nep-cba New Economics Papers
on Central Banking
Issue of 2021‒06‒28
39 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Evolving Monetary Policy in the Aftermath of the Great Recession By Aymeric Ortmans
  2. Monetary Policy and Financial Stability By Isabel Cairó; Jae W. Sim
  3. Monetary Policy with Opinionated Markets By Caballero, Ricardo; Simsek, Alp
  4. Constructing Divisia Monetary Aggregates for Singapore By William Barnett; Van H. Nguyen
  5. Institutional Arrangements and Inflation Bias: A Dynamic Heterogeneous Panel Approach By Diana Lima; Vasco Gabriel; Ioannis Lazopoulos
  6. The Emergence of Forward Guidance As a Monetary Policy Tool By Edward Nelson
  7. Monetary Policy Effectiveness under the Ultra-Low Interest Rate Environment: Evidence from Yield Curve Dynamics in Japan By Shigenori Shiratsuka
  9. Central Bank Policy and the Concentration of Risk: Empirical Estimates By Nuno Coimbra; Daisoon Kim; Hélène Rey
  10. Unexpected Supply Effects of Quantitative Easing and Tightening By Stefania D'Amico; Tim Seida
  11. The Information Content of Stress Test Announcements By Luca Guerrieri; Michele Modugno
  12. High-Frequency Estimates of the Natural Real Rate and Inflation Expectations By Alex Aronovich; Andrew C. Meldrum
  13. Fiscal regimes and the exchange rate By Enrique Alberola-Ila; Carlos Cantú; Paolo Cavallino; Nikola Mirkov
  14. Centralized systemic risk control in the interbank system: Relaxed control and Gamma-convergence By Lijun Bo; Tongqing Li; Xiang Yu
  15. Understanding a New Keynesian Model with Liquidity By Jia, Pengfei
  16. Banks' Liquidity Management During the COVID-19 Pandemic By Gounopoulos, Dimitrios; Luo, Kaisheng; Nicolae, Anamaria; Paltalidis, Nikos
  17. Impacts of the Fed Corporate Credit Facilities through the Lenses of ETFs and CDX By ; Stefania D'Amico; Stephen M. Lee
  18. Fiscal versus Monetary Policy in the 1960s By Friedman, Milton
  19. Jumpstarting an International Currency By Bahaj, Saleem; Reis, Ricardo
  20. Do macroprudential measures increase inequality? Evidence from the euro area household survey By Georgescu, Oana-Maria; Martín, Diego Vila
  21. Assessment of the effectiveness of the macroprudential measures implemented in the context of the Covid-19 pandemic By Lucas Avezum; Vítor Oliveira; Diogo Serra
  22. Effectives of Monetary Policy under the High and Low Economic Uncertainty States: Evidence from the Major Asian Economies By Balcilar, Mehmet; Ozdemir, Zeynel Abidin; Ozdemir, Huseyin; Aygun, Gurcan; Wohar, Mark E.
  23. Reallocating Liquidity to Resolve a Crisis: Evidence from the Panic of 1873 By Haelim Anderson; Kinda Cheryl Hachem; Simpson Zhang
  24. Risk shocks, due loans, and policy options: When less is more! By José R. Maria; Paulo Júlio; Sílvia Santos
  25. Measuring price selection in microdata: it’s not there By Karadi, Peter; Schoenle, Raphael; Wursten, Jesse
  26. The COVID-19 Crisis and the Federal Reserve's Policy Response By Richard H. Clarida; Burcu Duygan-Bump; Chiara Scotti
  27. Risk Premia at the ZLB: A Macroeconomic Interpretation By Francois Gourio; Phuong Ngo
  28. Exchange Rates and Monetary Policy with Heterogeneous Agents: Sizing up the Real Income Channel By Adrien Auclert; Matthew Rognlie; Martin Souchier; Ludwig Straub
  29. The Gold Standard and the International Dimension of the Great Depression. By Luca Pensieroso; Romain Restout
  30. Hierarchical contagions in the interdependent financial network By Barnett, William A.; Wang, Xue; Xu, Hai-Chuan; Zhou, Wei-Xing
  31. The Effect of the PPPLF on PPP Lending by Commercial Banks By Sriya Anbil; Mark A. Carlson; Mary-Frances Styczynski
  32. What Drives U.S. Treasury Re-use? By Sebastian Infante; Zack Saravay
  33. No country is an island: international cooperation and climate change By Ferrari, Massimo; Pagliari, Maria Sole
  34. Bailouts in Financial Networks By Beni Egressy; Roger Wattenhofer
  35. Forecasting US Inflation in Real Time By Chad Fulton; Kirstin Hubrich
  36. The Barnett Critique By Barnett, William A.; Park, Hyun; Park, Sohee
  37. Arbitrage Capital of Global Banks By Alyssa G. Anderson; Wenxin Du; Bernd Schlusche
  38. Fiscal risks and their impact on banks’ capital buffers in South Africa By Konstantin Makrelov; Neryvia Pillay; Bojosi Morule
  39. The Resilience of the U.S. Corporate Bond Market During Financial Crises By Bo Becker; Efraim Benmelech

  1. By: Aymeric Ortmans (Université Paris-Saclay, Univ Evry, EPEE)
    Abstract: A Taylor-type monetary policy rule is estimated using a time-varying parameter vector autoregressive model to assess changes in central banks' behavior during and after the Great Recession. Based on US and euro area data, the results show that both the Fed and the ECB have changed their behavior after the 2008 crisis. Contemporaneous coefficients have increased with expansionary monetary policy at the ZLB. Althoughthey do not indicate clear evidence of significant changes inthe systematic component of monetary policy, estimated response coefficients suggest dramatic shifts in monetary policy shocks after the Global Financial Crisis. These departures from rule-based behavior - i.e. monetary policy discretion - are increasingly larger with the implementation of non-standard measures. Unconventional monetary policy shocks are shown to strongly affect the US macroeconomy and to contribute to the variance of inflation and output even more importantly when the Fed eased its monetary policy at the ZLB. This is not the case in the euro area, despite increasing monetary policy shocks in unconventional times. A counterfactual analysis shows however thatthe shift in the systematic component of monetary policy appears to be a key determinant of the level of inflation and output at the ZLB, especially in the euro area that would have suffered a continuous period of deflation from 2014:1 to 2018:1 without any change in ECB's behavior after the 2008 crisis.
    Keywords: Federal Reserve, European Central Bank, Taylor rule, Time-varying parameter VAR, Shadow rate, Zero lower bound
    JEL: C32 E31 E32 E37 E43 E44 E52 E58
    Date: 2020
  2. By: Isabel Cairó; Jae W. Sim
    Abstract: The 2008 Global Financial Crisis called into question the narrow focus on price stability of inflation targeting regimes. This paper studies the relationship between price stability and financial stability by analyzing alternative monetary policy regimes for an economy that experiences endogenous financial crises due to excessive household sector leverage. We reach four conclusions. First, a central bank can improve both price stability and financial stability by adopting an aggressive inflation targeting regime, in the absence of the zero lower bound (ZLB) constraint on nominal interest rates. Second, in the presence of the ZLB constraint, an aggressive inflation targeting regime may undermine both price stability and financial stability. Third, an aggressive price-level targeting regime can improve both price stability and financial stability, regardless of the presence of the ZLB constraint. Finally, a leaning against the wind policy can be detrimental to both price stability and financial stability when the credit cycle is driven by countercyclical household sector leverage. In this environment, leaning with credit spreads can be more effective.
    Keywords: Inflation targeting; Financial crises; Zero lower bound
    JEL: E32 E52 G01
    Date: 2020–12–18
  3. By: Caballero, Ricardo; Simsek, Alp
    Abstract: Central banks (the Fed) and markets (the market) often disagree about the path of interest rates. We develop a model where these different views stem from disagreements between the Fed and the market about future aggregate demand. We then study the implications of these disagreements for monetary policy, the term structure of interest rates, and economic activity. In our model, agents learn from the data but not from each other-they are opinionated. In this context, the market perceives monetary policy "mistakes" and the Fed partially accommodates the market's view to mitigate the impact of perceived "mistakes" on output and inflation. The Fed plans to implement its own view gradually, as it expects the market to receive more information and move closer to the Fed's belief. Disagreements about future demand, together with learning, translate into disagreements about future interest rates. Disagreements also provide a microfoundation for monetary policy shocks: after a surprise policy announcement, the market (partially) learns the Fed's belief and the extent of future "mistaken" interest rate changes. We categorize these shocks into three groups: Fed belief shocks, market reaction shocks, and tantrum shocks, and analyze their impact on forward interest rates and economic activity. Tantrum shocks are the most damaging, as they arise when the Fed fails to forecast the forward rates' reaction. These shocks motivate additional gradualism as well as communication policies that reveal the Fed's belief, not to persuade the market (which is opinionated) but to prevent a misinterpretation of the Fed's belief. Finally, we also find that disagreements affect inflation and create a policy trade-off between stabilizing output and inflation.
    Keywords: aggregate demand shocks; belief shocks; communication; confident disagreement; forward curve; Gradualism; monetary policy and shocks; taper tantrum; the Fed's dot plot; the term structure of interest rates
    JEL: E00 E12 E21 E32 E43 E44 G11 G12
    Date: 2020–05
  4. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Van H. Nguyen (Department of Economics, The University of Kansas)
    Abstract: Since Barnett (1978) derived the user cost price of money, the economic theory of monetary services aggregation has been developed and extended into a field of its own with solid foundations in microeconomic theory. Divisia monetary aggregates have repeatedly been shown to be strictly preferred to their simple-sum counterparts, which have no competent foundations in microeconomic aggregation or index number theory. However, most central banks in the world, including that of Singapore, the Monetary Authority of Singapore (MAS), still report their monetary aggregates as simple summations. Recent DSGE macroeconomic models often ignore aggregate quantities of money as possible instruments or targets of monetary policy. In the case of a small open economy like Singapore’s, exchange rates are often targeted to achieve goals for inflation and output gap. See, e.g., McCallum (2006). Is that because quantities of money are irrelevant to economic activity? To examine the relevance of Divisia monetary aggregates in predicting real economy activity in Singapore, we construct monetary services indices for Singapore using the recent credit-card- augmented Divisia monetary aggregates formula. We produce those state-of-the-art monetary services indexes for Jan 1991 to Mar 2021. In future work, we plan to use our data to explore central bank policy in Singapore and to propose improvements in that policy. By making our data available to the public, we encourage others to do the same.
    Keywords: Divisia index, Divisia monetary aggregates, credit card augmented Divisia, open- economy macroeconomics, monetary policy analysis, Singapore.
    JEL: E32 E40 E41 E47 E50 E51 E52 E58
    Date: 2021–06
  5. By: Diana Lima; Vasco Gabriel; Ioannis Lazopoulos
    Abstract: The paper investigates whether the institutional arrangements that determine the conduct of monetary policy and prudential regulation and supervision of the banking system influence policymakers’ actions in pursuing their designated mandates. Employing recently developed dynamic heterogeneous panel methods and using data for 25 industrialised countries from 1960 to 2018, we empirically assess whether central banks’ main objective of inflation stability is compromised when assigned with both policy mandates manifested as inflation bias. Our results show that, once we appropriately control for relevant policy and institutional factors, the separation of prudential policy and monetary policy does not have a significant effect on inflation outcomes.
    JEL: E21 E60 F40
    Date: 2021
  6. By: Edward Nelson
    Abstract: Forward guidance—the issuance by a central bank of public statements concerning the likely future settings of its policy instruments—is widely regarded as a new tool of monetary policy. The analysis in this paper shows that Federal Reserve policymakers from the 1950s onward actually accepted the premises of forward guidance: the notion that longer-term interest rates are key yields in aggregate spending decisions; and the proposition that indications of intentions regarding future short-term interest rate policy can affect longer-term rates. Over the same period, they were nevertheless wary about providing forward guidance regarding short-term interest rates, fearing that this could generate untoward market reactions or lock the Federal Open Market Committee into inappropriate rate settings. They concentrated on describing future policy in terms of achievement of economic objectives, with their commentary on interest-rate prospects usually confined to consideration of the longer-term factors affecting rates. Even in these years, however, there were infrequent occasions—notably in 1974 and 1982—when policymakers provided more explicit guidance regarding the path of short-term rates. In the 1990s, a consensus developed in U.S. policy circles that was more receptive toward the notion of guiding longer-term interest rates by providing indications of future FOMC actions. This consensus developed even before concerns about the lower bound on short-term rates became prevalent in U.S. policymaking. The new mindset, which stressed the stabilizing effects on the economy of communication of policy intentions, set the stage for the emergence of forward guidance as a monetary policy tool.
    Keywords: Forward guidance; Monetary policy tools; Monetary policy strategy; Interest-rate forecasts; Interest-rate lower bound; Federal Open Market Committee; Federal Reserve Board and Federal Reserve System; Federal Reserve
    JEL: E43 E58
    Date: 2021–05–17
  7. By: Shigenori Shiratsuka (Faculty of Economics, Keio University)
    Abstract: In this paper, I examine the effectiveness of monetary policy under the ultra-low interest rate environment in Japan through the lens of yield curve dynamics. To that end, I employ the dynamic Nelson-Siegel model with time-varying parameters, thereby computing indicators for tracing the easing effects of monetary policy. I show that the estimation performance of the yield curve models is sufficiently improved even under the ultra-low interest rate environment by extending the dynamic Nelson-Siegel model to allow a loading parameter to vary over time, in addition to three parameters of yield curve dynamics: level, slope, and curvature. However, I also demonstrate that the identification of the level and loading parameters is critical in assessing monetary policy effects based on the estimation results for the yield curve dynamics. I reveal that monetary easing effects under the Quantitative and Qualitative Monetary Easing (QQE) are produced by flattening the yield curve in the ultra-long-term maturities over 10-year while easing effects from maturities shorter than 10-year remain almost unchanged. I argue that monetary policy fails to produce sufficient easing effects within the time frame of the standard macroeconomic stabilization policy, even with the full-fledged implementation of unconventional monetary policy measures under the current ultra-low interest rate environment.
    Keywords: Yield curve, Dynamic Nelson-Siegel model, Loading parameter, Unconventional monetary policy, Monetary policy indicator
    JEL: E43 E52 E58 G12
    Date: 2021–06–12
  8. By: Solikin M. Juhro; Reza
    Abstract: This paper studies the role of macroprudential policy in the insulation properties of flexible exchangerates. To this end, we build a small open economy New Keynesian DSGE model with a bankingsector where, in the model economy, entrepreneurs may take foreign loans, and the exchange rateintervention is undertaken via a modified Taylor-rule. We also add a macroprudential measure,which limits the entrepreneurs’ foreign to domestic loan ratio. From the analysis, three significantresults emerge. First, the responses of aggregate output, consumption, investment, and inflation varywidely concerning the type of foreign shocks and the combinations of macroprudential policy andexchange rate intervention. Second, the flexible exchange rate’s insulation properties seem to dependon the foreign shock hitting the economy. Under a foreign interest rate shock, a higher exchange rateintervention destabilizes output. Whereas under a risk premium shock, it stabilizes output. Finally, under the foreign shocks, tightening the macroprudential measure does not necessarily stabilize output in the economy.
    Keywords: exchange rate, macroprudential policy, credit frictions, external shocks
    JEL: E30 E32 E44 E51 E52 G21 G28
    Date: 2020
  9. By: Nuno Coimbra; Daisoon Kim; Hélène Rey
    Abstract: Before the 2008 crisis, the cross-sectional skewness of banks’ leverage went up and macro risk concentrated in the balance sheets of large banks. Using a model of profit-maximizing banks with heterogeneous Value-at-Risk constraints, we extract the distribution of banks’ risk-taking parameters from balance sheet data. The time series of these estimates allow us to understand systemic risk and its concentration in the banking sector over time. Counterfactual exercises show that (1) monetary policymakers confront the trade-off between stimulating the economy and financial stability, and (2) macroprudential policies can be effective tools to increase financial stability.
    JEL: E0 E5 F3 G01
    Date: 2021–06
  10. By: Stefania D'Amico; Tim Seida
    Abstract: To analyze the evolution of quantitative easing’s (QE) and tightening’s (QT) effects across consecutive announcements, we focus on their unexpected component. Treasury yield sensitivities to QE and QT supply surprises do not fall monotonically over time, thus later announcements seemed to remain powerful; yield sensitivities to QT surprises are on average larger than sensitivities to QE surprises, implying supply effects did not diminish during periods of market calm amid economic expansion; finally, yield sensitivities are amplified by the amount of interest-rate uncertainty prevailing before the announcement, implying that turning points in the balance sheet policy tended to elicit larger reactions.
    Keywords: Balance sheet policy surprises; quantitative easing and tightening; asset supply effects
    JEL: E43 E44 E52 E58
    Date: 2020–07–31
  11. By: Luca Guerrieri; Michele Modugno
    Abstract: We exploit institutional features of the U.S. banking stress tests to disentangle different types of information garnered by market participants when the stress test results are released. By examining the reaction of different asset prices, we find evidence that market participants value the stress test announcements not only for the information on possible future capital distributions but also for the signals about bank resilience. These results back the use of stress tests by central banks to inform the broader public about the soundness of the banking system.
    Keywords: Stress tests; Event study; Banks; Overnight stock returns; CDS spreads
    JEL: E58 G21
    Date: 2021–02–24
  12. By: Alex Aronovich; Andrew C. Meldrum
    Abstract: We propose a new method of estimating the natural real rate and long-horizon inflation expectations, using nonlinear regressions of survey-based measures of short-term nominal interest rates and inflation expectations on U.S. Treasury yields. We find that the natural real rate was relatively stable during the 1990s and early 2000s, but declined steadily after the global financial crisis, before dropping more sharply to around 0 percent during the recent COVID-19 pandemic. Long-horizon inflation expectations declined steadily during the 1990s and have since been relatively stable at close to 2 percent. According to our method, the declines in both the natural real rate and long-horizon inflation expectations are clearly statistically significant. Our estimates are available at whatever frequency we observe bond yields, making them ideal for intraday event-study analysis--for example, we show that the natural real rate and long-horizon inflation expectations are not affected by temporary shocks to the stance of monetary policy.
    Keywords: Natural real rate; Term structure model; Nonlinear regression
    JEL: E43 G12
    Date: 2021–05–28
  13. By: Enrique Alberola-Ila; Carlos Cantú; Paolo Cavallino; Nikola Mirkov
    Abstract: In this paper, we argue that the effect of monetary and fiscal policies on the exchange rate depends on the fiscal regime. A contractionary monetary (expansionary fiscal) shock can lead to a depreciation, rather than an appreciation, of the domestic currency if debt is not backed by future fiscal surpluses. We look at daily movements of the Brazilian real around policy announcements and find strong support for the existence of two regimes with opposite signs. The unconventional response of the exchange rate occurs when fiscal fundamentals are deteriorating and markets' concern about debt sustainability is rising. To rationalize these findings, we propose a model of sovereign default in which foreign investors are subject to higher haircuts and fiscal policy shifts between Ricardian and non-Ricardian regimes. In the latter, sovereign default risk drives the currency risk premium and affects how the exchange rate reacts to policy shocks.
    Keywords: exchange rate, monetary policy, fiscal policy, fiscal dominance, sovereign default
    JEL: E52 E62 E63 F31 F34 F41 G15
    Date: 2021–06
  14. By: Lijun Bo; Tongqing Li; Xiang Yu
    Abstract: This paper studies a systemic risk control problem by the central bank, which dynamically plans monetary supply for the interbank system with borrowing and lending activities. Facing both heterogeneity among banks and the common noise, the central bank aims to find an optimal strategy to minimize the average distance between log-monetary reserves and some prescribed capital levels for all banks. A relaxed control approach is adopted, and an optimal randomized control can be obtained in the system with finite banks by applying Ekeland's variational principle. As the number of banks grows large, we further prove the convergence of optimal strategies using the Gamma-convergence arguments, which yields an optimal relaxed control in the mean field model. It is shown that the limiting optimal relaxed control is linked to a solution of a stochastic Fokker-Planck-Kolmogorov (FPK) equation. The uniqueness of the solution to the stochastic FPK equation is also established under some mild conditions.
    Date: 2021–06
  15. By: Jia, Pengfei
    Abstract: The Global Financial Crisis of 2007--2009 and its aftermath have called for a rethink of the role of money in shaping business cycle fluctuations. To this end, this paper studies a New Keynesian model with money (liquidity). In the model, agents hold government money and other financial assets. However, there is a "short rate disconnect" (i.e., an interest rate spread) between the policy rate on money and the interest rate on household's savings. The paper shows that there exists a meaningful "liquidity effect" that is quantitatively significant for the macroeconomy. As the spread increases, so does the price of liquidity. In a model where consumption and money are complements, such an increase in the opportunity cost of money induces agents to consume less and work less. Both the effects imply that the real wage can fall, which in turn puts downward pressures on inflation via the New Keynesian Phillips curve. The fall in inflation makes the monetary authority cut the nominal interest rates by more, but at the cost of increasing the spread even further. In addition, the paper compares the dynamic responses to technology shocks and monetary policy shocks for the model with liquidity and the standard New Keynesian model. The results show that the responses can be quantitatively different for the two models. Finally, this paper studies the interaction between the liquidity effect and monetary policy, highlighting the liquidity effect that can play in business cycles.
    Keywords: Liquidity, Money, New Keynesian model, Business cycle fluctuations
    JEL: E32 E41 E51 E52 E62
    Date: 2021–06–14
  16. By: Gounopoulos, Dimitrios; Luo, Kaisheng; Nicolae, Anamaria; Paltalidis, Nikos
    Abstract: How banks managed the COVID-19 pandemic shock? The eruption of the financial crisis in 2007 evolved to a crisis of banks as liquidity providers (Acharya and Mora, 2015). The COVID-19 pandemic shock was associated with a surge in households’ deposits and a subsequent liquidity injection by the Federal Reserve. We show how the pandemic affected banks’ liquidity management and therefore by extension, the creation of new loans. We empirically evaluate the creation and management of banks’ liquidity through three well established mechanisms: market discipline (supply-side), internal capital markets (demand-side), and the balance-sheet mechanism which captures banks’ exposure to liquidity demand risk. We provide novel empirical evidence showing that households increased savings as a precaution against future declines in their income. Also, depositors did not discipline riskier banks, and the internal capital market mechanism was not in work during the pandemic. Hence, weakly-capitalized banks were not forced to offer higher deposit rates to stem deposit outflows. Furthermore, weakly-capitalized banks increased lending in the first phase of the pandemic, while in the midst of the pandemic, they cut back new lending origination and increased their exposure to Fed’s liquidity facilities. Well-capitalized banks on the other hand, increased lending in line with the increase in their deposits. Banks with higher exposure to liquidity risk were vulnerable to deposit outflows and increased their exposure in Fed’s liquidity facilities significantly more than low-commitments exposed banks.
    Keywords: Financial Institutions; Liquidity Risk; Bank Lending; COVID-19; Monetary Policy
    JEL: E51 E58 G21
    Date: 2021–05–26
  17. By: ; Stefania D'Amico; Stephen M. Lee
    Abstract: In this study, we use the liquid and efficient bond ETF prices and CDX spreads to quantify the effects of the announcements of the Primary and Secondary Market Corporate Credit Facilities on the underlying corporate bonds. We find that those announcements triggered: (i) large and positive jumps in the prices of directly-eligible ETFs as well as ETFs holding eligible bonds and their close substitutes; (ii) a discrete drop in the perceived credit risk of eligible bonds especially following the April 9th announcement; (iii) a roaring back of investment-grade issuance and a pick-up in high-yield issuance. Importantly, across all ETFs in our sample, the magnitude of their price response does not seem directly related to the size of the reduction in either credit risk or liquidity risk, but rather appears to reflect mostly the eligibility of the ETF and its underlying bonds at the Federal Reserve facilities. This leads us to believe that the main factor driving the reaction to the announcements might be the elimination of "disaster risk" for eligible issuers.
    Keywords: Balance Sheet Policy; Credit Easing; Corporate bond market
    JEL: E43 E44 E52 E58
    Date: 2020–05–19
  18. By: Friedman, Milton (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise)
    Abstract: In this lecture, Milton Friedman reviews the role of fiscal and monetary policies on the course of the U.S. business cycle, during several episodes from 1961 to 1969. He relates these developments to shifts in contemporary popular and scientific opinion about the determinants of the business cycle. In each episode of expansion or contraction, he shows that monetary policy – in the sense of changes in the rate of growth of the quantity of money – decisively dominated over fiscal policy in determining the pace of economic activity and the rate of inflation. During the lecture, Friedman makes several digressions to explain the variability of the lag in effect of monetary policy, the reason why interest rates are a poor guide to the stance of monetary policy, and why the downward-sloping liquidity preference function is a poor model that fails to comport with the real world. He also explains why tax increases are not necessarily contractionary, and why tax decreases are not necessarily expansionary.
    Date: 2021–06–23
  19. By: Bahaj, Saleem; Reis, Ricardo
    Abstract: Monetary and financial policies that lower the cost of credit for working capital in a currency outside of its country can provide the impetus for that currency to be used in international trade. This paper shows this in theory, by exploring the complementarity in the currency used for financing working capital and the currency used for invoicing sales. Financial policies by a central bank can jump-start the use of its currency outside a country's borders. In the data, the creation of 38 swap lines by the People's Bank of China between 2009 and 2018 provides a test of the theory. Signing a swap line with a country is significantly associated with increases in the use of the RMB in payments to and from that country in the following months.
    JEL: E44 E58 F33 F41 G15
    Date: 2020–05
  20. By: Georgescu, Oana-Maria; Martín, Diego Vila
    Abstract: Borrower-based macroprudential (MP) policies - such as caps on loan-to-value (LTV) ratios and debt-service-to-income (DSTI) limits - contain the build-up of systemic risk by reducing the probability and conditional impact of a crisis. While LTV/DSTI limits can increase inequality at introduction, they can dampen the increase in inequality under adverse macroeconomic conditions. The relative size of these opposing effects is an empirical question. We conduct counterfactual simulations under different macroeconomic and macroprudential policy scenarios using granular income and wealth data from the Households Finance and Consumption Survey (HFCS) for Ireland, Italy, Netherlands and Portugal. Simulation results show that borrower-based measures have a moderate negative welfare impact in terms of wealth inequality and a negligible impact on income inequality. JEL Classification: G21, G28, G51
    Keywords: household debt, inequality, macroprudential policy
    Date: 2021–06
  21. By: Lucas Avezum; Vítor Oliveira; Diogo Serra
    Abstract: In this paper we assess the effectiveness of the macroprudential capital buffers’ release on loans granted to households, implemented in the context of the Covid-19 pandemic. We obtain causal estimates by exploring differences in the availability of regulatory buffers prior to the pandemic shock among European countries and accounting for the time-varying effect of unobservable confounding variables with the synthetic control method. We find evidence that the buffers releases contributed, on average, to mitigate the procyclicality of credit to households, specifically for house purchase and for small businesses purposes. For the aggregate household lending, we find that the average treatment effect for both the release of the CCyB and that of the SyRB were positive. However, the results suggest that, for credit associated to small businesses purposes, only the release of the CCyB had an effect.
    JEL: E51 G28 H12
    Date: 2021
  22. By: Balcilar, Mehmet (Eastern Mediterranean University); Ozdemir, Zeynel Abidin (Ankara HBV University); Ozdemir, Huseyin (Gazi University); Aygun, Gurcan (Gazi University); Wohar, Mark E. (University of Nebraska Omaha)
    Abstract: This study examines the monetary policy effectiveness of five major Asian countries (China, Hong Kong, India, Japan, and South Korea) using a quantile vector autoregression (QVAR) model-based spillover estimation approach of Balcilar et al. (2020b) at different quantile paths. To do this, we first obtain the spillover index from interest rate to industrial production and consumer price index under the high and low levels of uncertainty. The full sample results from our analysis provide partial supporting evidence for the economic theory, which asserts that monetary policy efficiency must fall during periods of high economic uncertainty. Furthermore, this approach also allows us to uncover asymmetric effects of economic policy uncertainty and lending rate on macroeconomic indicators. The impacts of interest rate and domestic and foreign (US, EU) uncertainty shocks on major Asian markets present significant asymmetric characteristics. Moreover, our time-varying results suggest that monetary policy shocks are more effective and potent on Asian economies during very low and very high uncertain times than normal economic periods.
    Keywords: economic policy uncertainty, monetary policy efficiency, quantile spillover, QVAR
    JEL: C32 E44 F42 G01
    Date: 2021–05
  23. By: Haelim Anderson; Kinda Cheryl Hachem; Simpson Zhang
    Abstract: We study financial stability with constraints on central bank intervention. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium. Importantly, this reallocation can be implemented through the issuance of clearinghouse loan certificates, such as those issued in New York City during the Panic of 1873. With a new dataset constructed from archival records, we demonstrate that the New York Clearinghouse issued loan certificates to member banks in the way our model suggests would have helped resolve the panic.
    JEL: D53 D62 E42 E50 G01 N21
    Date: 2021–05
  24. By: José R. Maria; Paulo Júlio; Sílvia Santos
    Abstract: We use a dynamic stochastic general equilibrium model endowed with a complex banking system—in which due loans, occasionally binding credit restrictions, a cost of borrowing channel, and regulatory (capital and impairment) requirements coexist—to analyze the performance of various policy options impacting impairment recognition by banks. We discuss how looser or tighter policy designs affect output and welfare—both in the steady state and alongside dynamics—and the main driving forces that lie beneath the effects. The holding cost of due loans, restrictions to credit, dividend strategy, and the cure rate are key components of the driveshaft propelling policies to outcomes. We find that looser policies outperform tighter ones only if reflected into higher capital buffers (extra income is retained and not distributed as dividends) and for sufficiently low values of the holding cost. Higher cure rates increase the effectiveness of looser policies—they dominate for a wider range of holding costs—by raising the benefits of delaying impairment recognition. A policy targeting impairment recognition seems to take the upper edge due to its combined steady-state and business-cycle effects, but a policy that allows the regulatory impairment recognition to respond to the cycle is more effective from a business-cycle stabilization standpoint. Occasionally binding credit restrictions boost the effectiveness of looser policies during recessions due to its asymmetric effects over the cycle, pushing the mean output upwards.
    JEL: E32 E44 H62
    Date: 2021
  25. By: Karadi, Peter; Schoenle, Raphael; Wursten, Jesse
    Abstract: We use microdata to estimate the strength of price selection { a key metric for the effect of monetary policy on the real economy. We propose a product-level proxy for mispricing and assess whether products with larger mispricing respond with a higher probability to identified monetary and credit shocks. We find that they do not, suggesting selection is absent. Instead, we detect state-dependent adjustment on the gross extensive margin. Our results are broadly consistent with second-generation state-dependent pricing models and sizable effects of monetary policy on the real economy. JEL Classification: E31, E32, E52
    Keywords: identified credit and monetary policy shocks, monetary non-neutrality, PPI microdata, price-gap proxy, scanner data, state-dependent pricing
    Date: 2021–06
  26. By: Richard H. Clarida; Burcu Duygan-Bump; Chiara Scotti
    Abstract: The COVID-19 pandemic and the mitigation efforts put in place to contain it delivered the most severe blow to the U.S. economy since the Great Depression. In this paper, we argue that the Federal Reserve acted decisively and with dispatch to deploy all the tools in its conventional kit and to design, develop, and launch within weeks a series of innovative facilities to support the flow of credit to households and businesses. These measures, taken together, provided crucial support to the economy in 2020 and are continuing to contribute to what is expected to be a robust economic recovery in 2021.
    Keywords: Monetary policy; Forward guidance; Asset purchases; Section 13(3) facilities
    JEL: E40 E50
    Date: 2021–06–03
  27. By: Francois Gourio; Phuong Ngo
    Abstract: Historically, inflation is negatively correlated with stock returns, leading investors to fear inflation. We document using a variety of measures that this association became positive in the U.S. during the 2008-2015 period. We then show how an off-the-shelf New Keynesian model can reproduce this change of association due to the binding zero lower bound (ZLB) on short-term nominal interest rates during this period: in the model, demand shocks become more important when the ZLB binds because the central bank cannot respond as effectively as when interest rates are positive. This changing correlation in turn reduces the term premium, and hence contributes to explaining the decline in long-term interest rates. We use the model to evaluate this mechanism quantitatively. Our results shed light on the validity of the New Keynesian ZLB model, a cornerstone of modern macroeconomic theory.
    Keywords: zero lower bound; liquidity trap; stock market; inflation premia; term premia; risk premia
    JEL: C61 E31 E52 E62
    Date: 2020–01–03
  28. By: Adrien Auclert; Matthew Rognlie; Martin Souchier; Ludwig Straub
    Abstract: Introducing heterogeneous households to a New Keynesian small open economy model amplifies the real income channel of exchange rates: the rise in import prices from a depreciation lowers households’ real incomes, and leads them to cut back on spending. When the sum of import and export elasticities is one, this channel is offset by a larger Keynesian multiplier, heterogeneity is irrelevant, and expenditure switching drives the output response. With plausibly lower short-term elasticities, however, the real income channel dominates, and depreciation can be contractionary for output. This weakens monetary transmission and creates a dilemma for policymakers facing capital outflows. Delayed import price pass-through weakens the real income channel, while heterogeneous consumption baskets can strengthen it.
    JEL: E52 F32 F41
    Date: 2021–05
  29. By: Luca Pensieroso; Romain Restout
    Abstract: Was the Gold Standard a major determinant of the onset and protracted character of the Great Depression of the 1930s in the United States and worldwide? In this paper, we model the ‘Gold-Standard hypothesis’ in an open-economy, dynamic general equilibrium framework. We show that encompassing the international and monetary dimensions of the Great Depression is important to understand the turmoil of the 1930s, especially outside the United States. Contrary to what is often maintained in the literature, our results suggest that the vague of successive nominal exchange rate devaluations coupled with the monetary policy implemented in the United States did not act as a relief. On the contrary, they made the Depression worse.
    Keywords: Great Depression, Gold Standard, Open Macroeconomics, Dynamic General Equilibrium.
    JEL: N10 E13 N01
    Date: 2021
  30. By: Barnett, William A.; Wang, Xue; Xu, Hai-Chuan; Zhou, Wei-Xing
    Abstract: We model hierarchical cascades of failures among banks linked through an interdependent network. The interaction among banks include not only direct cross-holding, but also indirect dependency by holding mutual assets outside the banking system. Using data extracted from the European Banking Authority, we present the interdependency network composed of 48 banks and 21 asset classes. Since interbank exposures are not public, we first reconstruct the asset/liability cross-holding network using the aggregated claims. For the robustness, we employ 3 reconstruction methods, called Anan, Hała and Maxe. Then we combine the external portfolio holdings of each bank to compute the interdependency matrix. The interdependency network is much more dense than the direct cross-holding network, showing the complex latent interaction among banks. Finally, we perform macroprudential stress tests for the European banking system, using the adverse scenario in EBA stress test as the initial shock. For different reconstructed networks, we illustrate the hierarchical cascades and show that the failure hierarchies are roughly the same except for a few banks, reflecting the overlapping portfolio holding accounts for the majority of defaults. Understanding the interdependency network and the hierarchy of the cascades should help to improve policy intervention and implement rescue strategy.
    Keywords: financial network, interdependent network, contagions, stress test, macroprudential
    JEL: D85 G01 G21 G32 G33
    Date: 2021–06–22
  31. By: Sriya Anbil; Mark A. Carlson; Mary-Frances Styczynski
    Abstract: We analyze whether the Federal Reserve's Paycheck Protection Program Liquidity Facility (PPPLF) was successful in bolstering the ability of commercial banks to provide credit to small businesses under the Small Business Administration's Paycheck Protection Program (PPP). Using an instrumental variables approach, we find a causal effect of the facility boosting PPP lending. On average, commercial banks that used the PPPLF extended over twice as many PPP loans, relative to their total assets, as banks that did not use the PPPLF. Our instrument is a measure of banks' familiarity with the operation of the Federal Reserve’s discount window; this measure is strongly related to both the propensity to sign up for and to utilize the PPPLF. Further, using a similar instrumental variables approach, we find evidence that the availability of the facility as a backstop source of funds may also have supported bank PPP lending, especially for larger banks.
    Keywords: COVID-19; PPP; PPPLF; Federal Reserve; Central bank lending
    JEL: E58 G21 H81
    Date: 2021–05–05
  32. By: Sebastian Infante; Zack Saravay
    Abstract: We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.
    Keywords: Re-use; Repo; Treasury; Collateral; Rehypothecation
    JEL: E41 E51 E58 E63 G12 G24
    Date: 2020–12–18
  33. By: Ferrari, Massimo; Pagliari, Maria Sole
    Abstract: In this paper we explore the cross-country implications of climate-related mitigation policies. Specifically, we set up a two-country, two-sector (brown vs green) DSGE model with negative production externalities stemming from carbon-dioxide emissions. We estimate the model using US and euro area data and we characterize welfare-enhancing equilibria under alternative containment policies. Three main policy implications emerge: i) fiscal policy should focus on reducing emissions by levying taxes on polluting production activities; ii) monetary policy should look through environmental objectives while standing ready to support the economy when the costs of the environmental transition materialize; iii) international cooperation is crucial to obtain a Pareto improvement under the proposed policies. We finally find that the objective of reducing emissions by 50%, which is compatible with the Paris agreement's goal of limiting global warming to below 2 degrees Celsius with respect to pre-industrial levels, would not be attainable in absence of international cooperation even with the support of monetary policy. JEL Classification: F42, E50, E60, F30
    Keywords: climate modelling, DSGE model, open-economy macroeconomics, optimal policies
    Date: 2021–06
  34. By: Beni Egressy; Roger Wattenhofer
    Abstract: We consider networks of banks with assets and liabilities. Some banks may be insolvent, and a central bank can decide which insolvent banks, if any, to bail out. We view bailouts as an optimization problem where the central bank has given resources at its disposal and an objective it wants to maximize. We show that under various assumptions and for various natural objectives this optimization problem is NP-hard, and in some cases even hard to approximate. Furthermore, we also show that given a fixed central bank bailout objective, banks in the network can make new debt contracts to increase their own market value in the event of a bailout (at the expense of the central bank).
    Date: 2021–06
  35. By: Chad Fulton; Kirstin Hubrich
    Abstract: We perform a real-time forecasting exercise for US inflation, investigating whether and how additional information--additional macroeconomic variables, expert judgment, or forecast combination--can improve forecast accuracy and robustness. In our analysis we consider the pre-pandemic period including the Global Financial Crisis and the following expansion--the longest on record--featuring unemployment that fell to a rate not seen for nearly sixty years. Distinguishing features of our study include the use of published Federal Reserve Board staff forecasts contained in Tealbooks and a focus on forecasting performance before, during, and after the Global Financial Crisis, with relevance also for the current crisis and beyond. We find that while simple models remain hard to beat, the additional information that we consider can improve forecasts, especially in the post-crisis period. Our results show that (1) forecast combination approaches improve forecast accuracy over simpler models and robustify against bad forecasts, a particularly relevant feature in the current environment; (2) aggregating forecasts of inflation components can improve performance compared to forecasting the aggregate directly; (3) judgmental forecasts, which likely incorporate larger and more timely datasets, provide improved forecasts at short horizons.
    Keywords: Inflation; Survey forecasts; Forecast combination
    JEL: C53 E37 E30
    Date: 2021–03–04
  36. By: Barnett, William A.; Park, Hyun; Park, Sohee
    Abstract: The Barnett critique states that there is an internal inconsistency between the theory that is implied by simple sum monetary aggregation (perfect substitutability among components) and the economic theory that produces the models within which those aggregates are used. That inconsistency causes the appearance of unstable demand and supply for money. The incorrect inference of unstable money demand has caused serious harm to the field of monetary economics. The appearance of instability of the demand for money function disappears, if the relevant neoclassical microeconomic aggregation and index number theories are used to produce the monetary aggregates, which then would nest properly within the money demand functions. In fact, studies of the demand for money function using competently produced monetary aggregates and state-of-the-art demand system modeling methodology have found the demand for money function to be more stable and more easily modeled than the demand for most other consumer goods. See, e.g., Barnett and Serletis (2000, chapters 2, 7, 9, 16, 17, 18, 24), Barnett and Chauvet (2011, chapters 1, 4, 7), and Barnett (2012, pp. 92-110).
    Keywords: Divisia monetary aggregates; demand for money; Barnett critique; index number theory; aggregation theory.
    JEL: E4 E41 E5 E51
    Date: 2021–06–22
  37. By: Alyssa G. Anderson; Wenxin Du; Bernd Schlusche
    Abstract: We show that the role of unsecured, short-term wholesale funding for global banks has changed significantly in the post-financial-crisis regulatory environment. Global banks mainly use such funding to finance liquid, near risk-free arbitrage positions---in particular, the interest on excess reserves arbitrage and the covered interest rate parity arbitrage. In this environment, we examine the response of global banks to a large negative wholesale funding shock as a result of the U.S. money market mutual fund reform implemented in 2016. In contrast to past episodes of wholesale funding dry-ups, we find that the primary response of global banks to the reform was a cutback in arbitrage positions that relied on unsecured funding, rather than a reduction in loan provision.
    Keywords: Money market mutual funds; Wholesale funding; Arbitrage
    JEL: G20 F30 E40
    Date: 2021–05–14
  38. By: Konstantin Makrelov; Neryvia Pillay; Bojosi Morule
    Abstract: South Africa’s fiscal balances have deteriorated significantly over the last decade, while the economy has been recording disappointing economic growth rates even prior to the COVID-19 crisis. In this paper, we estimate a series of equations using the Arellano and Bond (1991) estimator to test how sovereign risk premia affect capital buffers, while controlling for variables identified in the literature, such as size of banks, the economic cycle, competition and equity prices. Unlike other studies, we use actual capital buffers provided by the South African Prudential Authority. We show that these are substantively different to the proxy buffers calculated using the common approach in the literature, indicating that results based on proxy measures should be interpreted with caution. Our overall results show a positive relationship between the sovereign risk premium and capital buffers, and the results are robust across different specifications. This suggests that banks are accumulating capital to mitigate against fiscal and other domestic policy risks, and the related financial stability issues. It is likely that this is contributing to higher lending rates.
    Keywords: fiscal policy, capital buffers, Financial Regulation, sovereign-bank nexus, South Africa
    JEL: C23 E62 H32 G28
    Date: 2021–06
  39. By: Bo Becker; Efraim Benmelech
    Abstract: Corporate bond markets proved remarkably resilient against a sharp contraction caused by the 2020 Covid-19 pandemic. We document three important findings: (1) bond issuance increased immediately when the contraction hit, whereas, in contrast, syndicated loan issuance was low; (2) Federal Reserve interventions increased bond issuance, while loan issuance also increased, but to a lesser degree; and (3) bond issuance was concentrated in the investment-grade segment for large and profitable issuers. We compare these results to previous crises and recessions and document similar patterns. We conclude that the U.S. bond market is an important and resilient source of funding for corporations.
    JEL: E43 E44 E51 G01 G21 G23
    Date: 2021–05

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