|
on Central Banking |
| By: | Florian B\¨oser (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland); Hans Gersbach (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | Bank leverage constraints can emerge from regulatory capital requirements as well as from central bank collateral requirements in reserve lending facilities. While these two channels are usually examined separately, we are able to compare them with the help of a bank money creation model in which central bank reserves have to be acquired to settle interbank liabilities. In particular, we show that with regard to bank monitoring, monetary policy via collateral requirements leads to a unique collateral leverage channel, which cannot be replicated by standard capital requirements. Through this channel, banks can expand loan supply and deposit issuance when they face liquidity constraints, by raising the collateral value of their loans with tighter monitoring of firms. The collateral leverage channel can improve welfare beyond standard bank capital regulation. Our results may inform current policy debates, such as the design of central bank collateral frameworks or the question whether monetary policy remains effective in times with large central bank reserves. |
| Keywords: | leverage, banks, monitoring, bank regulation, monetary policy |
| JEL: | E42 E52 E58 G21 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:21-358&r= |
| By: | Adriana Grasso (Bank of Italy); Guido Traficante (European University of Rome) |
| Abstract: | This paper studies optimal robust monetary policy when the central bank imperfectly observes potential output and has Knightian uncertainty about the intertemporal elasticity of substitution and the slope of the Phillips curve. The literature on optimal robust monetary policy has focused on either imperfect observability of some variables or on parameter uncertainty. We characterize robust monetary policy analytically under the two types of uncertainty and show that in general they call for a more aggressive reaction of monetary policy compared with the certainty case. |
| Keywords: | potential output, parameter uncertainty, optimal monetary policy, Taylor rule |
| JEL: | E32 E52 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1339_21&r= |
| By: | Jelena Zivanovic |
| Abstract: | This paper analyzes the design of simple macroprudential rules for bank and non-bank credit markets in a medium-scale dynamic stochastic general equilibrium model. In the model, mutual funds support corporate bond issuance by rms with access to capital markets; a banking sector supplies loans to the remaining producers. This model is used to study the optimal design of monetary and macroprudential rules and to address whether financial stability in the banking and bond markets is welfare improving. First, in response to aggregate productivity and financial shocks, the welfare-maximizing monetary policy rule implies near price stability, while the optimal macroprudential policy rule stabilizes bank credit and bond volumes. Second, there is no trade-off between price and financial stability. Third, if the central bank cannot correctly identify a sector-specific financial shock, responding optimally as if the shock affects both sectors, then welfare outcomes are negligibly worse than those under the optimal policy. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates; Credit risk management; Financial stability; Financial system regulation and policies |
| JEL: | E30 E44 E50 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-31&r= |
| By: | Harrison, Richard (Bank of England) |
| Abstract: | This paper studies optimal time‑consistent monetary policy in a simple New Keynesian model with long‑term nominal government debt. Fiscal policy is ‘active’, so that stabilisation of the government debt stock is a binding constraint on monetary policy. Away from the lower bound on the monetary policy rate, optimal monetary policy cannot fully offset the effects of shocks to the natural rate of interest, reducing welfare. At the lower bound, recessionary shocks increase the real value of government debt, generating the anticipation of higher future inflation to stabilise real debt. Higher inflation expectations reduce real interest rates, mitigating the effects of recessionary shocks. If debt duration is long enough, improved performance at the lower bound may outweigh higher welfare losses in normal times, compared with the case in which fiscal policy is ‘passive’. |
| Keywords: | Optimal monetary policy; fiscal policy; effective lower bound; government debt |
| JEL: | E52 E58 E62 |
| Date: | 2021–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0928&r= |
| By: | Christophe Blot (Sciences Po – OFCE & Université Paris Ouest Nanterre - EconomiX); Fabien Labondance (CRESE EA3190, Univ. Bourgogne Franche-Comté, F-25000 Besançon, France) |
| Abstract: | We investigate whether monetary policy influences the retail interest rates in the Euro Area when the policy rate reaches the effective lower bound. We estimate a panel-Error Correction Model that accounts for potential heterogeneities in the transmission of monetary policy. The analysis disentangles alternative non-standard measures implemented by the ECB. We find that unconventional measures have influenced banking interest rates beyond the pass-through of the current and expected policy rate. These effects are driven by liquidity provisions in core countries and by covered bond purchase programmes in peripheral ones. |
| Keywords: | Unconventional measures, retail interest rate, Heterogeneous panel |
| JEL: | E43 E52 E58 G21 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:crb:wpaper:2021-03&r= |
| By: | Marek Dabrowski |
| Abstract: | The economic characteristics of the COVID-19 crisis differ from those of previous crises. It is a combination of demand- and supply-side constraints which led to the formation of a monetary overhang that will be unfrozen once the pandemic ends. Monetary policy must take this effect into consideration, along with other pro-inflationary factors, in the post-pandemic era. It must also think in advance about how to avoid a policy trap coming from fiscal dominance. This paper is organized as follows: Chapter 2 deals with the economic characteristics of the COVID-19 pandemic and its impact on the effectiveness of the monetary policy response measures undertaken. In Chapter 3, we analyse the monetary policy decisions of the ECB (and other major CBs for comparison) and their effectiveness in achieving the declared policy goals in the short term. Chapter 4 is devoted to an analysis of the policy challenges which may be faced by the ECB and other major CBs once the pandemic emergency comes to its end. Chapter 5 contains a summary and the conclusions of our analysis. |
| Keywords: | COVID-19 pandemic, monetary policy, forced saving, monetary overhang, quantitative easing, inflation, fiscal dominance |
| JEL: | E31 E41 E51 E52 E58 E62 E63 F62 H62 H63 |
| Date: | 2021–04–09 |
| URL: | http://d.repec.org/n?u=RePEc:sec:report:0504&r= |
| By: | Florian B\¨oser (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland) |
| Abstract: | We study how the subjective beliefs about loan repayment on the side of liquidity-constrained banks affect the central bank’s choice of collateral standards in its lending facilities. Optimism on the side of banks, entailing a higher collateral value of bank loans, can lead to excessive lending and bank default. Pessimism, though, can entail insufficient lending and productivity losses. With an appropriate haircut on collateral, the central bank can perfectly neutralize the banks’ belief distortions and always induce the socially optimal allocation. Under uncertainty about beliefs, the central bank’s incentives to set looser collateral standards increase. This reduces the risk of deficient bank lending if sufficiently pessimistic beliefs realize. In extreme cases, monetary policy aims at mitigating productivity losses only, instead of also avoiding bank default. |
| Keywords: | beliefs, collateral, liquidity, central bank, banks |
| JEL: | D83 D84 E51 E52 E58 G21 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:eth:wpswif:21-357&r= |
| By: | Shaghil Ahmed; Ozge Akinci; Albert Queraltó |
| Abstract: | We explore how the sources of shocks driving interest rates, country vulnerabilities, and central bank communications affect the spillovers of U.S. monetary policy changes to emerging market economies (EMEs). We utilize a two-country New Keynesian model with financial frictions and partly dollarized balance sheets, as well as poorly anchored inflation expectations reflecting imperfect monetary policy credibility in vulnerable EMEs. Contrary to other recent studies that also emphasize the sources of shocks, our approach allows the quantification of effects on real macroeconomic variables as well, in addition to financial spillovers. Moreover, we model the most relevant vulnerabilities structurally. We show that higher U.S. interest rates arising from stronger U.S. aggregate demand generate modestly positive spillovers to economic activity in EMEs with stronger fundamentals but can be adverse for vulnerable EMEs. In contrast, U.S. monetary tightening’s driven by a more-hawkish policy stance cause a substantial slowdown in activity in all EMEs. Our model also captures the challenging policy tradeoffs that EME central banks face, and we show that these tradeoffs can potentially be improved by clearer communications from them. |
| Keywords: | financial frictions; U.S. monetary policy spillovers; adaptive expectations |
| JEL: | E32 E44 F41 |
| Date: | 2021–06–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:92825&r= |
| By: | King Yoong Lim; Chunping Liu; Shuonan Zhang |
| Abstract: | We develop a DSGE model with cash and digital currency to study the financial stability properties of two potential central banking policies in China. Specifically, a Loan Prime Rate (LPR)-setting policy function and central bank digital currency (CBDC) implementation are examined. Distinguish between a benchmark model and a "Post-CBDC world", we Bayesian-estimate the model. Post-CBDC implementation, we find macroeconomic variables to display greater procyclicality to real shocks. However, we also find a potential LPR-setting policy to exhibit an improved stabilization property in the post-CBDC world. We uncover an optimal design of LPR policy function, which targets more specifically housing and capital asset markets, as well as the growth in CBDC. This suggests a potential policy complementarity between these two seemingly unrelated central banking policies in the financial stability agenda of China going forward. |
| Keywords: | China, Digital Currency, Loan Prime Rate, Monetary Policy, Bayesian DSGE models. |
| JEL: | E4 E52 E58 C11 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbs:wpaper:2021/02&r= |
| By: | Xu Zhang |
| Abstract: | Combining the high-frequency multidimensional approach of Gürkaynak et al. (2005) with Greenbook measures of the Federal Reserve’s information set as in Romer and Romer (2004), I propose a new method of constructing a monetary policy shock that occurs on Federal Reserve announcement days. I provide substantial evidence that the new monetary policy shock is consistent with the predictions of workhorse macroeconomic models for structural monetary policy shocks. The new shock has large and highly statistically significant instantaneous effects on the Treasury yield curve. Using the shock as an external instrument in a VAR analysis, I find that contractionary monetary policy has modest downward effects on both output and inflation over business-cycle frequencies. |
| Keywords: | Business fluctuations and cycles; Central bank research; Econometric and statistical methods; Interest rates; Monetary policy |
| JEL: | E5 G0 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-29&r= |
| By: | Flores Zendejas, Juan; Nodari, Gianandrea |
| Abstract: | This chapter analyzes the role of central banks during the first years of the Great Depression. The literature has focused on central banks' loss of autonomy and on the implementation of innovative, countercyclical monetary policies which fostered economic recovery but also led to higher rates of inflation and exchange rate volatility. However, we show that these kinds of policies had been foreseen by foreign advisors before and during the crisis. Policymakers had been reluctant to implement them due to the fear of a loss of credibility for the gold standard regime. Furthermore, we show that in most cases this shift was short-lived and central banks could avert, to a large extent, the problem of fiscal dominance. Central banks became effective actors, channeling credit to the real economy and also supporting the emergence of state institutions that would promote the development of local industry. |
| Keywords: | Central banking, Great Depression, Gold standard, Money doctors, Financial crises |
| JEL: | N0 N26 N16 F38 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:gnv:wpaper:unige:152742&r= |
| By: | Krupenin, Kirill (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Wu, Kyle (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Liu, Katherine (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Bacon, Matthew (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); McElhennon, Gavin (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise); Qiao, Elizabeth (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise) |
| Abstract: | As a response to the economic crisis caused by the COVID-19 pandemic, the Federal Reserve implemented one of the most expansionary monetary policies in its history, renewing asset purchases under quantitative easing and supporting the economy using a wide range of other tools. In this paper, the authors provide an overview of the changes in the balance sheet of the Federal Reserve from February 26th, 2020 to April 7th, 2021 as well as an overview of the main actions taken by the Federal Reserve over the same period. The authors then analyze the impact of the activity of the Federal Reserve on the economy from the monetary perspective. In particular, the authors examine the expansion of the balance sheet of U.S. commercial banks, analyze credit counterparts of broad money, and conduct the golden growth rate analysis for broad money supply growth. The authors conclude the paper by analyzing changes in inflation expectations and Treasury yields. |
| Keywords: | Money supply; credit; money multipliers; monetary policy |
| JEL: | E51 E52 |
| Date: | 2021–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:ris:jhisae:0187&r= |
| By: | Rémi Odry; Roman Mestre |
| Abstract: | In this paper, we investigate the role of the monetary policy adopted by the European Central Bank (ECB) in business cycle synchronization in Europe between 2000 and 2018. To this aim, we employ wavelets to compute the pairwise business cycle correlations (BCC) at different frequencies and use Generalized Method of Moments (GMM) dynamic estimators in panel to explain their variations. Our results show that monetary policy has a long-term impact on the synchronization of business cycles in Europe. More specifically, we find that the adopted unconventional monetary policies impact positively the synchronization. Finally, we show that fiscal policies can be used as tools to fix country-specific movements of business cycles. |
| Keywords: | Business cycle synchronization, Monetary policy, EMU, Europe |
| JEL: | E52 E58 E37 C01 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-19&r= |
| By: | Stanisławska, Ewa; Paloviita, Maritta |
| Abstract: | Using the ECB Consumer Expectations Survey, this paper investigates how consumers revise medium-term inflation expectations. We provide robust evidence of their adjustment to the current economic developments. In particular, consumers adjust medium-term inflation views in response to changes in short-term inflation expectations and, to a lesser degree, to changes in perceptions of current inflation. We find that the strong adverse Covid-19 pandemic shock contributed to an increase in consumer inflation expectations. We show that consumers who declare high trust in the ECB adjust their medium-term inflation expectations to a lesser degree than consumers with low trust. Our results increase understanding of expectations formation, which is an important issue for medium-term oriented monetary policy. |
| JEL: | D12 D84 E31 E58 |
| Date: | 2021–06–29 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2021_010&r= |
| By: | Luca Benati |
| Abstract: | Building upon the insight that M1 velocity is the permanent component of nominal interest rates–see Benati (2020)–I propose a novel, and straightforward approach to estimating the natural rate of interest, which is conceptually related to Cochrane’s (1994?) proposal to estimate the permanent component of GNP by exploiting the informational content of consumption. Under monetary regimes (such as inflation-targeting) making inflation I(0), the easiest way to implement the proposed approach is to (?) project the monetary policy rate onto M1 velocity–thus obtaining an estimate of the nominal natural rate–and then (??) subtract from this inflation’s sample average (or target), thus obtaining the real natural rate. More complex implementations based on structural VARs produce very similar estimates. Compared to existing approaches, the one proposed herein presents two key advantages: (1) under regimes making inflation I(0), M1 velocity is equal, up to a linear transformation, to the real natural rate, so that the natural rate is, in fact, observed; and (2) based on a high-frequency estimate of nominal GDP, the natural rate can be computed at the monthy or even weekly frequency. In the U.S., Euro area, and Canada the natural rate dropped sharply in the months following the collapse of Lehman Brothers. Likewise, the 1929 stock market crash was followed in the U.S. by a dramatic decrease in the natural rate. |
| Keywords: | Natural rate of interest; money velocity; structural VARs; unit roots; cointegration. |
| Date: | 2021–05 |
| URL: | http://d.repec.org/n?u=RePEc:ube:dpvwib:dp2108&r= |
| By: | Guido Bulligan (Bank of Italy); Francesco Corsello (Bank of Italy); Stefano Neri (Bank of Italy); Alex Tagliabracci (Bank of Italy) |
| Abstract: | This paper provides evidence of de-anchoring of long-term inflation expectations in the euro area based on both time series and panel methods and data from the ECB Survey of Professional Forecasters. Long-term inflation expectations recorded two sharp and permanent declines: the first after the 2013 disinflation, the second in early 2019. Long-term inflation expectations also started reacting to short-term developments in inflation after the 2013 disinflation. Long-term growth expectations have declined continuously since the early 2000s. Looking forward, the increased likelihood of a low growth and low inflation environment may reduce the monetary policy space. The positive correlation between long-term real GDP growth and inflation expectations suggests that forecasters view future macroeconomic developments as driven mainly by demand-side shocks. Under these circumstances, the risk of a further de-anchoring of long-term inflation expectations remains high. |
| Keywords: | survey data, panel data, professional forecasters, inflation expectations, monetary policy |
| JEL: | E31 E52 E58 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_624_21&r= |
| By: | Toni Ahnert; David Martinez-Miera |
| Abstract: | We model the opacity and deposit rate choices of banks that imperfectly compete for uninsured deposits, are subject to runs, and face a threat of entry. We show how shocks that increase bank competition or bank transparency increase deposit rates, costly withdrawals, and thus bank fragility. Therefore, perfect competition is not socially optimal. We also propose a theory of bank opacity. The cost of opacity is more withdrawals from a solvent bank, lowering bank profits. The benefit of opacity is to deter the entry of a competitor, increasing future bank profits. The excessive opacity of incumbent banks rationalizes transparency regulation. |
| Keywords: | Financial institutions; Financial markets; Financial stability; Financial system regulation and policies; Wholesale funding |
| JEL: | G21 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:21-30&r= |
| By: | Giuseppe Ferrero (Bank of Italy); Massimiliano Pisani (Bank of Italy); Martino Tasso (Bank of Italy) |
| Abstract: | We review the debate on the monetary and fiscal policy measures that were adopted in response to the pandemic shock in advanced economies, as well as others that could be taken in the near future, once the health emergency is over. The pandemic is an exceptional global health shock, which has negatively affected the income, liquidity, and financial conditions of households and firms worldwide. Policy responses adopted in advanced economies in 2020 – based on extraordinary large-scale, swift, targeted monetary and fiscal measures – were appropriate to sustain liquidity, income, and aggregate demand and, thus, helped to avert a devastating financial crisis. Once the health emergency is over, the legacies of the shock will be a recovery of uncertain strength and timing, a low interest rate environment, and high corporate and public debts. Support measures should be removed with caution. A cross-country coordinated policy mix based on (i) accommodative monetary policies (if consistent with central bank objectives), (ii) public investments and (iii) a gradual rebalancing of government accounts, could be effective in sustaining a strong global recovery and reduce private and public debt. |
| Keywords: | COVID 19, secular stagnation, monetary policy, fiscal policy |
| JEL: | E52 E58 E62 F01 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_623_21&r= |
| By: | Léonore Raguideau-Hannotin |
| Abstract: | This paper investigates the monetary autonomy of Central Eastern and South Eastern European countries with the Euro area. These countries are European Union Member States that have not adopted yet the Euro single currency. Despite high degree of convergence as measured by Maastricht criteria, four of them do no plan to enter the Euro area soon. We therefore assess monetary autonomy of these countries over the long run through the use of a multivariate cointegration methodology with structural breaks (Johansen et al., 2000). This methodology allows us to capture the multidimensional aspects of monetary autonomy in the context of nominal convergence in the Economic and Monetary Union, by including both domestic and Euro area variables into the system (policy rates, infation rates, exchange rate). It also enables us to exploit all information contained in the macroeconomic series of these countries, for which broken economic history translates into non-stationary time series with breaks. Our empirical results suggest that modelling structural breaks changes the number and/or nature of cointegrating relations between our variables compared to the standard error correction model without breaks. With this modelling, we find monetary policy spillover from the Euro area to Bulgaria, the Czech Republic, Hungary and Romania. The inclusion of Euro area inflation to our baseline model enriches the cointegrating relations for the Czech Republic and Bulgaria. Poland is found to be the most monetary-independent country of ourstudy across the various models estimated. On the other hand, Romania's monetary interdependence with Euro area is better modelled without taking into account any structural break. |
| Keywords: | Central Eastern and South Eastern European countries, Economic and Monetary Union, European Union, nominal convergence, monetary autonomy, structural breaks, cointegration, integration, CESEE, EU, EMU |
| JEL: | F31 F36 F42 P33 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2021-20&r= |
| By: | Cahen-Fourot, Louison |
| Abstract: | In the perspective of a social-ecological transformation, this article sets the discussion on the future of central banking back in the context of ecological limits to growth. It first surveys the literature on proposals to introduce sustainability in central banking. It then draws from the conceptualization of money as a social relation to discuss central banks’ mandates, independence, governance and instruments. This article therefore adopts a normative stance. Central banks should be politically accountable with a renewed governance and committees composition. In line with the endogenous nature of money, their mandate needs not to include price stability and should focus on fostering full employment, social cohesion and relevant economic development within the ecological limits of the planet. Three policy instruments are then discussed to shift the nature of central banks’ operations responsive to prescriptive: differentiated target interest rates, credit control and qualitative tightening in assets purchasing programs. |
| Keywords: | monetary policy; central banking; sustainability; social-ecological transformation; post-growth; endogenous money |
| Date: | 2021–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:wiw:wus045:8204&r= |
| By: | Marta Areosa; Waldyr Areosa; Vinicius Carrasco |
| Abstract: | We use a sticky-dispersed information model to analyze how price setting changes when the interest rate is understood as a public signal that informs the view of the monetary authority on the current state of the economy. Firms use information to infer one another´s prices, as they face strategic complementarity on pricing decision. We build a counterfactual to isolate the informational effect of the interest rate and study its influence on inflation dynamics. We also obtain the optimal parameters of the policy instrument (regarding three different efficiency criteria), considering that the central bank knows that firms take information from its actions. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:553&r= |
| By: | Simmons, Richard; Dini, Paolo; Culkin, Nigel; Littera, Giuseppe |
| Abstract: | ‘Financial crisis’ is sometimes regarded as synonymous with ‘economic crisis’, but this is an oversimplification and risks missing the feedback loops between the financial and real economies. In this paper, the role of money is revisited in the context of distinguishing the real economy from the financial economy. A theoretical framework is developed to explain how endogenous (bank credit) and central bank exogenous (quantitative easing, QE) money creation feed into the real and financial economies. It looks at how the velocity of monetary circulation varies between the two economies and across asset types within the financial economy. Monetary transmission mechanisms are set into a framework that helps explain how QE stimulus risks combining asset price bubbles with poor growth in the real economy. The real economy transmission mechanism of ‘helicopter money’ is given context, enabling an assessment of the efficacy of both the QE and helicopter money policy routes. Finally, we present a new type of monetary transmission, ‘Smart Helicopter Money’, to deliver monetary stimulus to innovators, SMEs and high-growth firms via both complementary currencies and a modified form of QE in order to achieve proportionally greater impact on the real economy. |
| Keywords: | monetary policy; financial crisis; helicopter money; real economy; financial economy; quantitative easing; complementary currency; velocity of circulation; innovation; economic growth; Development Economics Research Group |
| JEL: | F3 G3 J1 |
| Date: | 2021–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:110904&r= |
| By: | Tobias Adrian; Michael Junho Lee; Tommaso Mancini-Griffoli; Antoine Martin |
| Abstract: | Recent developments in payments technology raise important questions about the role of central banks either in providing a digital currency themselves or in supporting the development of digital currencies by private actors, as some authors of this post have discussed in a recent IMF blog post. In this post, we consider two ways a central bank could choose to become involved with digital currencies and discuss some implications of these potential choices. |
| Keywords: | central bank digital currency; stablecoin |
| JEL: | E58 E42 |
| Date: | 2021–06–23 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednls:92802&r= |
| By: | Meenagh, David (Cardiff Business School); Minford, Patrick (Cardiff Business School); Zhao, Zhiqi (Cardiff Business School) |
| Abstract: | This paper studies the economy of Hong Kong through the lens of a small open economy DSGE model with a currency board exchange rate commitment. It assumes flexible prices and a banking system that provides credit to entrepreneurial household-firms; the money supply is fully backed by reserves under the currency board. We estimate and evaluate the model by Indirect Inference over the sample period of 1994Q1-2018Q3; we find that it matches the data behaviour, as represented by a VAR. We examined the economy’s volatility using bootstrapping of the model innovations, under both the estimated currency board model and a standard alternative regime with floating exchange rate and a Taylor rule; we found that Hong Kong welfare is higher in the currency board, which substantially reduces output volatility. |
| Keywords: | Currency Board, Monetary Policy, Hong Kong, Indirect Inference |
| JEL: | E52 F41 G5 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2021/13&r= |
| By: | Marco Bottone (Bank of Italy); Alex Tagliabracci (Bank of Italy); Giordano Zevi (Bank of Italy) |
| Abstract: | In this paper we use a unique dataset to study how awareness of the formulation of the ECB’s inflation aim, defined as "below, but close to, 2%", shapes the inflation expectations of a representative set of Italian firms. In particular, we show that in the period under consideration such awareness raises firms’ inflation expectations by about 25 basis points at all time horizons with respect to the control group. In the recent period of low inflation, this finding implies that being informed about the ECB’s aim stabilizes firms’ inflation expectations at higher levels, closer to its target. However, this occurs at the expense of a lower correspondence of such expectations with ex-post realized inflation, especially on short-term horizons. When explicitly asked, the majority of firms indicates the ECB inflation aim as being between 1.0% and 1.5%, while just a few of them see it as between 1.7% and 1.9%. This result might be related to the difficulty of interpreting the “below, but close to†formulation, and suggests that a precise definition of the ECB’s inflation aim could be easier to communicate and more likely to be properly understood. |
| Keywords: | ECB’s inflation aim, firms’ inflation expectations, monetary policy, information treatments, survey data |
| JEL: | D22 E31 E52 E58 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_621_21&r= |
| By: | Flores Zendejas, Juan; Norbert, Gaillard |
| Abstract: | This chapter provides a historical overview of the efforts for international cooperation in pursuit of financial stability. We argue that there are two fundamental threats likely to undermine the actions of an international lender of last resort (ILOLR): debtor moral hazard and creditor moral hazard. During the Pax Britannica years, the Bank of England and the Bank of France were de facto ILOLR and managed to contain both types of moral hazard. In the interwar years, the League of Nations developed new forms of last-resort loans but failed to prevent the Great Depression because of the lack of cooperation between top capital-exporting countries. Since its establishment in 1944, the International Monetary Fund (IMF) has granted various credit facilities conditioned on the recipient countries accepting macroeconomic stabilization. The financial globalization process that started in the 1980s has exacerbated creditor moral hazard. This issue, largely overlooked by the IMF, should be a major source of concern for policy makers. |
| Keywords: | Moral hazard, Lender of last resort, Financial crises |
| JEL: | B26 F33 F34 F53 N20 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:gnv:wpaper:unige:152743&r= |
| By: | Havlik, Annika; Heinemann, Friedrich; Helbig, Samuel; Nover, Justus |
| Abstract: | We use event study regressions to compare the impact of EU monetary versus fiscal policy announcements on government bond spreads of ten euro member countries. Our motivation is to evaluate which of the two players - the ECB or the EU fiscal level - has been more crucial for the stabilization of euro sovereign bond markets in the crisis environment of the pandemic. This question is of substantial relevance to assess potential risks for the effective independence of the ECB in the future. Our key result is that the pandemic monetary emergency measures through the PEPP have been highly effective, whereas fiscal rescue announcements had much less impact. We document a smaller and statistically significant spread-reducing effect only for the announcement of the 'Next Generation EU' program. In contrast, a temporary relaxation of European fiscal rules through the activation of the emergency-escape clause under the Stability and Growth Pact is associated with rising spreads. Our results have an unpleasant implication for the debate on a looming fiscal dominance of the ECB in the presence of rising public debt levels as so far, the stabilization of sovereign bond markets appears to hinge largely on the Eurosystem's role as a massive buyer of high-debt countries' sovereign bonds. |
| Keywords: | Sovereign spreads,monetary policy,fiscal policy,fiscal dominance,event analysis |
| JEL: | E63 H12 H63 H81 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:zewdip:21050&r= |
| By: | José Valentim Machado Vicente; Jaqueline Terra Moura Marins; Wagner Piazza Gaglianone |
| Abstract: | The purpose of this paper is to measure the impact of interest rate decisions of the Monetary Policy Committee (MPC) on foreign exchange (FX) rate in Brazil. In this sense, two new daily measures of interest rate surprises are proposed using market and survey data, respectively. Overall, the results indicate a significant effect of MPC’s decisions on FX returns. In particular, the surprise variable, measured with market data, is statistically significant to explain FX returns and has a negative sign, as expected (a positive surprise implies an appreciation of the domestic currency). Moreover, this effect is symmetric, in terms of positive or negative surprises, and does not depend on the level of Selic interest rate. Nonetheless, the surprise variable seems not to be significant to explain FX returns in recent years, under a single-digit interest rate regime. Robustness exercises –using GARCH models to account for the second moment of FX rate returns or including FX market official intervention time series as additional control variables – corroborate the previous findings. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bcb:wpaper:552&r= |
| By: | Fumitaka Nakamura (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: fumitaka.nakamura@boj.or.jp)); Nao Sudo (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Head of Financial System Research Division, Financial System and Bank Examination Department), Bank of Japan (E-mail: nao.sudou@boj.or.jp)); Yu Sugisaki (Economist, Institute for Monetary and Economic Studies (currently, Research and Statistics Department), Bank of Japan (E-mail: yuu.sugisaki@boj.or.jp)) |
| Abstract: | We study how monetary policy affects the labor status of people of different ages and genders using Japanese data from the late 1990s to the late 2010s, with monetary policy shocks identified using high frequency market data. We first show that expansionary monetary policy shocks reduce the unemployment rate of all ages in both genders by almost the same amount. We then show that the impacts of these shocks are starkly different across ages in terms of changes in the labor force and number of employed. Expansionary monetary policy shocks cause the non- labor force of young and elderly people to join the labor force, leading to an increase in the number of employed of these age groups, leaving the middle-aged less affected. Our findings are consistent with the view that changes in the labor force participation rate play a role in determining the degree of labor market slack for specific ages. |
| Keywords: | Monetary policy, Age structure, Labor market slack, Wage Phillips curve, High frequency identification |
| JEL: | E24 E32 E52 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:ime:imedps:21-e-06&r= |
| By: | Emmanuel Joel Aikins Abakah; Guglielmo Maria Caporale; Luis A. Gil-Alana |
| Abstract: | This paper analyses the effects of containment measures and monetary and fiscal responses on US financial markets during the Covid-19 pandemic. More specifically, it applies fractional integration methods to analyse their impact on the daily S&P500, the US Treasury Bond Index (USTB), the S&P Green Bond Index (GREEN) and the Dow Jones (DJ) Islamic World Market Index (ISLAM) over the period 1/01/2020-10/03/2021. The results suggest that all four indices are highly persistent and exhibit orders of integration close to 1. A small degree of mean reversion is observed only for the S&P500 under the assumption of white noise errors and USTB with autocorrelated errors; therefore, market efficiency appears to hold in most cases. The mortality rate, surprisingly, seems to have affected stock and bond prices positively with autocorrelated errors. As for the policy responses, both the containment and fiscal measures had a rather limited impact, whilst there were significant announcement effects which lifted markets, especially in the case of monetary announcements. There is also evidence of a significant, positive response to changes in the effective Federal funds rate, which suggests that the financial industry, mainly benefiting from interest rises, plays a dominant role. |
| Keywords: | Covid-19, policy responses and announcements, containment measures, US financial markets, stocks, bonds, Islamic stocks, green bonds |
| JEL: | C22 C32 G15 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_9163&r= |
| By: | Jongrim Ha (World Bank, Prospects Group); M. Ayhan Kose (World Bank, Prospects Group; Brookings Institution; CEPR; CAMA); Franziska Ohnsorge (World Bank, Prospects Group; CEPR; CAMA) |
| Abstract: | We analyze the evolution and drivers of inflation during the pandemic and the likely trajectory of inflation in the near-term using an event study of inflation around global recessions and a factor-augmented vector auto-regression (FAVAR) model. We report three main results. First, the decline in global inflation during the 2020 global recession was the most muted and shortest-lived of any of the five global recessions over the past 50 years and the increase in inflation since May 2020 has been the fastest. Second, the decline in global inflation from January-May 2020 was four-fifths driven by the collapse in global demand and another one-fifth driven by plunging oil prices, with some offsetting inflationary pressures from supply disruptions. The subsequent surge in inflation has been mostly driven by a sharp increase in global demand. Third, both model-based forecasts and current inflation expectations point to an increase in inflation for 2021 of just over 1 percentage point. For virtually all advanced economies and one-half of inflation-targeting emerging market and developing economies (EMDEs), an increase of this magnitude would leave inflation within target ranges. If the increase is temporary and inflation expectations remain well-anchored, it may not warrant a monetary policy response. If, however, inflation expectations risk becoming unanchored, EMDE central banks may be compelled to tighten monetary policy before the recovery is fully entrenched. |
| Keywords: | Global Inflation; COVID-19; Global Recession; FAVAR; Oil Prices; Global Shocks. |
| JEL: | E31 E32 Q43 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:2108&r= |
| By: | Joshua Brault (Department of Economics, Carleton University); Hashmat Khan (Department of Economics, Carleton University); Louis Phaneuf (Department of Economics, Universite du Quebec a Montreal); Jean Gardy Victor |
| Abstract: | We estimate a multi-shock DSGE model with a Bayesian method that differentiates between states of determinacy and indeterminacy. Determinacy is statistically preferred to indeterminacy before and after 1980. Key to this finding is a Taylor rule wherein the Fed targets output growth relative to trend instead of the level of the output gap or a mix of output gap and output growth. This allows us to revisit postwar macroeconomic fluctuations without indeterminacy. Relative to the pre-1980s, we find that the post-1983 contribution of shocks to the marginal efficiency of investment to the cyclical variance of output growth fell from 50% in the pre-1980s to 20% during the Great Moderation. Greater nominal wage flexibility was a main source of decline in the volatility of output and working hours during the Great Moderation, a finding which appears consistent with the post-1980 large deunionization in the private sector. Lower inflation variability resulted mostly from the Fed’s hawkish stance against inflation and changes in preference parameters. Lower trend inflation and smaller shocks were not major factors driving the Great Moderation. |
| Keywords: | Monetary Policy; Determinacy; Bayesian Estimation; Sources of Business Cycle; Changes in Aggregate Volatility |
| JEL: | E31 E32 E37 |
| Date: | 2021–02–19 |
| URL: | http://d.repec.org/n?u=RePEc:car:carecp:21-01&r= |
| By: | Tirupam Goel; Isha Agarwal |
| Abstract: | Supervisory risk assessment tools, such as stress-tests, provide complementary information about bank-specific risk exposures. Recent empirical evidence, however, underscores the potential inaccuracies inherent in such assessments. We develop a model to investigate the regulatory implications of these inaccuracies. In the absence of such tools, the regulator sets the same requirement across banks. Risk assessment tools provide a noisy signal about banks' types, and enable bank specific capital surcharges, which can improve welfare. Yet, a noisy assessment can distort banks' ex ante incentives and lead to riskier banks. The optimal surcharge is zero when assessment accuracy is below a certain threshold, and increases with accuracy otherwise. |
| Keywords: | capital regulation; stress-tests; information asymmetry; adverse incentives; disclosure policy; Covid-19 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:953&r= |
| By: | Valerio Paolo Vacca (Banca d'Italia); Fabian Bichlmeier (Deutsche Bundesbank); Paolo Biraschi (Single Resolution Board); Natalie Boschi (Bafin); Antonio J. Bravo Alvarez (FROB Autoridad de Resolución Ejecutiva); Luciano Di Primio (Banca d'Italia); André Ebner (Deutsche Bundesbank); Silvia Hoeretzeder (Oesterreichische Nationalbank); Elisa Llorente Ballesteros (Banco de España); Claudia Miani (Single Resolution Board); Giacomo Ricci (Banca d'Italia); Raffaele Santioni (Banca d'Italia); Stefan Schellerer (Oesterreichische Nationalbank); Hanna Westman (Rahoitusvakausvirasto) |
| Abstract: | We present an analytical framework for quantifying the potential impact on the real economy stemming from a bank’s sudden liquidation, focusing on the consequences that arise when a credit institution interrupts its lending activities. In a first step, we quantify the potential credit shortfall faced by firms and households due to the sudden liquidation of a bank. In a second step, we estimate the impact of a firm’s credit shortfall on real outcomes via both a Factor-Augmented Vector Autoregression (FAVAR) model and a micro-econometric model. Appropriate reference values (benchmarks) are provided to assess the estimated outcomes. The illustrative results show that this harmonized approach is feasible across the Banking Union and it is applicable to banks of heterogeneous size and significance. Particularly in the case of the medium-sized banks, the implementation of this common analytical framework could provide useful insights to reduce the uncertainty about whether resolution is in the public interest, i.e. to what extent the failure of an institution would endanger financial stability. |
| Keywords: | bank resolution, bank insolvency, crisis management, public interest assessment |
| JEL: | E58 G01 G21 G28 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_626_21&r= |
| By: | Enrique Bátiz-Zuk; José Luis Lara Sánchez |
| Abstract: | This paper analyzes the monthly evolution of bank competition in Mexico from 2008 to 2019 using different measures. Subsequently, we analyze whether the 2014 financial reform had an effect on some of our competition measures. We use ordinary and quantile regression techniques and Markov switching models to identify changes in regimes. We find partial empirical evidence supporting the idea that the reform had a positive average effect and increased banks competition intensity during a few years. However, we also document heterogeneity as some large banks benefited from an increase in their market power. We perform several robustness tests and report that our measures lead to values that are congruent and similar to those available in the literature. The main policy lesson of our research is that regulators could benefit from the monitoring of competition evolution using a finer time frequency. |
| JEL: | D40 G21 G28 L10 L11 L50 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdm:wpaper:2021-06&r= |
| By: | Dudley Cooke (University of Exeter); Tatiana Damjanovic (Durham University Business School) |
| Abstract: | This paper studies the welfare consequences of monetary policy in a stickywage New Keynesian model with heterogenous firms and endogenous entry. Cross-sectional dispersion in price-markups and labor shares is generated by a translog demand structure and aggregate fluctuations in these variables are driven by firm entry and selection. We show that when the distribution of firm-level productivity is Pareto, selection is such that the aggregate price-markup and labor share are fixed. If firm entry is static, the divine coincidence appears, and wage stability is optimal. If firm entry is dynamic, or selection is weakened, optimal stabilization policy accounts for the size distribution of firms. We calculate the welfare loss of ignoring firm entry and selection to be 0.1 − 0.3 percent of steady state consumption. |
| Keywords: | Firm Entry, Heterogenous Firms, Optimal Monetary Policy, Translog Preferences |
| JEL: | E32 E52 L11 |
| Date: | 2021–02 |
| URL: | http://d.repec.org/n?u=RePEc:dur:durham:2021_02&r= |
| By: | Maria Ludovica Drudi (Bank of Italy); Stefano Nobili (Bank of Italy) |
| Abstract: | The paper develops an early warning system to identify banks that could face liquidity crises. To obtain a robust system for measuring banks’ liquidity vulnerabilities, we compare the predictive performance of three models – logistic LASSO, random forest and Extreme Gradient Boosting – and of their combination. Using a comprehensive dataset of liquidity crisis events between December 2014 and January 2020, our early warning models’ signals are calibrated according to the policymaker's preferences between type I and II errors. Unlike most of the literature, which focuses on default risk and typically proposes a forecast horizon ranging from 4 to 6 quarters, we analyse liquidity risk and we consider a 3-month forecast horizon. The key finding is that combining different estimation procedures improves model performance and yields accurate out-of-sample predictions. The results show that the combined models achieve an extremely low percentage of false negatives, lower than the values usually reported in the literature, while at the same time limiting the number of false positives. |
| Keywords: | banking crisis, early warning models, liquidity risk, lender of last resort, machine learning |
| JEL: | C52 C53 G21 E58 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1337_21&r= |
| By: | Maurizio Trapanese (Banca d'Italia) |
| Abstract: | This paper presents an overall analysis of the economics of non-bank financial intermediation, and argues that the financial stability concerns stemming from this sector support the need to fill the regulation gap that exists with respect to other segments. It examines the structure of markets, the economic incentives of the agents involved, and the institutional aspects characterizing this form of intermediation as compared with that performed by banks. The policy framework developed so far has been based mainly on micro-prudential tools, looking at individual institutions and activities. The focus of the regulatory actions should not be (or should not only be) the stability of individual entities. Financial regulators should pay more attention to the effects that the collective actions and activities of non-bank financial entities may have on the financial system as a whole and on the real economy. I find that the effectiveness of micro-prudential tools is strengthened if they are accompanied by a framework containing policy measures to address systemic risk. |
| Keywords: | financial crises, international regulation |
| JEL: | F53 G01 G20 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_625_21&r= |
| By: | Francesco Marchionne (Indiana University); Michele Fratianni (Kelley School of Business, Bloomington, Indiana, USA and Universita' Politecnica delle Marche, Ancona, Italy); Federico Giri (Dipartimento di Scienze Economiche e Sociali - Universita' Politecnica delle Marche, Ancona, Italy); Luca Papi (Di.S.E.S. - Universita' Politecnica delle Marche) |
| Abstract: | We examine how banking supervisors affect credit at the local level by charging fines to individual banks. Using a macro approach to capture the direct effect on the fined bank and the indirect effect on the other banks operating in the local credit market, we estimate reputational, reallocation and balance sheet effects on Italian provinces over the period 2005-2016 by a fixed effects model and instrumental variables. Provincial gross bank loans expand after a fine independently of its size. The impact of fine frequency depends on the size of the provincial banking sector, but neither on bank governance/ownership nor crises. No statistically significant evidence supports reputational or balance sheet effects. Instead, our results suggest that it would behoove bank supervisors to favor frequency over size of bank fines. Bank fines seem to work more like a good housekeeping seal of approval, enhancing transparency and effective banking practices. |
| Keywords: | fine frequency, fine size, bank credit, local markets, supervision |
| JEL: | G01 F14 F18 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:anc:wmofir:169&r= |
| By: | Gennaro Catapano (Bank of Italy); Francesco Franceschi (Bank of Italy); Valentina Michelangeli (Bank of Italy); Michele Loberto (Bank of Italy) |
| Abstract: | In this paper, we extend and calibrate with Italian data the Agent-based model of the real estate sector described in Baptista et al., 2016. We design a novel calibration methodology that is built on a multivariate moment-based measure and a set of three search algorithms: a low discrepancy series, a machine learning surrogate and a genetic algorithm. The calibrated and validated model is then used to evaluate the effects of three hypothetical borrower-based macroprudential policies: an 80 per cent loan-to-value cap, a 30 per cent cap on the loan-service-to-income ratio and a combination of both policies. We find that, within our framework, these policy interventions tend to slow down the credit cycle and reduce the probability of defaults on mortgages. However, with respect to the Italian housing market, we only find very small effects over a five-year horizon on both property prices and mortgage defaults. This latter result is consistent with the view that the Italian household sector is financially sound. Finally, we find that restrictive policies lead to a shift in demand toward lower quality dwellings. |
| Keywords: | agent based model, housing market, macroprudential policy |
| JEL: | D1 D31 E58 R2 R21 R31 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1338_21&r= |
| By: | Annie Portelance |
| Abstract: | A central bank’s ability to measure the impact of its communications is nothing less than challenging. This is for several reasons: (i) the general public is a vastly broad audience with varying degrees of knowledge of, interest in and engagement with economics and central banking; (ii) some communications goals—such as building trust—take a significant amount of time; (iii) results from communications efforts are often intangible and difficult to measure; and (iv) many communications outcomes are influenced by broader social factors that are beyond a central bank’s control. The Bank of Canada’s Communications Department has developed a framework to quantify and qualify the Bank’s communications efforts and their results. Using data-based measurement and evaluation, the department can assess the impact of the Bank’s communications activities and gauge the department’s contribution to the Bank’s overall goals. These measurement and evaluation activities have contributed significantly to the Communications Department’s work, informing both strategic and tactical decisions. The use of measurement and evaluation brings a fresh perspective and enriches the practice of strategic communications—in a sense, integrating science into an established art. The Bank’s framework provides a solid foundation upon which measurement and evaluation approaches can stand securely as they evolve. |
| Keywords: | Central bank research; Credibility; Monetary policy communications |
| JEL: | D8 D83 |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocadp:21-9&r= |
| By: | Gamze Danisman (Faculty of Economics, Administrative and Social Sciences, Kadir Has University, Turkey); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges) |
| Abstract: | We examine the influence of economic policy uncertainty on bank stability post-2007-2008 global financial crisis. We rely on the economic policy uncertainty (EPU) index introduced by Baker et al. (2016). We use 176,477 quarterly observations for US commercial banks over the period from 2011Q1 to 2020Q3 and find consistent and robust evidence that bank stability decreases as the level of economic policy uncertainty increases. We specifically control for demand-side effects which indicates that the decrease in bank stability not only originates from borrowers' and customers' conditions but also from a change in bank behavior. A deeper investigation shows that the negative impact of policy uncertainty on bank stability is stronger for larger banks, and weaker for highly capitalized banks as well as for more liquid banks. Our findings have important implications particularly for the COVID-19 policy implementations. |
| Keywords: | JEL classification: G18,G21,G28 Economic Policy Uncertainty,Bank Stability,Bank Risk,COVID-19 |
| Date: | 2021–06–14 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03259298&r= |