nep-cba New Economics Papers
on Central Banking
Issue of 2021‒06‒21
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Initial monetary policy response to the COVID-19 pandemic in inflation targeting economies By Joanna Niedźwiedzińska
  3. The fuel of unparalleled recovery: Monetary policy in South Africa between 1925 and 1936 By Swanepoel, Christie; Fliers, Philip
  4. Credible Emerging Market Central Banks could embrace Quantitative Easing to fight COVID-19 By Gianluca Benigno; Jon Hartley; Alicia García-Herrero; Alessandro Rebucci; Elina Ribakova
  5. What drives portfolio capital inflows into emerging market economies? The role of the Fed’s and ECB’s balance sheet policies By Michał Ledóchowski; Piotr Żuk
  6. The Making of Hawks and Doves By Malmendier, Ulrike M.; Nagel, Stefan; Yan, Zhen
  7. Monetary Policy, Trends in Real Interest Rates and Depressed Demand By Paul Beaudry; Césaire Meh
  8. Unconventional Policy Instruments and Transmission Channels:A State-Contingent Toolbox for the ECB By Luigi Bonatti; Andrea Fracasso; Roberto Tamborini
  9. The decline in euro area inflation and the choice of policy strategy By Wieland, Volker
  10. Economic policy uncertainty in banking: a literature review By Ozili, Peterson Kitakogelu;
  11. Bagehot for Central Bankers By Laurent Le Maux
  12. Interdependence Between Monetary Policy And Asset Prices In Asean-5 Countries By Solikin M. Juhro; Bernard N. Iyke; Paresh K. Narayan
  13. Money, Banking, and Old-School Historical Economics By Eric Monnet; Francois R. Velde
  14. The Long-Term Effects of Capital Requirements By Gianni De Nicolò; Nataliya Klimenko; Sebastian Pfeil; Jean-Charles Rochet
  15. Can regulating bank capital help prevent and mitigate financial downturns? By Alejandro García; Josef Schroth
  16. Determinacy without the Taylor Principle By George-Marios Angeletos; Chen Lian
  17. Prudential Policy with Distorted Beliefs By Eduardo Dávila; Ansgar Walther
  18. Exchange rate shocks in multicurrency interbank markets By Pierre L. Siklos; Martin Stefan
  19. ECB Communication: What Is It Telling Us? By Rokas Kaminskas; Modestas Stukas; Linas Jurksas
  20. The Financial US Uncertainty Spillover Multiplier: Evidence from a GVAR Model By Afees A. Salisu; Rangan Gupta; Riza Demirer
  21. The Preferential Treatment of Green Bonds By Francesco Giovanardi; Matthias Kaldorf; Lucas Radke; Florian Wicknig
  22. Hysteresis and full employment in a small open economy By Timothy Watson; Juha Tervala
  23. Anticipating financial crisis in the 1960s and 1980s: using the past to plan for the ‘Apocalypse’ By Catherine R. Schenk
  24. What Are the Financial Systemic Implications of Access and Non-Access to Federal Reserve Deposit Accounts for Central Counterparties? By Maggie Sklar
  25. Monetary Policy Spillovers Under Covid-19: Evidence from U.S. Foreign Bank Subsidiaries By Mark M. Spiegel
  26. Measuring the impact of a bank failure on the real economy: an EU-wide analytical framework By Vacca, Valerio Paolo; Bichlmeier, Fabian; Biraschi, Paolo; Boschi, Natalie; Álvarez, Antonio J. Bravo; Di Primio, Luciano; Ebner, André; Hoeretzeder, Silvia; Ballesteros, Elisa Llorente; Miani, Claudia; Ricci, Giacomo; Santioni, Raffaele; Schellerer, Stefan; Westman, Hanna
  27. Nonlinear unemployment effects of the inflation tax By Mohammed Ait Lahcen; Garth Baughman; Stanislav Rabinovich; Hugo van Buggenum

  1. By: Joanna Niedźwiedzińska (Narodowy Bank Polski)
    Abstract: The monetary policy response to COVID-19 was, in many ways, exceptional. This paper investigates some aspects of this exceptionality among 28 inflation targeters. Evidently, the reviewed central banks assessed the pandemic to be a clear-cut case for loosening by promptly announcing expansionary decisions, often at extraordinary meetings, using a possibly broad set of measures, with not much hesitation before reaching for unconventional ones. One of the key aspects of the analysed monetary policy response was also how quickly the authorities reacted to the shock. It turned out that, on average, advanced economies announced their initial policy actions within a month, whereas emerging market economies were twice as fast. This difference could be, however, to a great extent, explained by the timing of registering the first COVID-19 cases in a country, having room for policy manoeuvre with respect to nonstandard measures and being in need of liquidity provisions with a less deep financial system.
    Keywords: Monetary Policy, Central Banking, Policy Design.
    JEL: E31 E52 E58 E61
    Date: 2020
  2. By: Solikin M. Juhro (Bank Indonesia)
    Abstract: This paper is aimed to explore salient issues of central banking practices, especially on challenges confronted by central banks in the digital era, lessons learned, as well as their implications. As we have acknowledged, in the midst of major financial crises in the last two decades, central banks faced very complex policy challenges blighted with high uncertainty, all of which have changed the practical and theoretical perspectives of central bank policy. The complexity and uncertainty of issues faced by central banks have and will continue to evolve in line with the advancement of digital technology. Navigating central banking practices in the digital era, therefore, is a very challenges task that requires the central bank's ability to create breakthroughs and orchestrate policy innovations. While the central bank policy mix is still a viable strategy, central banks are required to operate beyond conventional wisdom, with novel practices. Optimizing the benefits of technological advances and becoming a relevant regulator in the digital era must anchor the central bank's strategy in the future.
    Keywords: Central Bank Policy, Digital Transformation, Central Bank Digital Currency
    JEL: E52 E58 O3
    Date: 2021
  3. By: Swanepoel, Christie; Fliers, Philip
    Abstract: The newly established South African Reserve Bank (SARB) was tasked to protect the currency by navigating the interwar gold standard, and, from March 1933, maintaining parity with the Pound Sterling. We find that South Africa's exit from gold secured an unparalleled and rapid recovery from the Great Depression. South Africa's exit was accompanied by an inextricable link of the SARB's policy rate to the interest rate set by the Bank of England (BoE). This sacrifice of independent monetary policy allowed the SARB to fix the country's exchange rate without impeding the flow of gold to London. The SARB fuelled the economy by reducing its policy rates and accumulating gold. Had South Africa not devalued, the country would have suffered a severe depression and persistent deflation. An alternative to the devaluation, was for the SARB to pursue a cheap money strategy. By setting interest rates historically low, we find that South Africa could have achieved higher levels of economic growth, at the cost of higher inflation. Ultimately, South Africa's unparalleled recovery can be ascribed to the devaluation, however the change in the SARB monetary policy and the bank's control over the gold markets were of paramount importance.
    Keywords: monetary policy management,interwar gold standard,South Africa
    JEL: N14 N20 E42 E52 E58 F33
    Date: 2021
  4. By: Gianluca Benigno (Associate Professor in the Department of Economics at the London School of Economics); Jon Hartley (MPP Candidate and researcher, Harvard Kennedy School); Alicia García-Herrero (Senior Research Fellow, Bruegel); Alessandro Rebucci (Associate Professor of Finance, Johns Hopkins Carey Business School, CEPR and NBER); Elina Ribakova (Deputy Chief Economist, Institute of International Finance)
    Abstract: Emerging economies are fighting COVID-19 and the economic sudden stop imposed by the containment and lockdown policies, in the same way as advanced economies. However, emerging markets also face large and rapid capital outflows as a result of the pandemic. This column argues that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimizing the risks of large depreciations and spiralling inflation.
    Keywords: Coronavirus, COVID-19, Quantitative Easing, Emerging Markets, Fiscal Stimulus
    Date: 2020–06
  5. By: Michał Ledóchowski (Narodowy Bank Polski); Piotr Żuk (Narodowy Bank Polski)
    Abstract: This paper provides an empirical investigation of the impact of balance sheet policies undertaken by the Fed and the ECB since the Global Financial Crisis of 2009 on portfolio capital flows to emerging market economies (EMEs). The analysis is based upon a panel dataset covering 31 EMEs from different regions throughout the period of 2009-2019. Our results show that quantitative easing by the Fed has translated into capital inflows into EMEs throughout the world. The Fed’s operations have affected both equity and debt flows. However, no such effect could be confirmed in the case of the balance sheet policies launched by ECB, even in the case of economies that remain closely integrated with the eurozone economy such as those from Central and Eastern Europe. These results have relevant policy implications, in particular in light of major central banks expanding their balance sheets in response to the Covid-19 pandemic. Most of all, in those EMEs that remain most vulnerable to capital flows volatility, changes in the Fed’s balance sheet policies may warrant domestic macroeconomic policy adjustment in order to mitigate capital flow volatility to these economies.
    Keywords: capital flows, emerging market economies, unconventional monetary policy spillovers, quantitative easing, balance sheet policies, longer-term refinancing operations
    JEL: E52 F32
    Date: 2020
  6. By: Malmendier, Ulrike M.; Nagel, Stefan; Yan, Zhen
    Abstract: Personal experiences of inflation strongly influence the hawkish or dovish leanings of central bankers. For all members of the Federal Open Market Committee (FOMC) since 1951, we estimate an adaptive learning rule based on their lifetime inflation data. The resulting experience-based forecasts have significant predictive power for members' FOMC voting decisions, the hawkishness of the tone of their speeches, as well as the heterogeneity in their semi-annual inflation projections. Averaging over all FOMC members present at a meeting, inflation experiences also help to explain the federal funds target rate, over and above conventional Taylor rule components.
    Keywords: Availability bias; Experience effects; Federal Funds Rate; Inflation forecasts; monetary policy
    JEL: D84 E03 E50
    Date: 2020–06
  7. By: Paul Beaudry; Césaire Meh
    Abstract: Over the last few decades, real interest rates have trended downward in many countries. The most common explanation is that this reflects depressed demand due to demographic, technological and other real factors such as income inequality. In this paper we explore the claim that these trends may have been amplified by certain features of monetary policy. We show that when long-run asset demands by households are C-shaped in relation to real interest rates, a feature we motivate through bequest motives, monetary policy has the potential to affect steady-state properties even if money is neutral in the long run. In particular, we show that if monetary policy reacts aggressively to inflation, this supports a steady state where inflation is close to the central bank’s target. However, the same aggressive policy simultaneously favours the emergence of, and the convergence to, a second stable and determinate steady state where both the real interest rate and inflation are lower and monetary policy is constrained by the effective lower bound. We discuss how fiscal policy can be used to escape this low-real-rate, low-inflation trap with the potential for a discontinuous response of long-run inflation.
    Keywords: Debt management, Economic models, Fiscal policy, Inflation and prices, Interest rates, Monetary policy
    JEL: E2 E43 E44 E5 E52 E62 E63 H3 H6 H63
    Date: 2021–06
  8. By: Luigi Bonatti; Andrea Fracasso; Roberto Tamborini
    Abstract: We present a general framework apt to explain why central banks care about the co-existence of different transmission channels of monetary policy, and hence they endow themselves with different policy instruments. Within this framework, we then review and examine the key instruments adopted by the ECB to tackle the post-pandemic challenges, with a view to their consistency and efficacy. Finally, we make a few considerations about the future perspectives of monetary policy.
    Date: 2021
  9. By: Wieland, Volker
    Abstract: This note argues that the European Central Bank should adjust its strategy in order to consider broader measures of inflation in its policy deliberations and communications. In particular, it points out that a broad measure of domestic goods and services price inflation such as the GDP deflator has increased along with the euro area recovery and the expansion of monetary policy since 2013, while HICP inflation has become more variable and, on average, has declined. Similarly, the cost of owner-occupied housing, which is excluded from the HICP, has risen during this period. Furthermore, it shows that optimal monetary policy at the effective lower bound on nominal interest rates aims to return inflation more slowly to the inflation target from below than in normal times because of uncertainty about the effects and potential side effects of quantitative easing.
    Date: 2021
  10. By: Ozili, Peterson Kitakogelu;
    Abstract: This paper is a survey of the most important research in the economic policy uncertainty literature. Economic policy uncertainty, although still under-researched relative to mainstream topics in economics and finance, has recently received increased scholarly attention. Through synthesizing common themes in the literature, the paper highlights the progress made so far and suggest some avenues for future research which allows future researchers to position their research and differentiate themselves from other studies in the literature. The paper finds that economic policy uncertainty affects banks through a reduction in credit supply and loan re-pricing. High economic policy uncertainty compel bank managers to discretionary distort bank financial reporting in ways that help them to mitigate the depressing effect of economic policy uncertainty on their profitability.
    Keywords: economic policy uncertainty, banking, banks, uncertainty, index, news, government, tax code, inflation, elections.
    JEL: E52 E61 G18 G20 G21 G24 G28
    Date: 2021
  11. By: Laurent Le Maux (University of Western Brittany)
    Abstract: Walter Bagehot (1873) published his famous book, Lombard Street, almost 150 years ago. The adage 'lending freely against good collateral at a penalty rate' is associated with his name and his book has always been set on a pedestal and is still considered as the leading reference on the role of lender of last resort. Nonetheless, without a clear understanding of the theoretical grounds and the institutional features of the British banking system, any interpretation of Bagehot's writings remains vague if not misleading, which is worrisome if they are supposed to provide a guideline for policy makers. The purpose of the present paper is to determine whether Bagehot's recommendation remains relevant for modern central bankers or whether it was indigenous to the monetary and banking architecture of Victorian times.
    Keywords: Central Banking, Lender of Last Resort
    JEL: B1 E5
    Date: 2021–02–10
  12. By: Solikin M. Juhro (Bank Indonesia); Bernard N. Iyke (APAEA); Paresh K. Narayan (APAEA)
    Abstract: In this paper, we investigate the interdependence between monetary policy and asset prices in ASEAN-5 countries. Within country-specific models and proxying asset prices by the composite stock market indices of these countries, we find strong interdependence between monetary policy and asset prices. We show that real stock prices decline as interest rates increase due to a contractionary monetary policy shock. Interest rates rise in response to an increase in real stock prices induced by a stock price shock, although it does so after a couple of months after the shock. We find the interdependence of monetary policy and asset prices to hold up within panel models. The delay in interest rate response to stock price shocks originates from three of the ASEAN-5 countries, namely Indonesia, the Philippines, and Thailand.
    Keywords: Monetary Policy, Asset Prices, ASEAN-5 Countries
    JEL: E52 E58 E61 G12
    Date: 2020
  13. By: Eric Monnet; Francois R. Velde
    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: historical macroeconomics; money; banking; financial intermediation
    JEL: N01 N10 N20
    Date: 2020–11–13
  14. By: Gianni De Nicolò; Nataliya Klimenko; Sebastian Pfeil; Jean-Charles Rochet
    Abstract: We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.
    Keywords: bank capital requirements, credit crunch, systemic risk
    JEL: E21 E32 F44 G21 G28
    Date: 2021
  15. By: Alejandro García; Josef Schroth
    Abstract: Countercyclical capital buffers are regulatory measures developed in response to the global financial crisis of 2008–09. This note focuses on how time-varying capital buffers can improve financial stability in Canada.
    Keywords: Business fluctuations and cycles; Credit and credit aggregates; Credit risk management; Financial stability; Financial system regulation and policies; Lender of last resort
    JEL: E44
    Date: 2021–06
  16. By: George-Marios Angeletos; Chen Lian
    Abstract: A long-standing issue in the theory of monetary policy is that the same path for the interest rate can be associated with multiple bounded equilibrium paths for inflation and output. We show that a small friction in memory and intertemporal coordination can remove this indeterminacy. This leaves no space for equilibrium selection by means of either the Taylor Principle or the Fiscal Theory of the Price Level. It reinforces the logical foundations of the New Keynesian model’s conventional solution (a.k.a. its fundamental or MSV solution). And it liberates feedback rules to serve only one function: stabilization.
    JEL: D8 E4 E5 E7
    Date: 2021–06
  17. By: Eduardo Dávila; Ansgar Walther
    Abstract: This paper studies leverage regulation and monetary policy when equity investors and/or creditors have distorted beliefs relative to a planner. We characterize how the optimal leverage regulation responds to arbitrary changes in investors' and creditors' beliefs and relate our results to practical scenarios. We show that the optimal regulation depends on the type and magnitude of such changes. Optimism by investors calls for looser leverage regulation, while optimism by creditors, or jointly by both investors and creditors, calls for tighter leverage regulation. Monetary policy should be tightened (loosened) in response to either investors' or creditors' optimism (pessimism).
    JEL: E52 E61 G21 G28
    Date: 2021–06
  18. By: Pierre L. Siklos; Martin Stefan
    Abstract: We simulate the impact on the nonbank liabilities of banks in a multiplex interbank environment arising from changes in currency exposure. Currency shocks as a source of financial contagion in the banking sector have not, so far, been considered. Our model considers two sources of contagion: shocks to nonbank assets and exchange rate shocks. Interbank loans can mature at different times. We demonstrate that a dominant currency can be a significant source of financial contagion. We also find evidence of asymmetries in losses stemming from large currency depreciations versus appreciations. A variety of scenarios are considered allowing for differences in the sparsity of the banking network, the relative size and number of banks, changes in nonbank assets and equity, the possibility of bank breakups, and the dominance of a particular currency. Policy implications are also drawn.
    Keywords: Systemic risk, financial contagion, interbank markets, multilayer networks
    Date: 2021–05
  19. By: Rokas Kaminskas (Bank of Lithuania, ISM University of Management and Economics); Modestas Stukas (Bank of Lithuania); Linas Jurksas (Bank of Lithuania, Vilnius University)
    Abstract: This paper examines changing ECB communication and how it has impacted euro area financial markets over the past two decades. We applied a combination of topic modelling and sentiment analysis for over 2000 public ECB Executive Board member speeches, as well as over 200 ECB press conferences. Topic analysis revealed that the ECB’s main focus has shifted from strategy and objectives, at the inception of the euro area, to various policy actions during the global financial crisis and, more recently, to instruments and economic developments. Sentiment analysis showed an expected trend of a more negative communication tone during periods of turmoil and a gradual shift to a more dovish monetary policy tone over time. Regression analysis revealed that sentiment indices had the expected impact on financial market indicators, while press conferences showed substantially stronger effects than speeches.
    Keywords: ECB, speeches, press conferences, text analysis, sentiments, financial markets
    JEL: C80 E43 E44 E58 G12
    Date: 2021–05–11
  20. By: Afees A. Salisu (Centre for Econometric and Allied Research, University of Ibadan, Ibadan, Nigeria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield, 0028, South Africa); Riza Demirer (Department of Economics and Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA)
    Abstract: This study examines the role of the Global Financial Cycle (GFCy) in the propagation of uncertainty shocks from the U.S. to global economies. Specifically, we construct a large-scale global vector autoregressive (GVAR) model of 33 countries and analyze the response of real Gross Domestic Product (GDP) to uncertainty shocks associated with the U.S. as well as the domestic economy, conditional on the state of the Global Financial Cycle. While our findings confirm the dominant role of U.S. uncertainty over global economic dynamics, we show that the global financial cycle plays a moderating role over the spillover effects of such shocks. U.S. uncertainty shocks, compared to own domestic uncertainty shocks, are found to have a more prominent negative impact on output, during overstressed financial markets implied by the low values of the GFCy, while the impact turns largely insignificant during high global financial cycle states. The effects are particularly evidence in the case of the European and other G7 economies, highlighting the strong connection across these developed economies compared to their emerging counterparts. Overall, the findings provide evidence in favor of a U.S. uncertainty spillover multiplier, suggesting that the design of expansionary monetary policy as a response to U.S. uncertainty needs to be contingent on the state of the integrated global financial markets, captured by the global financial cycle.
    Keywords: Uncertainty Shocks, Global Financial Cycle, Real GDP, Global Vector Autoregressive Model
    JEL: C32 D8 E32 G15
  21. By: Francesco Giovanardi (University of Cologne, Center for Macroeconomic Research); Matthias Kaldorf (University of Cologne, Center for Macroeconomic Research. Sibille-Hartmann-Str. 2-8, 50969 Cologne, Germany); Lucas Radke (University of Cologne, Center for Macroeconomic Research); Florian Wicknig (University of Cologne, Center for Macroeconomic Research)
    Abstract: We study the preferential treatment of green bonds in the Central Bank collateral framework as an environmental policy instrument. We propose a macroeconomic model with environmental and financial frictions, in which green and conventional entrepreneurs issue defaultable bonds to banks that use them as collateral. Collateral policy solves a financial stability trade-off between increasing bond issuance and subsidizing entrepreneur default risk. In a calibration to the Euro Area, optimal collateral policy features substantial preferential treatment, implying a green-conventional bond spread of 73bp. This increases the green bond share by 0.69 percentage points, while the green capital share increases by 0.32 percentage points, which in turn reduces pollution. The limited response of green investment is caused by higher risk taking of green entrepreneurs. When optimal Pigouvian taxation is available, collateral policy does not feature preferential treatment, but still improves welfare by addressing adverse effects of taxation on financial stability.
    Keywords: Green Investment, Central Bank Policy, Collateral Framework, Corporate De-fault Risk, Environmental Policy
    JEL: E44 E58 E63 Q58
    Date: 2021–06
  22. By: Timothy Watson; Juha Tervala
    Abstract: We simulate a small open economy Two Agent New Keynesian (TANK) model featuring ‘learning by doing’ in production whereby changes in employment generate hysteresis in productivity and output. Credit constraints and hysteresis amplify the efficacy of Fiscal stimulus in a small open economy with a floating exchange rate and inflation-targeting central bank such that output multipliers can exceed unity; welfare multipliers can be positive; and the degree of hysteresis, output and employment multipliers match empirical evidence well. Fiscal stimulus helps reverse output hysteresis, and price-level targeting provides superior macroeconomic stabilisation compared to other simple monetary rules combined with fiscal stimulus.
    Keywords: Hysteresis, open economy macroeconomics, monetary policy, fiscal policy
    JEL: E32 E63 F41
    Date: 2021–06
  23. By: Catherine R. Schenk
    Abstract: The 2008 crisis was a boon to the discipline of economic history and created an appetite for ‘lessons from the past’ by academics as well as policy-makers as they sought to respond to the failure of economic theory to anticipate the crisis. But beyond this intense example, can we make conclusions about the pathway to impact for historical treatments? Is there something especially inspiring or impactful about the 1930s? Does the widespread awareness that there was an interwar great depression and that it was terrible and that it may have contributed to the Second World War mean that it has particular resonance when it is invoked by policy-makers? How has the past been used in anticipation of (rather than reaction to) financial crises? Examining two episodes, this chapter demonstrates the use of the past as a parable for current and future policy and as a rehearsal for a future crisis.
    Keywords: devaluation, debt crisis, Bretton Woods, central bank cooperation, Great Depression
    Date: 2021–05–01
  24. By: Maggie Sklar
    Abstract: In this working paper, I examine the interconnections between designated derivatives central counterparties (CCPs) with Federal Reserve deposit accounts and non-designated CCPs and the potential financial stability implications. This working paper notes the interconnections between the non-designated and designated derivatives CCPs through their clearing members and the commercial custodial banks they utilize to hold and transfer collateral. The paper then identifies additional potential contagion risks and financial stability risks, including liquidity risk, market risk, concentration risk, and loss of confidence more broadly. Although there are a number of research articles addressing these topics with respect to designated CCPs or OTC derivatives, this working paper includes the perspective looking at U.S. futures CCPs and non-designated CCPs.
    Keywords: Chicago Fed; Federal Reserve Bank of Chicago; Federal Reserve System; Financial Economics; Non-bank Financial Institutions; Financial Instruments; Institutional Investors; Government Policy and Regulation
    JEL: G23 G28
    Date: 2020–10–21
  25. By: Mark M. Spiegel
    Abstract: This paper uses Call Report data to examine the impact of home country monetary policy on foreign bank subsidiary lending in the United States during the COVID-19 pandemic. Examining a large sample of foreign bank subsidiaries and domestic U.S. banks, we find that foreign bank lending growth was positively associated with both lower home country policy rates and negative home country rates. Our point estimates indicate that a one standard deviation decrease in home country policy rates was associated with a 3.5 percentage point increase in lending growth while negative home country policy rates added an additional 3.0 percentage points on average. Disparities in sensitivity to home country rates also exist by bank size, as large banks exhibited more responsiveness to home country policy rate levels, but were less responsive to negative policy rates. Easier home country policy rates are also found to impact negatively in growth in capital ratios and bank income, in keeping with expanded foreign subsidiary activity. However, income responses to negative home country rates are mixed, in a manner suggestive of sophisticated adjustment of global bank balance sheets to changes in relative home and host country monetary policy stances. Overall, our findings confirm that the bank lending channel for global monetary policy spillovers was active during the pandemic crisis.
    Keywords: Monetary policy; negative interest rates; banking; foreign subsidiaries; covid19
    JEL: G14 G18 G32
    Date: 2021–05–25
  26. By: Vacca, Valerio Paolo; Bichlmeier, Fabian; Biraschi, Paolo; Boschi, Natalie; Álvarez, Antonio J. Bravo; Di Primio, Luciano; Ebner, André; Hoeretzeder, Silvia; Ballesteros, Elisa Llorente; Miani, Claudia; Ricci, Giacomo; Santioni, Raffaele; Schellerer, Stefan; Westman, Hanna
    Abstract: The crisis management framework for banks in the European Union (EU) requires the resolution authorities to identify the existence of a public interest to resolve an ailing bank, rather than to open normal insolvency proceedings (NIPs). The Public Interest Assessment (PIA) determines whether resolution objectives, including the safeguard of financial stability, can be better preserved using resolution tools than NIPs .This paper provides a contribution to the ongoing discussion on the implementation of the PIA, by presenting an analytical framework to quantify the potential impact on the real economy stemming from a bank’s failure under NIPs through the interruption of the lending activity (“credit channel”). The framework is harmonized across the jurisdictions belonging to the Banking Union and aims to improve the quantitative leg of the PIA, to be coupled with qualitative elements. In a first step, we quantify the potential credit shortfall faced by firms and households due to the abrupt closure of a bank. In a second step, the impact of the credit shortfall on real outcomes is estimated via a FAVAR model and via a micro-econometric model. Reference values are provided to assess the relevance of the estimated outcomes. The illustrative results show that such a harmonized approach can be applied across the Banking Union and to banks of heterogeneous size. In case of mid-sized banks, this common analytical framework could reduce the uncertainty regarding the extent to which the failure of the institution could have a negative impact to the real economy if the lending activity is interrupted as possibly the case under NIPs. JEL Classification: E58, G01, G21, G28
    Keywords: bank insolvency, bank lending, bank resolution, EU crisis management framework, public interest assessment
    Date: 2021–06
  27. By: Mohammed Ait Lahcen; Garth Baughman; Stanislav Rabinovich; Hugo van Buggenum
    Abstract: We argue that long-run inflation has nonlinear and state-dependent e ects on unemployment, output, and welfare. Using panel data from the OECD, we document three correlations. First, there is a positive long-run relationship between anticipated inflation and unemployment. Second, there is also a positive correlation between anticipated inflation and unemployment volatility. Third, the long-run inflation-unemployment relationship is not only positive, but also stronger when unemployment is higher. We show that these correlations arise in a standard monetary search model with two shocks - productivity and monetary - and frictions in labor and goods markets. Inflation lowers the surplus from a worker-firm match, in turn making it sensitive to productivity shocks or to further increases in inflation. We calibrate the model to match the US postwar labor market and monetary data and show that it is consistent with observed cross-country correlations. The model implies that the welfare cost of inflation is nonlinear in the level of inflation and is amplified by the presence of aggregate shocks.
    Keywords: Money, search, inflation, unemployment, unemployment volatility, fundamental surplus, product-labor market interaction
    JEL: E24 E30 E40 E50
    Date: 2021–06

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