: Gianluca Benigno; Pierpaolo Benigno
    Abstract: We would like to propose a new framework for monetary policy analysis that encompasses, as a special case, the Neo-Wicksellian paradigm. A general form of an aggregate-demand equation reveals a role for liquidity, as well as less effective movements in future real rates with respect to current ones, in stimulating aggregate demand. The quantity of reserves and their interest rate both matter for determining inflation and economic activity.
    Keywords: monetary policy framework; reserves; inflation
    JEL: E31 E43 E52 E58
    Date: 2021–06–01
  8. By: Rogelio De la Peña
    Abstract: It has been debated whether monetary policy should lean against the wind, i.e., if central banks should also respond to the build-up of financial imbalances. I contribute to the debate by showing that targeting the two policy objectives with a single instrument is more costly for a small-open economy than for a closed one. To this end, I develop a small-open economy DSGE model with the Bernanke-Gertler-Gilchrist financial accelerator that features financial frictions and monopolistic competition in goods markets. I then estimate this model for Mexico to explore the policy regimes yielding the lowest welfare cost. My main finding is that the Tinbergen rule is alive and well. In addition, my model is useful to gauge macroprudential measures effectiveness when discriminating against foreign liabilities.
    JEL: C51 E32 E44 E52 E58 E61 F41 G21 G28
    Date: 2021–04
  9. By: Emilio Ocampo
    Abstract: Argentina’s modern economic history offers perhaps the clearest evidence in support of a rules-based fiscal and monetary policy framework. From 1899 until 1914 the country abided by the rules of the gold standard and experienced rapid GDP growth with price stability. After WWI and until 1939, when it was mostly off the gold standard, its inflation rate and fiscal balances remained in line with those of the world’s most developed countries. During the 1930s the Argentine Treasury was able to issue long-term debt in pesos at rates between 3% and 4% per annum. Something fundamental happened after 1945 and its effects proved persistent: since then inflation has averaged 143% a year –with several bouts of extreme inflation and hyperinflation. In the last 50 years, persistent and high fiscal imbalances, low growth and recurrent sovereign debt defaults have become semi-permanent features of the Argentine economy. This paper argues that Argentina suffers from a condition that can be described as fiscal and monetary anomie, the roots of which can be traced back to the establishment of a populist-corporatist economic regime in 1946. It also contends that the failure of the 1990s structural reforms reinforced this condition.
    Keywords: Argentina, Economic History, Fiscal Policy, Monetary Policy, Populism
    JEL: E5 E63 N16 O54
    Date: 2021–05
  10. By: Daniel Gründler; Eric Mayer; Johann Scharler
    Abstract: We study nominal exchange rate dynamics in the aftermath of U.S. monetary policy announcements. Using high-frequency interest rate and stock price movements around FOMC announcements, we distinguish between pure monetary policy shocks and information shocks, which are associated with new information contained in the announcements. Contractionary pure policy shocks give rise to a strong, but transitory, appreciation on impact. Information shocks also appreciate the exchange rate, but the effect builds up only slowly over time and is highly persistent. Thus, we conclude that although the short-run effects on the exchange rate are primarily due to pure policy shocks, the medium-run response is driven by information effects.
    Keywords: central bank information, high-frequency identification, proxy VAR, exchange rate dynamics
    JEL: E44 E52 E30
    Date: 2021
  11. By: Servaas Storm (Delft University of Technology)
    Abstract: The Rebuilding Macroeconomic Theory Project, led by David Vines and Samuel Wills (2020), is an important, albeit long overdue, initiative to rethink a failing mainstream macroeconomics. Professors Vines and Wills, who must be congratulated for stepping up to the challenge of trying to make mainstream macroeconomics relevant again, call for a new multiple-equilibrium and diverse (MEADE) paradigm for macroeconomics. Their idea is to start with simple models, ideally two-dimensional sketches, that explain mechanisms that can cause multiple equilibria. These mechanisms should then be incorporated into larger DSGE models in a new, multiple-equilibrium synthesis to see how the fundamental pieces of the economy fit together, subject to it being 'properly micro-founded'. This paper argues that the MEADE paradigm is bound to fail, because it maintains the DSGE model as the unifying framework at the center of macroeconomic analysis. The paper reviews 10 fundamental weaknesses inherent in DSGE models which make these models irreparably useless for macroeconomic policy analysis. Mainstream macroeconomics must put DSGE models, once and for all, in the Museum of Implausible Economic Models – and learn important lessons from non-DSGE macroeconomic approaches.
    Keywords: New Keynesian DSGE models; rational expectations; micro-foundations; loanable funds model; Lucas critique; multiple equilibria; income distribution; demand-led growth; money and monetary production economy.
    JEL: E20 E60 F60 O10 O40
    Date: 2021–02–14
  12. By: Dean Corbae; Pablo D'Erasmo
    Abstract: We develop a model of banking industry dynamics to study the quantitative impact of regulatory policies on bank risk taking and market structure. Since our model is matched to U.S. data, we propose a market structure where big banks with market power interact with small, competitive fringe banks as well as non-bank lenders. Banks face idiosyncratic funding shocks in addition to aggregate shocks which affect the fraction of performing loans in their portfolio. A nontrivial bank size distribution arises out of endogenous entry and exit, as well as banks' buffer stock of capital. We show the model predictions are consistent with untargeted business cycle properties, the bank lending channel, and empirical studies of the role of concentration on financial stability. We find that regulatory policies can have an important impact on banking market structure, which, along with selection effects, can generate changes in allocative efficiency and stability.
    Keywords: Macroprudential policy; Bank size distribution; Industry dynamics with imperfect competition
    JEL: E44 G21 L11
    Date: 2021–05–26
  13. By: Sanders, Austen (Bank of England); Willison, Matthew (Bank of England)
    Abstract: This paper compares the performance of regulatory thresholds as predictors of distress for large banks with their performance for small banks. Using a data set of capital and liquidity ratios for a sample of UK‑focused banks in 2007, we apply simple threshold-based rules to assess how regulatory thresholds might have identified banks that subsequently became distressed. We compare results for large banks with results for small banks, optimising thresholds separately for the two groups. Our results suggest that the regulatory ratios we use are better aligned with risks which cause distress of large banks than with those which cause distress of small banks. We find that when thresholds are set to correctly identify a high proportion of banks which subsequently became distressed, they generate materially lower false alarm rates for large banks than for small. This result is robust to definitional choices and to resampling. We also test whether supervisors’ judgements about the quality of banks’ governance have predictive power with regard to distress. We find that adding supervisors’ judgements to regulatory ratios improves predictions for small banks but not for large banks.
    Keywords: Banking regulation; Basel III; bank failure; global financial crisis; regulatory complexity
    JEL: G01 G21 G28
    Date: 2021–05–28
  14. By: Marco Onofri; Gert Peersman; Frank R. Smets (-)
    Abstract: We analyze the effectiveness of a Negative Interest Rate Policy (NIRP) in a quantitative Dynamic Stochastic General Equilibrium model for the euro area with a nancial sector. Similarly to other studies in the literature, we show that a NIRP can have a contractionary effect on the economy when there is a zero lower bound on the interest rate of household deposits, and such deposits are the only source of bank funding and household savings. However, we show that the contractionary effects vanish and the NIRP becomes expansionary when we allow for additional assets in the savings portfolio of households, and when we introduce alternative sources of bank funding in the model, such as bank bonds. These two features, which characterize the euro area very well, are hence essential to study the effectiveness of a NIRP.
    Date: 2021–05
  15. By: Brandt, Lennart; Saint Guilhem, Arthur; Schröder, Maximilian; Van Robays, Ine
    Abstract: Financial asset prices contain a rich set of real-time information on the economy. To extract this information, it is crucial to understand the driving factors behind financial market developments. In this paper, we exploit daily cross-asset price movements in a sign-restricted BVAR model to analyse the extent to which euro area and US yields, equity prices, and the euro-US dollar exchange rate are jointly driven by monetary policy, macro and global risk factors. A novelty is that we allow for cross-Atlantic spillovers while also accounting for the unique role of the US in the global financial system. Our results underline the importance of US spillovers and shifts in global risk sentiment for understanding the dynamics of euro area financial variables. Euro area shocks transmit much less to US financial markets in comparison, with global risk shocks being more important instead. Using the daily shocks as instruments in a Proxy-SVAR, we demonstrate that the transmission of financial market movements to the macroeconomy depends on the underlying driver, thereby illustrating why it matters to look into the driving factors in the first place. JEL Classification: C32, C54, E44, E52
    Keywords: financial conditions, high-frequency identification, international transmission, large-scale asset purchases, monetary policy
    Date: 2021–05
  16. By: Ehrmann, Michael
    Abstract: Inflation targeting is implemented in different ways – most often by adopting point targets, by having tolerance bands around a point target, or by specifying target ranges. Using data for 20 economies, this paper tests whether the various target types affect the anchoring of inflation expectations at shorter horizons differently. It tests two contradictory hypotheses, namely that targets with intervals lead to (i) less anchoring, e.g. because they provide more flexibility to the central bank, or (ii) better anchoring, because they are missed less often, leading to an enhanced credibility. The evidence refutes the first hypothesis, and generally finds that target ranges or (in some cases) tolerance bands outperform the other types. However, the effects partially depend on the economic context and no target type consistently outperforms all others. This suggests that there are some benefits to adopting intervals, but the central bank can anchor inflation expectations also by other means. JEL Classification: E52, E58, E31
    Keywords: inflation expectations, inflation targeting, point target, target range, tolerance band
    Date: 2021–05
  17. By: Ampudia, Miguel; Lo Duca, Marco; Farkas, Mátyás; Perez-Quiros, Gabriel; Pirovano, Mara; Rünstler, Gerhard; Tereanu, Eugen
    Abstract: Since the global financial crises, many countries have implemented macroprudential policies with the aim to render the financial system more resilient to shocks and limit the procyclicality of the financial system. We present theoretical and empirical evidence on the effectiveness of macroprudential policy, on both, financial stability and economic growth focussing on capital measures and borrower-based measures. JEL Classification: G21
    Keywords: bank capital, borrowers, financial stability, macroprudential policy
    Date: 2021–05
  18. By: Raphael Auer; Rainer Boehme
    Abstract: CBDCs should let central banks provide a universal means of payment for the digital era. At the same time, such currencies must safeguard consumer privacy and maintain the two-tier financial system. We set out the economic and operational requirements for a "minimally invasive" design – one that preserves the private sector's primary role in retail payments and financial intermediation – for CBDCs and discuss the implications for the underlying technology. Developments inspired by popular cryptocurrency systems do not meet these requirements. Instead, cash is the model for CBDC design. Showing particular promise are digital banknotes that run on "intermediated" or "hybrid" CBDC architectures, supported with technology to facilitate record-keeping of direct claims on the central bank by private sector entities. Their economic design should emphasise the use of the CBDC as medium of exchange but needs to limit its appeal as a savings vehicle. In the process, a novel trade-off for central banks emerges: they can operate either a complex technical infrastructure or a complex supervisory regime. There are many ways to proceed, but all require central banks to develop substantial technological expertise.
    Keywords: central bank digital currency, CBDC, payments, cash, privacy, distributed systems
    JEL: E42 E58 G21 G28
    Date: 2021–06
  19. By: Tomas Domonkos (Slovak Academy of Sciences & Comenius University in Bratislava, Slovakia); Boris Fisera (Slovak Academy of Sciences; Charles University, Prague); Maria Siranova (Slovak Academy of Sciences)
    Abstract: In this paper we investigate the effect of income inequality on the transmission of standard and unconventional monetary policy shocks to bank loan rates. We hypothesize that income inequality might encapsulate important characteristics of credit market demand. We use an interacted panel error correction model to examine a set of EA countries over the years 2008-2016. Our findings suggest that higher income inequality hinders the transmission of standard monetary policy to consumer loans and limits the use of unconventional monetary policy in the housing loans segment. Conversely, more unequal societies are characterized by stronger monetary transmission in the small firm loans segment.
    Keywords: interest-rate pass-through, interacted PMG, income inequality, standard monetary policy, unconventional monetary policy
    JEL: D31 E21 E52 E58
    Date: 2021–05
  20. By: Faria-e-Castro, Miguel
    Abstract: What are the quantitative macroeconomic effects of the countercyclical capital buffer (CCyB)? I study this question in a nonlinear DSGE model with occasional financial crises, which is calibrated and combined with US data to estimate sequences of structural shocks. Raising capital buffers during leverage expansions can reduce the frequency of crises by more than half. A quantitative application to the 2007-08 financial crisis shows that the CCyB in the 2:5% range (as in the Federal Reserve's current framework) could have greatly mitigated the financial panic of 2008, for a cumulative gain of 29% in aggregate consumption. The threat of raising capital requirements is effective even if this tool is not used in equilibrium. JEL Classification: E4, E6, G2
    Keywords: countercyclical capital buffer, financial crises, macroprudential policy
    Date: 2021–06
  21. By: Guy Segal (Bank of Israel)
    Abstract: Using simulations on different macroeconomic models, we show that monetary policy can mitigate the drop in output after a negative demand shock and lead to a positive inflation gap and convergence to its target from above. Thus, the risk hitting the ELB is lower due to the overshooting inflation. Such dynamics are feasible under a super-inertial rule, i.e., when the degree of interest rate smoothing is above a threshold greater than one. The more backward-looking the economy is, the higher the threshold is. Hence, a superinertial policy should be in the toolbox of central banks to support demand-shock dominated crisis.
    Date: 2021–05
  22. By: Michael Ehrmann (European Central Bank); Robin Tietz (Cass Business School); Bauke Visser (Erasmus University Rotterdam)
    Abstract: Whether Federal Reserve Bank presidents have the right to vote on the U.S. monetary policy committee depends on a mechanical, yearly rotation scheme. Rotation is without exclusion: also nonvoting presidents attend and participate in the meetings of the committee. Does voting status change behavior? We find that the data go against the hypothesis that without the voting right, presidents use their public speeches and their meeting interventions to compensate for the loss of formal influence; rather, they support the hypothesis that the voting right makes presidents more involved. We also find that speeches move financial markets less in years that presidents vote. We argue that these discounts are consistent with their communication behavior.
    Keywords: voting right rotation, monetary policy committee, central bank communication, FOMC, financial market response
    JEL: E58 D71 D72
    Date: 2021–06–05
  23. By: Yoshihiko Norimasa (Bank of Japan); Kazuki Ueda (Bank of Japan); Tomohiro Watanabe (Nippon Life Insurance Company)
    Abstract: This study uses panel quantile regression to examine the risk of capital outflows in times of stress (capital flows-at-risk, CFaR) for 16 emerging economies. Our analysis shows that changes in financial conditions in advanced economies and in the monetary policy stance of the United States affect the risk of large capital outflows for some countries. In particular, we find that tighter financial conditions in advanced economies during a phase when the U.S. monetary policy stance is changing significantly affect emerging economies' CFaR. Further, using government debt as a measure of emerging economies' structural vulnerability, we find that an increase in government debt substantially raises the risk of capital outflows in times of stress. Moreover, while in the case of debt investment, CFaR tend to be greater the higher the level of government debt, in the case of other investment (consisting mainly of bank lending), CFaR tend to increase when financial conditions in advanced economies deteriorate.
    Keywords: Risk of Capital Outflows (CFaR: Capital Flows-at-Risk); Global Factors; Local Factors; Panel Quantile Regression; Relative Entropy
    JEL: E52 F32 F34 F37
    Date: 2021–05–26
  24. By: Shesadri Banerjee; M S Mohanty
    Abstract: The effect of US monetary policy on EMEs is one of the fiercely debated issues in international finance. We contribute to this debate using micro- and macro-level analyses from India over the period 2004-2019. Using a dynamic panel estimation model of non-financial firms, we show that US monetary tightening adversely affects firms’ net worth and reduces domestic credit relative to external credit. Using a sign-identified VAR model, we find that the contractionary US monetary policy leads to a significant downturn in the domestic credit and business cycles. The responses of firms and the impact on the domestic credit cycle suggest that the financial channel of the exchange rate is one of the conduits transmitting US monetary policy to India.
    Keywords: US monetary policy, international transmission of monetary policy, dynamic panel estimation, sign-restricted VAR model, financial channel, Indian economy
    JEL: E32 E52 F41 F42 F61 F62
    Date: 2021–05
  25. By: Jan Kregel
    Abstract: This policy brief explores a route to remaking the international financial system that would avoid the contradictions inherent in some of the prevailing reform proposals currently under discussion. Senior Scholar Jan Kregel argues that the willingness of central banks to consider electronic currency provides an opening to reconsider a truly innovative reform of the international financial system, and one that is more appropriate to a digital monetary world: John Maynard Keynes's original clearing union proposal. Kregel investigates whether such a clearing system could be built up from an already-existing initiative that has emerged in the private sector. He analyzes the operations of a private, cross-border payment system that could serve as a real-world blueprint for a more politically palatable equivalent of Keynes's international clearing union.
    Date: 2021–02
  26. By: Kuikeu, Oscar
    Abstract: It’s well established that the current period of covid-19 crisis is an one of not yet observed about the assessing on relevant concept as Exchange Rate behavior. In facts, since Edwards (1989) the dynamism of them are governs by relevant economic fundamentals in general called fundamentals as the structural reforms policies undertaken as resilience measure against covid-19 crisis. Thus what is the meaning to assess on the Relevance of this approach? Due to little theoretical consideration what can be about the adequate method or technic for address on this issue? These are the main questions we are trying to answer, here. Globally speaking, the taking into account at the theoretical level of consideration as the honeymoon effect is relevant in the sense that the empirical methodology lies on this kind of theoretical consideration.
    Keywords: Fundamentals, Misalignment, honeymoon effect
    JEL: C32 F33 O47
    Date: 2021–05–30
  27. By: Bittner, Christian; Fecht, Falko; Georg, Co-Pierre
    Abstract: Does banks' zombie lending induced by unconventional monetary policy also allow zombie firms to leverage their trade credit borrowing? We first provide evidence suggesting that - even in Germany - particularly weak banks used the European Central Bank's very long-term refinancing operations (VLTROs) to evergreen exposures to zombie firms, which in turn elevated credit risk. Second, we show that zombie firms, which obtained additional funding from banks relying to a larger extent on VLTRO funding, also increased their accounts payable and advance payments received from downstream and upstream firms. And third, zombie firms that obtained further bank funding and such trade credit after the VLTROs had an elevated expected default probability even compared to average zombie firms. This suggests that suppliers relying on banks' lending decisions as a signal about borrowers' credit quality might be misled by banks' zombie lending to extend more trade credit to zombie firms exposing suppliers to elevated contagion risk.
    Keywords: unconventional monetary policy,zombie lending,trade credit
    JEL: G1 G20 E58
    Date: 2021
  28. By: Heng Chen; Walter Engert; Kim Huynh; Daneal O’Habib
    Abstract: Providing bank notes is one of the Bank of Canada’s core functions. The Bank is therefore interested in whether cash is adequately distributed across society, and this also influences the Bank’s thinking on issuing a central bank digital currency. We provide a perspective on these issues by exploring access of First Nations reserves to cash. To do so, we measure the distance between the 637 reserve band offices in Canada and their closest cash sources. In this study, these cash sources are branches of financial institutions (FIs), automated bank machines (ABMs) owned by FIs, and white label ABMs. We measure the distance between band offices and cash sources by geographical distance (“as the crow flies”) and by travel distance (e.g., road routes). We also provide some information on access to financial services more generally and set out questions for future research.
    Keywords: Bank notes; Digital currencies and fintech; Financial institutions; Financial services; Payment clearing and settlement systems
    JEL: E41 E42 E5 G21
  29. By: Uddin, Godwin
    Abstract: Financial system soundness in world economies remains germane, but in the same vein, the COVID-19 outbreak had made governments scampering for any and every solution as experience has shown the need to incentivize businesses to enable economy-wide recovery. In this perspective, consideration of the Nigerian case is made, to re-echo possible collaboration by the Central Bank of Nigeria (CBN) and an operationally-associated agency - the Asset Management Corporation of Nigeria (AMCON). This viewpoint shows the role that AMCON could play to recoup extended facilities, in view to ensure financial system soundness, amidst others. Thus, efforts to leverage on this collaboration could aid going forward a fruitful operational effectiveness of so established policy responses.
    Keywords: COVID-19 pandemic; Central Bank of Nigeria; economic stimulus packages; Nigeria; financial system soundness; recession
    JEL: E5 E52 E58 G28
    Date: 2021–05–17
  30. By: Zaghini, Andrea
    Abstract: By focusing on the cost conditions at issuance, I find that not only the Covid-19 pandemic effects were different across bonds and firms at different stages, but also that the market composition was significantly affected, collapsing on investment-grade bonds, a segment in which the share of bonds eligible to the ECB corporate programmes strikingly increased from 15% to 40%. Contemporaneously, the high-yield segment shrunk to almost disappear at 4%. Another source of risk detected in the pricing mechanism is the weak resilience to pandemic: the premium requested is around 30 bp and started to be priced only after the early containment actions taken by the national authorities. On the contrary, I do not find evidence supporting an increased risk for corporations headquartered in countries with a reduced fiscal space, nor the existence of a premium in favour of green bonds, which should be the backbone of a possible “green recovery”. JEL Classification: G15, G32, E52
    Keywords: corporate quantitative easing, Covid pandemic, ECB, green bonds
    Date: 2021–06
  31. By: Daniel Nathan (Bank of Israel)
    Abstract: This paper decomposes the Israeli term structure of interest rates into two parts: the expected path of real interest rates and the risk premia for 01/1985â12/2019. We carry out the estimation using a discrete-time essentially affine term structure model (ATSM). ATSM models are essentially reduced-form models: they assume that latent factors drive the economy, and are extensively used by major central banks to infer risk premia in the term structure. The results show that part of the decline in real yields since 1985 was accompanied by a substantial decrease in the real risk premium; the compensation investors require to hold government indexed-bonds has gone down substantially. The compensation has been as high as 3% for the 10-year real yield and has gone down to around zero in recent years. The inflation risk premium (an inflation compensation which is part of the nominal yield curve), has also shown a significant drop in recent years. The inflation risk premium has become slightly negative in recent years after being as high as 2.5% in early 2000 for the 10-year nominal yield.
    Date: 2021–03
  32. By: Ojo/Roedl, Marianne
    Abstract: The implications of COVID developments for monetary policy will certainly extend beyond the increased use of digital platforms and payments. The current environment is also focused on smart green techniques and green initiatives aimed at promoting a transition to a net zero based carbon emissions economy. During the onset of the pandemic, it was initially thought that carbon emissions would fall drastically – given the impact of the pandemic, not only on the airlines industry, but also as a result of “Stay at Home” measures imposed by jurisdictions, which even made it illegal to drive to certain places, where purposes for doing so were unjustified. However, the pandemic has also witnessed unprecedented levels in digital subscriptions, online sales and marketing – also fueled through digital payments and the use of digital platforms and distributed ledger technologies in facilitating cashless payments – cash, namely bank notes and coins, also being considered to be a medium of COVID transmission. Coupled with attributes such speed, convenience and ease, the need for financial inclusion has also become an objective in facilitating the era of innovative digital means of payments. As well as considering the current implications of measures that have been instigated to address the impacts of the pandemic, drawing from past and current lessons from selected jurisdictions, this paper also considers why the transition to a net zero carbon economy may prove more challenging than may first appear. However, jurisdictional differences and historical developments will play a part in determining how sustainable certain implemented policies and measures are – as well as in facilitating a transition to normality.
    Keywords: EU Green Deal; sustainable finance, interest rates; inflation; pandemic asset purchase program (PEPP); APP asset purchase program; longer term financing operations; transition risks; financial stability; CBDCs
    JEL: E5 G21 G28 G3 G38 K2
    Date: 2021–06–02
  33. By: Littke, Helge; Ossandon Busch, Matias
    Abstract: We investigate whether idiosyncratic interbank funding shocks affecting a bank headquarters can trigger a liquidity hoarding reaction by their regional branches. Shock-affected branches of Brazilian banks increase liquid assets and cut lending in the shocks' aftermath compared to non-affected branches within the same municipality, even in absence of a market-wide freeze. These effects increase in branches' reliance on internal funding and vary depending on banks' access to central bank emergency liquidity. Our findings suggest that the geographical fragmentation of branches' funding limits their ability to offset idiosyncratic funding shocks.
    Keywords: Interbank funding,Internal capital markets,Financial market structure,Liquidity risk,Central bank interventions
    JEL: G01 G11 G21
    Date: 2021
  34. By: Wilfrido Jurado Pedroza
    Abstract: This paper advances the literature on the dynamics of the U.S. Dollar-Mexican Peso (USD/MXN) volatility process by leveraging high-frequency data. First, it documents the factors that characterize the intraday volatility process of the USD/MXN exchange rate at high frequencies based on a sample of five-minute returns from 2008 to 2017. Second, it empirically identifies the effects and the relative impact on the USD/MXN volatility process of various macroeconomic announcements, at different frequencies. The results conclude that the most impactful releases are associated with the monetary policy announcements by the Federal Reserve and Banco de México, together with the publication of some U.S. and China macroeconomic data. Furthermore, the results suggest that the different mechanisms implemented by Mexico's FX Commission have accomplished their objective of stabilizing the volatility of the USD/MXN.
    JEL: E5 F31 G12 G14
    Date: 2021–06
  35. By: Jorge Fornero; Markus Kirchner; Carlos Molina
    Abstract: Shadow monetary policy rates (SMPRs) are useful to evaluate the policy stance when interest rates are at their lower bounds and unconventional policies are implemented. We present a methodology to estimate an SMPR for the case of a small open economy based on a dynamic factor model, which allows to consider the impact of foreign monetary conditions on domestic ones. An application to Chile shows that under large negative shocks, unconventional policies drove the domestic SMPR to negative levels. Also, the SMPR is mainly driven by domestic (foreign) factors in the short (long) run, lending support to the classic trilemma.
    Date: 2021–05
  36. By: Richard K. Green (University of Southern California)
    Abstract: In 1998, I published a paper that showed that under a wide range of specifications, residential investment led GDP, while non-residential investment did not. That papers was followed by a number of others, including Coulson and Kim (2000), Davis and Heathcoate (2005) and Leamer (2007) that used more sophisticated techniques than my paper, but found the same outcome— that residential investment led GDP. Leamer famously announced that housing was the business cycle. But in light of the Great Financial Crisis, the subsequent crash in residential investment, and the fundamental changes in the mortgage market, I thought it worth revisiting housing as a leading indicator. I have found that it is a much weaker leading indicator than before, and that it is much less sensitive to Federal Reserve Policy—especially changes in the Federal Funds Rate—than before. It is possible that the increasing stringency of local land use policy had interfered with the ability of the Federal Reserve to use housing as an instrument on monetary policy.
    Date: 2021–05–27
  37. By: Florian B\¨oser (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland); Chiara Colesanti Senni (Council on Economic Policies)
    Abstract: Policy makers have argued that markets are not pricing climate risk appropriately yet, which may lead to a misallocation of resources and financial instability. Climate risk-adjusted refinancing operations (CAROs) conducted by the central bank are one possible instrument to address this issue. CAROs are characterized by interest rates on reserve loans, which depend on the climate risk exposure of the assets held by the borrowing bank. If private agents and the central bank have differing beliefs about the likelihood of the transition to a low-carbon economy, the allocation emerging without CAROs is, from the central bank’s perspective, suboptimal and may lead to financial instability. We find that an appropriate design of CAROs allows the central bank to influence bank lending in a way that induces the optimal allocation under its beliefs and eliminates financial instability. Moreover, we show that investment into climate risk mitigation reduces the need for central bank intervention, and that CAROs can be used to achieve specific climate-related allocation targets.
    Keywords: central bank, banks, refinancing operations, interest rates, climate risk
    JEL: D84 E42 E43 E44 E58 G21 Q50
    Date: 2021–05
  38. By: Tanweer Akram
    Abstract: There are several widely used benchmark models of the long-term interest rate in quantitative finance. However, these models have yet to incorporate Keynes's valuable insights about interest rate dynamics. The Keynesian approach to interest rate dynamics can be readily incorporated in the benchmark models of the long-term interest rate. This paper modifies several benchmark interest rate models. In these modified models the long-term interest rate is related to the short-term interest rate and a Wiener process. The Keynesian approach to interest rate dynamics can be useful in addressing theoretical and policy issues.
    Keywords: Long-Term Interest Rate; Bond Yields; Monetary Policy; Short-Term Interest Rate; John Maynard Keynes
    JEL: E12 E43 E50 E58 E60 G10 G12 G41
    Date: 2021–06

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