nep-cba New Economics Papers
on Central Banking
Issue of 2021‒08‒09
forty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Liquidity Traps, Prudential Policies, and International Spillovers By Javier Bianchi; Louphou Coulibaly
  2. Impossible trinity in a small open economy: A state-space model informed policy simulation By Guna Raj Bhatta; Rabindra Nepal; Kankesu Jayanthakumaran; Charles Harvie
  3. Financial Shocks, Uncertainty Shocks, and Monetary Policy Trade-Offs By Brianti, Marco
  4. The Bank Liquidity Channel of Financial (In)stability By Joshua Bosshardt; Ali Kakhbod; Farzad Saidi
  5. TARGET2 - The European system for large-value payments settlement By Paolo Bramini; Matteo Coletti; Francesco Di Stasio; Pierfrancesco Molina; Vittorio Schina; Massimo Valentini
  6. From Deviations to Shortfalls: The Effects of the FOMC's New Employment Objective By Brent Bundick; Nicolas Petrosky-Nadeau
  7. Stressed but not Helpless: Strategic Behaviour of Banks Under Adverse Market Conditions By Grzegorz Halaj; Sofia Priazhkina
  8. Monetary policy shocks over the business cycle: Extending the Smooth Transition framework By Martin Bruns; Michele Piffer
  9. Fiscal and monetary policy interactions in a low interest rate world By Boris Hofmann; Marco Jacopo Lombardi; Benoit Mojon; Athanasios Orphanides
  10. A tail of three occasionally-binding constraints: a modelling approach to GDP-at-Risk By Aikman, David; Bluwstein, Kristina; Karmakar, Sudipto
  11. Monetary policy in the age of automation By Luca Fornaro; Martin Wolf
  12. Effects of Monetary Policy Communication in Emerging Market Economies: Evidence from Malaysia By Sui-Jade Ho; Özer Karagedikli
  13. Monetary Policy and the Persistent Aggregate Effects of Wealth Redistribution By Martin Kuncl; Alexander Ueberfeldt
  14. Corporate loans, banks’ internal risk estimates and central bank collateral: evidence from the euro area By Calza, Alessandro; Hey, Julius-Benjamin; Parrini, Alessandro; Sauer, Stephan
  15. Money Creation in Russia: Does the Money Multiplier Exist? By Vadim O. Grishchenko; Alexander Mihailov; Vasily N. Tkachev
  16. Macroprudential Limits on Mortgage Products: The Australian Experience By Nicholas Garvin; Alex Kearney; Corrine Rosé
  17. Policy biases in a model with labor market frictions By Richard Dennis; Tatiana Kirsanova
  18. Macroeconomic stabilisation and monetary policy effectiveness in a low-interest-rate environment By Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
  19. Japanese monetary policy and household saving By Israel, Karl-Friedrich; Sepp, Tim; Sonnenberg, Nils
  20. Revisiting the macroeconomic effects of monetary policy shocks By Firmin Doko Tchatoka; Qazi Haque
  21. Measuring Household Inflation Perceptions and Expectations: The Effect of Guided vs Non-Guided Inflation Questions By Bernd Hayo; Pierre-Guillaume Meon
  22. Exploring the potential benefits of inflation overshooting By Robert Amano; Marc-André Gosselin; Kurt See
  23. Inflation Expectations and Central Bank Communication with Unknown Prior By Tatsushi Okuda; Tomohiro Tsuruga
  24. Inflation expectations, inflation target credibility and the COVID-19 pandemic: New evidence from Germany By Coleman, Winnie; Nautz, Dieter
  25. The Positive Case for a CBDC By Andrew Usher; Edona Reshidi; Francisco Rivadeneyra; Scott Hendry
  26. When the panic broke out: COVID-19 and investment funds' portfolio rebalancing around the world By Massimiliano Affinito; Raffaele Santioni
  27. Precautionary saving and un-anchored expectations By Grimaud, Alex
  28. A digital euro: a contribution to the discussion on technical design choices By Emanuele Urbinati; Alessia Belsito; Daniele Cani; Angela Caporrini; Marco Capotosto; Simone Folino; Giuseppe Galano; Giancarlo Goretti; Gabriele Marcelli; Pietro Tiberi; Alessia Vita
  29. The impact of machine learning and big data on credit markets By Eccles, Peter; Grout, Paul; Siciliani, Paolo; Zalewska, Anna
  30. The growth-at-risk perspective on the system-wide impact of Basel III finalisation in the euro area By Budnik, Katarzyna; Dimitrov, Ivan; Giglio, Carla; Groß, Johannes; Lampe, Max; Sarychev, Andrei; Tarbé, Matthieu; Vagliano, Gianluca; Volk, Matjaz
  31. Macroprudential Policies, Credit Guarantee Schemes and Commercial Loans: Lending Decisions of Banks By Selva Bahar Baziki; Tanju Capacioglu
  32. Fundamentals vs. policies: can the US dollar’s dominance in global trade be dented? By Georgiadis, Georgios; Le Mezo, Helena; Mehl, Arnaud; Tille, Cédric
  33. How Do Investors Prefer Banks to Transit to Basel Internal Models: Mandatorily or Voluntarily? By Henry Penikas; Anastasia Skarednova; Mikhail Surkov
  34. Risk, Inside Money, and the Real Economy By van Buggenum, Hugo
  35. Coexistence of Money and Interest-Bearing Bonds By van Buggenum, Hugo
  36. Tradable and Non-tradable Inflation in Turkey: Predicting Different States with Markov Regime-Switching Approach By Hulya Saygili; Aysun Turkvatan
  37. Three Liquid Assets By Nicola Amendola; Lorenzo Carbonari; Leo Ferraris
  38. Tariffs and the Exchange Rate: Evidence from Twitter By Dmitry Matveev; Francisco Ruge-Murcia
  39. Gender, age and nationality diversity in UK banks By Suss, Joel; Angeli, Marilena; Eckley, Peter
  40. Cash and COVID-19: The impact of the second wave in Canada By Heng Chen; Walter Engert; Marie-Hélène Felt; Kim P. Huynh; Gradon Nicholls; Daneal O'Habib; Julia Zhu
  41. Financial Intermediation and Structural Change: Theory and Evidence By David Jones; Corrado Di Maria; Simone Valente
  42. Public debt and inflation nexus in Nigeria: An ARDL bounds test approach By Aimola, Akingbade U; Odhiambo, Nicholas M

  1. By: Javier Bianchi; Louphou Coulibaly
    Abstract: We present a simple open economy framework to study the transmission channels of monetary and macroprudential policies and evaluate the implications for international spillovers and global welfare. Using an analytical decomposition, we first identify three transmission channels: intertemporal substitution, expenditure switching, and aggregate income. Quantitatively, expenditure switching plays a prominent role for monetary policy, while macroprudential policy operates almost entirely through intertemporal substitution. Turning to the normative analysis, we show that the risk of a liquidity trap generates a monetary policy tradeoff between stabilizing output today and reducing capital flows to lower the likelihood of a future recession. However, leaning against the wind is not necessarily optimal, even in the absence of capital controls. Finally, we argue that contrary to emerging policy concerns, capital controls are not beggar-thy-neighbor and can enhance global macroeconomic stability.
    Keywords: Monetary and macroprudential policies; Liquidity traps; International spillovers; Capital flows
    JEL: E21 E52 F32 E62 E44 E43 E23
    Date: 2021–07–27
  2. By: Guna Raj Bhatta; Rabindra Nepal; Kankesu Jayanthakumaran; Charles Harvie
    Abstract: Should monetary policy independence be maintained when the exchange rate is fixed under closed capital account conditions in a small open economy? We apply the Kalman filter at State Space model to test the Nepalese economy’s policy trilemma condition involving restricting capital flow, maintaining policy independence and fixing the exchange rate over the period 1989-2019. Accounting for two-thirds of Nepal’s total trade, Nepal is heavily trade-dependent to India in South Asia, which underwent economic liberalisation during the early 1990s. We modify the traditional Taylor-rule-based monetary policy reaction function to more closely represent Nepal’s economic characteristics by mixing backward-looking and forward-looking strategies and incorporating a fixed exchange rate in the monetary policy reaction function. The simulation results provide strong evidence of policy trilemma failure and inevitable policy trade-offs. In the monetary policy reaction function of both domestic and foreign conditions, the parameter value of domestic condition needs to be close to zero, to get the simulated interest rate close to observed. The loss of monetary policy independence raises a range of policy issues for the Nepalese economy: the rationale for fixing the exchange rate, and the efficacy of capital account closure which might deteriorate the effectiveness of monetary policy.
    Keywords: Monetary Policy Independence, Impossible Trinity, State Space Model, Calibration, Policy Simulation
    JEL: E47 E52 E58
    Date: 2021–07
  3. By: Brianti, Marco (University of Alberta, Department of Economics)
    Abstract: This paper separately identifies financial and uncertainty shocks using a novel SVAR procedure and discusses their distinct monetary policy implications. The procedure relies on the qualitatively different responses of corporate cash holdings: after a financial shock, firms draw down their cash reserves as they lose access to external finance, while uncertainty shocks drive up cash holdings for precautionary reasons. Although both financial and uncertainty shocks are contractionary, my results show that the former are inflationary while the latter generate deflation. I rationalize this pattern in a New-Keynesian model: after a financial shock, firms increase prices to raise current liquidity; after an uncertainty shock, firms cut prices in response to falling demand. These distinct channels have stark monetary policy implications: conditional on uncertainty shocks, the monetary authority can potentially stabilize output and inflation at the same time, while in the case of financial shocks, the central bank can stabilize inflation only at the cost of more unstable output fluctuations.
    Keywords: financial shocks; uncertainty shocks; SVAR; inflation; monetary policy
    JEL: E30 E31 E32 E44
    Date: 2021–08–02
  4. By: Joshua Bosshardt (Federal Housing Finance Agency); Ali Kakhbod (Rice University); Farzad Saidi (UniversityofBonn & CEPR)
    Abstract: We examine the system-wide effects of liquidity regulation on banks’ balance sheets. In the general equilibrium model, banks have to hold liquid assets, and choose among illiquid assets varying in the extent to which they are difficult to value before maturity, e.g., structured securities. By improving the liquidity of interbank markets, tighter liquidity requirements induce banks to invest in such complex assets. We evaluate the welfare properties of combining liquidity regulation with other financial-stability policies, and show that it can complement ex-ante policies, such as asset-specific taxes, whereas it can undermine the benefits of ex-post interventions, such as quantative easing.
    Keywords: liquidity regulation, securitization, interbank markets, financial stability, quantitative easing
    JEL: E44 G01 G21 G28
    Date: 2021–08
  5. By: Paolo Bramini (Bank of Italy); Matteo Coletti (Bank of Italy); Francesco Di Stasio (Bank of Italy); Pierfrancesco Molina (Bank of Italy); Vittorio Schina (Bank of Italy); Massimo Valentini (Bank of Italy)
    Abstract: TARGET2 is the main European platform for the settlement of large-value payments in central bank money open to Central banks and commercial banks participation. TARGET2 was a prerequisite of the Monetary Union establishment and is a pillar for its functioning, for the single monetary policy conduct and the financial integration of the euro area. This publication explains its genesis and functioning, and outlines its possible future developments.
    Keywords: payment systems, market infrastructures, gross settlement
    JEL: E42 E58
    Date: 2021–07
  6. By: Brent Bundick; Nicolas Petrosky-Nadeau
    Abstract: The Federal Open Market Committee (FOMC) recently revised its interpretation of its maximum employment mandate. In this paper, we analyze the possible effects of this policy change using a theoretical model with frictional labor markets and nominal rigidities. A monetary policy which stabilizes “shortfalls” rather than “deviations” of employment from its maximum level leads to higher inflation and more hiring at all times due to expectations of more accommodative future policy. Thus, offsetting only shortfalls of employment results in higher nominal policy rates on average which provide more policy space and better outcomes during a zero lower bound episode. Our model suggests that the FOMC's reinterpretation of its employment mandate could alter the business-cycle and longer-run properties of the economy and result in a steeper reduced-form Phillips curve.
    Keywords: Monetary Policy; Equilibrium Unemployment; Nominal Rigidities; Zero Lower Bound
    JEL: E32 E52 J64
    Date: 2021–07–15
  7. By: Grzegorz Halaj; Sofia Priazhkina
    Abstract: We model bank management actions in severe stress test conditions using a game-theoretical framework. Banks update their balance sheets to strategically maximize risk-adjusted returns to shareholders given three regulatory constraints and feedback effects related to fire sales, interactions of loan supply and demand, and deteriorating funding conditions. The framework allows us to study the role of strategic behaviors in amplifying or mitigating adverse macrofinancial shocks in a banking system and the role of macroprudential policies in the mitigation of systemic risk. In a macro-consistent stress testing application, we show that a trade-off can arise between banking stability (solvency) and macroeconomic stability (lending) and test whether the release of a countercyclical capital buffer can reduce systemic risk.
    Keywords: Central bank research; Economic models; Financial institutions; Financial stability; Financial system regulation and policies
    JEL: C72 G21
    Date: 2021–07
  8. By: Martin Bruns (University of East Anglia); Michele Piffer (King's College London)
    Abstract: We extend the Smooth Transition Vector Autoregressive model to allow for identification via a combination of external instruments and sign restrictions, while estimating rather than calibrating the parameters ruling the nonlinearity of the model. We hence o er an alternative to using the recursive identification with selected calibrated parameters, which is the main approach currently available. We use the model to study how the effects of monetary policy shocks change over the business cycle. We show that financial variables, inflation and output respond to a monetary shock more in a recession than in an expansion, in line with the predictions from the financial accelerator literature.
    Keywords: Nonlinear models, proxy SVARs, monetary policy shocks, sign restrictions.
    JEL: C32 E52
    Date: 2021–08–05
  9. By: Boris Hofmann; Marco Jacopo Lombardi; Benoit Mojon; Athanasios Orphanides
    Abstract: We analyse fiscal and monetary policy interactions when interest rate policy is hampered by the zero lower bound (ZLB) in an environment where expectations are formed with perpetual learning. The ZLB induces a deterioration of economic performance and raises the risk of persistent low ation that can disanchor in ation expectations and lead to debt de ation. Systematic use of quantitative easing (QE) can partially substitute for interest rate easing and, if sufficiently aggressive, can maintain average in ation in line with the central bank's goal. By compressing term premia on longterm interest rates, QE creates fiscal space that facilitates expansionary fiscal policy and reduces debt-de ation risk. The ZLB can be counteracted with less aggressive QE if mildly negative policy rates are feasible, if more countercyclical fiscal policy can be activated, or if the central bank can credibly communicate a clear in ation goal. Timidity in implementing QE and excessively debt-averse fiscal policies are counterproductive.
    Keywords: zero lower bound, fiscal policy, debt de ation, quantitative easing, perpetual learning
    Date: 2021–07
  10. By: Aikman, David (King's College London); Bluwstein, Kristina (Bank of England); Karmakar, Sudipto (Bank of England)
    Abstract: We build a semi-structural New Keynesian model with financial frictions to study the drivers of macroeconomic tail risk (‘GDP-at-Risk’). We analyse the empirically observed fat left tail of the GDP distribution by modelling three key non-linearities emphasised in the literature: 1) an effective lower bound on nominal interest rates, 2) a credit crunch in bank credit supply when bank capital depletes, and 3) deleveraging by borrowers when debt service burdens become excessive. We obtain three key results. First, our model generates a significantly fat-tailed distribution of GDP – a finding that is absent in most linear New Keynesian and RBC models. Second, we show how these constraints interact with each other. We find that an economy prone to debt deleveraging will experience significantly more credit crunch and effective lower bound episodes than otherwise. Moreover, as the effective lower bound becomes more proximate, the frequency of credit crunch episodes increases significantly. As a rule of thumb, we find that each 50 basis point decline in monetary policy headroom requires additional capital buffers of 1% of assets or 2%–2.5% points lower debt service burdens to hold the risk level constant. Third, we use the model to generate a historical decomposition of GDP-at-Risk for the United Kingdom. The implied risk outlook deteriorates significantly in the run-up to the Global Financial Crisis, driven by depleted capital buffers and increasing debt burdens. Since then, GDP-at-Risk has remained elevated, with greater bank resilience and lower debt offset by the limited capacity of monetary policy to cushion adverse shocks.
    Keywords: Financial crises; bank capital; debt deleveraging; macroprudential policy; effective lower bound; GDP-at-Risk
    JEL: G01 G28
    Date: 2021–07–26
  11. By: Luca Fornaro; Martin Wolf
    Abstract: We provide a framework in which monetary policy affects firms’ automation decisions (i.e. how intensively capital and labor are used in production). This new feature has far-reaching consequences for monetary policy. Monetary expansions can increase output by inducing firms to invest and automate more, while having little impact on inflation and employment. A protracted period of weak demand might translate into less investment and de-automation, rather than into deflation and involuntary unemployment. Running the economy hot, through expansionary monetary and fiscal policies, may have a positive long run impact on labor productivity and wages. Technological advances that increase the scope for automation may give rise to persistent unemployment, unless they are accompanied by expansionary macroeconomic policies.
    Keywords: monetary policy, automation, fiscal expansions, hysteresis, liquidity traps, secular stagnation, endogenous productivity, wages
    JEL: E32 E43 E52 O31 O42
    Date: 2021–07
  12. By: Sui-Jade Ho (Bank Negara Malaysia); Özer Karagedikli (South East Asian Central Banks (SEACEN) Research and Training Centre and Centre for Applied Macroeconomic Analysis (CAMA))
    Abstract: By conducting a high-frequency event study similar to Gürkaynak et al. (2005), we find that two factors are needed to adequately capture the effects of monetary policy announcements for a non-inflation targeting emerging market economy, Malaysia. These factors are the surprise changes in the policy rate (Overnight Policy Rate, OPR) and the information about the future path of monetary policy. We find that the path factor has a strong influence on long-term government bond yields, corporate bond yields and spreads. Our findings are indicative of the view that monetary policy communication is mostly about revealing information pertaining to the central bank’s assessment of the economic outlook, as opposed to an unconditional binding commitment to follow a specific policy path.
    Date: 2021–07
  13. By: Martin Kuncl; Alexander Ueberfeldt
    Abstract: We identify a sizable wealth redistribution channel which creates a monetary policy trade-off whereby short-term economic stimulus is followed by persistently lower output over the medium term. This trade-off is stronger in economies with more nominal household debt but weakened by a more aggressive monetary policy stance and underprice-level targeting. Given this trade-off, low-for-long episodes can lead to persistently depressed output. The medium-term implications of the wealth redistribution channel rely on the presence of labor supply heterogeneity, which we show both analytically and in the context of an estimated New Keynesian general equilibrium model with household heterogeneity.
    Keywords: Monetary policy framework; Monetary policy transmission
    JEL: E21 E50
    Date: 2021–08
  14. By: Calza, Alessandro; Hey, Julius-Benjamin; Parrini, Alessandro; Sauer, Stephan
    Abstract: We use a unique dataset of ratings for euro area corporate loans from commercial banks’ internal rating-based (IRBs) systems and central banks’ in-house credit assessment systems (ICASs) to investigate whether banks’ IRB ratings underestimate the credit risk of their corporate loan portfolios when the latter are used as collateral in the Eurosystem’s monetary policy operations. We are able to identify systematic risk underestimation by comparing the IRB ratings with those produced for the same borrowers by the ICASs. Our results show that while they are on average more conservative than ICASs for the entire population of rated corporate loans, IRBs are significantly less conservative than ICASs for those loans that are actually used as Eurosystem collateral, particularly for large loans. The less conservative estimates of risk by IRBs relative to ICASs can be partly explained by banks’ liquidity constraints, but not by their degree of capitalisation. Overall, our findings suggest the existence of a collateral-related channel through which the use of IRB ratings may influence the internal estimation of risk by banks. JEL Classification: G21, G28
    Keywords: banking regulation, central bank liquidity, internal ratings, probability of default
    Date: 2021–07
  15. By: Vadim O. Grishchenko (Research and Forecasting Department, Bank of Russia); Alexander Mihailov (Department of Economics, University of Reading); Vasily N. Tkachev (International Finance Department, Moscow State University of International Relations (MGIMO- University))
    Abstract: For decades, the monetary economics literature has considered multiple deposit expansion via the money multiplier logic as empirically corroborated. However, the developments witnessed in advanced economies since the Global Financial Crisis challenged this settled view, and central banks as well as the Bank for International Settlements were among the first to openly reconsider it. In this paper, we revisit the issue empirically, but in a way aligned with a 'narrative' context of the evolving institutional frameworks for banking activities and monetary policy that profoundly and ultimately shape it out. Using a vector autoregression model estimated on Russian monthly data over two subsamples, 2005-2012 and 2012-2019, we find robust evidence that, while multiple deposit expansion may have existed in underdeveloped financial systems in the past, where the volume of lending was limited by the supply of bank reserves, nowadays lending is constrained mainly by the demand for credit. The key explanations we propose are: the rapid rise of money markets in the 20th- 21st centuries, the unlimited access to central bank liquidity provision facilities, and the evolution of bank management from the 'golden rule' of banking, where liquidity gaps aim at zero, to Asset and Liability Management, where banks flexibly manage liquidity gaps. Our results robustly show that the influence on real money balances of money supply factors, such as bank reserve requirements and the real monetary base, has become statistically insignificant over the recent decade in Russia, while that of money demand factors, such as the nominal interest rate, has remained significant and negative, which is consistent with the economic intuition we have suggested.
    Keywords: multiple deposit expansion, money multiplier, supply of bank reserves, demand for credit, evolution of bank management, monetary policy, Russia
    JEL: E41 E42 E44 E51 E58 G21
    Date: 2021–08–03
  16. By: Nicholas Garvin (Reserve Bank of Australia); Alex Kearney (Reserve Bank of Australia); Corrine Rosé (Reserve Bank of Australia)
    Abstract: The Australian Prudential Regulation Authority implemented 2 credit limits between 2014 and 2018. Unlike similar policies in other countries, these imposed limits on particular mortgage products – first investor mortgages, then interest-only (IO) mortgages. With prudential bank-level panel data, we empirically identify banks' credit supply and interest rate responses and test for other effects of these policies. The policies quickly reduced growth in the targeted type of credit while total mortgage growth remained steady. Banks met the limits by raising interest rates on targeted mortgage products and this lifted their income temporarily. The largest banks substituted into non-targeted mortgage products while smaller banks did not. Practical implementation difficulties slowed effects of the (first) investor policy, and led to some disproportionate bank responses, but had largely been overcome by the time the (second) IO policy was implemented.
    Keywords: macroprudential policy; banks; mortgages; mortgage rates
    JEL: E43 E5 G21 G28
    Date: 2021–07
  17. By: Richard Dennis; Tatiana Kirsanova
    Abstract: We develop a model with labor-market matching frictions that is subject to a range of shocks, including shocks to matching efficiency and bargaining power, and use the model to examine how monetary policy should respond to such shocks. We show that optimal monetary policy is highly efficient at responding to these labor market shocks, producing outcomes that are close to the flex-price equilibrium. Moreover, this efficiency remains if monetary policy is conducted with discretion, indicating that time-inconsistency and forward-guidance are not central to the policy response. We also show that several popular simple rules are also effective at responding to these labor market shocks.
    Keywords: Labor market frictions, matching, optimal policy
    JEL: E52 E61 C62 C73
    Date: 2021–07
  18. By: Coenen, Günter; Montes-Galdón, Carlos; Schmidt, Sebastian
    Abstract: The secular decline in the equilibrium real interest rate observed over the past decades has materially limited the room for policy-rate reductions in recessions, and has led to a marked increase in the incidence of episodes where policy rates are likely to be at, or near, the effective lower bound on nominal interest rates. Using the ECB's New Area-Wide Model, we show that, if unaddressed, the effective lower bound can cause substantial costs in terms of worsened macroeconomic performance, as reflected in negative biases in inflation and economic activity, as well as heightened macroeconomic volatility. These costs can be mitigated by the use of nonstandard instruments, notably the joint use of interest-rate forward guidance and large-scale asset purchases. When considering alternatives to inflation targeting, we find that make-up strategies such as price-level targeting and average-inflation targeting can, if they are well-understood by the private sector, largely undo the negative biases and heightened volatility induced by the effective lower bound. JEL Classification: E31, E32, E37, E52, E58
    Keywords: asset purchases, effective lower bound, forward guidance, make-up strategies, monetary policy
    Date: 2021–07
  19. By: Israel, Karl-Friedrich; Sepp, Tim; Sonnenberg, Nils
    Abstract: This paper analyzes the impact of monetary policy on household saving in Japan between 1993 and 2017. Using annual data from the Japan Panel Survey of Consumers it is shown that monetary expansion has contributed to a widening gap in households' net saving through an adverse effect on the volume of saving of non-academic households. In contrast, households with at least one academic tend to be able to compensate these adverse effects of monetary expansion or can even benefit from it. The paper documents how inequality in terms of the ability to build up wealth has increased in Japan over the past decades. The statistical analysis controls for household size as well as potential spatial effects in the transmission mechanism of monetary policy on household saving.
    Keywords: Japan,interest rate,monetary policy,household saving,inequality
    JEL: D31 D63 E52 E58
    Date: 2021
  20. By: Firmin Doko Tchatoka; Qazi Haque
    Abstract: We shed new light on the effects of monetary policy shocks in the US. Gertler and Karadi (2015) suggest that movements in credit costs may result in substantial impact of monetary policy shocks on economic activity. Using the proxy SVAR framework, we show that once the Volcker disinflation period is left out and one focuses on the post-1984 period, monetary policy shocks have no significant effects on output, despite large movements in credit costs. Our finding is robust to weak identification and alternative measure of economic activity.
    Keywords: Monetary policy shocks, Proxy-SVAR, Weak identification, Output Dynamics
    JEL: E31 E32 E43 E44 E52
    Date: 2021–07
  21. By: Bernd Hayo (University of Marburg); Pierre-Guillaume Meon (Universite libre de Bruxelles)
    Abstract: An experiment using a representative survey of the German population shows that letting respondents report a number rather than asking them to choose from a list of predefined ranges lowers the response rate for both perceived past and expected inflation and decreases (increases) reported past (expected) inflation. Income, education, gender, objective and subjective knowledge about monetary policy, and political affiliation affect the effect’s size but not its sign. East and West German respondents who were 15 or older when the Berlin Wall fell have reactions different from those who were younger at that time, which supports the ‘impressionable years’ hypothesis based on different inflation experiences.
    Keywords: Inflation perception, inflation expectation, survey question design, Germany, household survey, impressionable years hypothesis
    JEL: E52 E58 Z1
    Date: 2021
  22. By: Robert Amano; Marc-André Gosselin; Kurt See
    Abstract: After a period with the interest rate at the effective lower bound, temporarily overshooting inflation may offer important economic benefits. This may be especially true for vulnerable segments of the population, such as workers with low attachment to the labour force and the long-term unemployed.
    Keywords: Inflation targets; monetary policy; monetary policy framework; and labour markets
    JEL: E52 J20
    Date: 2021–07
  23. By: Tatsushi Okuda (Associate Director and Economist, Institute for Monetary and Economic Studies (currently, Director, Financial System and Bank Examination Department), Bank of Japan (E-mail:; Tomohiro Tsuruga (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail:
    Abstract: We construct a noisy information model of central bank communication on future inflation rates and highlight an informational friction that plays a key role in explaining several empirical properties of firms' inflation expectations. Using a survey of Japanese firms' inflation expectations, we document new empirical facts related to the size of firms and their inflation expectations. We observe a persistent deviation of expectations from the central bank's inflation target and find that the deviation is monotonically increasing in firm size, while the degree of the forecasting imprecision, responsiveness to actual inflation, and the heterogeneity in firms' expectations are monotonically decreasing in firm size. To reconcile these empirical regularities, we construct a dynamic model of inflation expectation formation by Bayesian firms where the central bank's inflation forecast serves as a noisy public signal of future inflation rates and propose an informational friction in the communication about future inflation: the central bank's prior about the future inflation rate, which is unknown to firms. In this setup, the sluggishness of the adjustment of inflation expectations is amplified by the central bank's communication. Moreover, this friction drastically changes the role and the effect of central bank communication on firms' expectations formation. Firms utilize the inflation forecast as a signal not of the level but of changes in future inflation rates.
    Keywords: Imperfect information, inflation expectations, communication
    JEL: E50 D83 D84 D82
    Date: 2021–07
  24. By: Coleman, Winnie; Nautz, Dieter
    Abstract: Using the exact wording of the ECB's definition of price-stability, we started a representative online survey of German citizens in January 2019 that is designed to measure long-term inflation expectations and the credibility of the inflation target. Our results indicate that credibility has decreased in our sample period, particularly in the course of the deep recession implied by the COVID-19 pandemic. Interestingly, even though inflation rates in Germany have been clearly below 2% for several years, credibility has declined mainly because Germans increasingly expect that inflation will be much higher than 2% over the medium term. We investigate how inflation expectations and the impact of the pandemic depend on personal characteristics including age, gender, education, income, and political attitude.
    Keywords: Credibility of Inflation Targets,Household Inflation Expectations,Expectation Formation,Online Surveys,Covid-19 Pandemic
    JEL: E31 E52 E58
    Date: 2021
  25. By: Andrew Usher; Edona Reshidi; Francisco Rivadeneyra; Scott Hendry
    Abstract: In this paper we discuss the competition and innovation arguments for issuing a central bank digital currency (CBDC). A CBDC could be an effective competition policy tool for payments. On innovation, we argue that a CBDC could be necessary to support the vibrancy of the digital economy by helping solve market failures and fostering competition and innovation in new digital payments markets. Overall, competition and innovation are supporting arguments for issuing a CBDC.
    Keywords: Digital currencies and fintech; Financial institutions; Financial stability
    JEL: E58 L5
    Date: 2021–07
  26. By: Massimiliano Affinito (Bank of Italy); Raffaele Santioni (Bank of Italy)
    Abstract: To contribute to the understanding of investment funds' (IFs) behaviour, the paper exploits the exogenous shock of the COVID-19 pandemic and analyses more than 12 million security sales and purchases during the first four months of 2020 by over 20,000 IFs from more than 40 national jurisdictions and investing in more than 100 economies and 20 industries. Our estimates reveal that, when the emergency strikes, IFs do not sell indiscriminately but divest from assets considered the most vulnerable at the moment, that is, those issued by more COVID-affected countries and industries. Our results also show several dimensions of heterogeneity according to the pandemic outbreak phase, asset type, IF category and performance, extent of unitholders' outflows, and nationality of IFs. Our results, on the one hand, provide new evidence on the intrinsic fragility of IFs and the connection between their choices and fire sales, but, on the other, they also show that IF industry includes heterogeneous institutions that behave very differently. Finally, our results document that monetary policy measures have a reassuring effect also for IFs, which corroborates recent evidence on a non-bank financial institution channel of unconventional monetary policies.
    Keywords: coronavirus, Covid-19, investment funds, Morningstar holdings, pandemic, portfolio rebalancing, resilience.
    JEL: G01 G12 G15 G32
    Date: 2021–07
  27. By: Grimaud, Alex
    Abstract: This paper revisits monetary policy in a heterogeneous agents new Keynesian (HANK) model where agents use adaptive learning (AL) in order to form their expectations. Due to the households' finite heterogeneity triggered by idiosyncratic unemployment risk, the model is subject to micro-founded heterogeneous expectations that are not anchored to the rational expectation path. Households experience different histories which has non-trivial consequences on their individual AL processes. In this model, supply shocks generate precautionary saving and possible long-lasting disinflationary traps associated with excess saving. Dovish policies focused on closing the output gap dampen the learning effects which is in contradiction with previously established representative agent under learning results. Price level targeting appears to resolve most of the problem by netter anchoring long-run expectations of future utility flows.
    Keywords: Adaptive learning, supply shocks, precautionary saving, heterogeneous expectations, HANK and price level targeting
    JEL: E25 E31 E52
    Date: 2021–07–05
  28. By: Emanuele Urbinati (Bank of Italy); Alessia Belsito (Bank of Italy); Daniele Cani (Bank of Italy); Angela Caporrini (Bank of Italy); Marco Capotosto (Bank of Italy); Simone Folino (Bank of Italy); Giuseppe Galano (Bank of Italy); Giancarlo Goretti (Bank of Italy); Gabriele Marcelli (Bank of Italy); Pietro Tiberi (Bank of Italy); Alessia Vita (Bank of Italy)
    Abstract: In the last decade, the advent of new technologies has dramatically changed the banking and financial ecosystem. Financial operators have transformed their services in the context of the Fintech phenomenon; households’ payment habits are rapidly changing as well, embracing the revolution brought by the digital innovations. In this context, a number of central banks are devoting significant resources to examining the feasibility of introducing a digital currency as a complement to physical money. After an introduction that illustrates the main characteristics defining a Central Bank Digital Currency (CBDC), the paper presents ongoing CBDC-related work around the globe, discusses how a digital currency could support a central bank in performing its functions, and analyses its key features. The paper then illustrates a possible digital euro solution based on the integration of an account-based platform with a DLT-based one. The integration of these two components would make it possible to reap the benefits of two complementary solutions, reciprocally balancing their advantages and disadvantages, as regards, for instance, privacy. Finally, the paper presents the findings of experiments on the digital euro carried out by experts of the euro-area National Central Banks and the ECB; according to the results of those experiments, the integration of an account-based platform with a DLT-based one may provide a sound basis on which to build a fully-fledged solution, capable of meeting both regulatory and retail users’ needs.
    Keywords: digital euro, payment systems, financial market infrastructure, blockchain
    JEL: E42
    Date: 2021–07
  29. By: Eccles, Peter (Bank of England); Grout, Paul (Bank of England); Siciliani, Paolo (Bank of England); Zalewska, Anna (University of Bath)
    Abstract: There is evidence that machine learning (ML) can improve the screening of risky borrowers, but the empirical literature gives diverse answers as to the impact of ML on credit markets. We provide a model in which traditional banks compete with fintech (innovative) banks that screen borrowers using ML technology and show that the impact of the adoption of the ML technology on credit markets depends on the characteristics of the market (eg borrower mix, cost of innovation, the intensity of competition, precision of the innovative technology, etc.). We provide a series of scenarios. For example, we show that if implementing ML technology is relatively expensive and lower-risk borrowers are a significant proportion of all risky borrowers, then all risky borrowers will be worse off following the introduction of ML, even when the lower-risk borrowers can be separated perfectly from others. At the other extreme, we show that if costs of implementing ML are low and there are few lower-risk borrowers, then lower-risk borrowers gain from the introduction of ML, at the expense of higher-risk and safe borrowers. Implications for policy, including the potential for tension between micro and macroprudential policies, are explored.
    Keywords: Adverse selection; banking; big data; capital requirements; credit markets; fintech; machine learning; prudential regulation
    JEL: G21 G28 G32
    Date: 2021–07–09
  30. By: Budnik, Katarzyna; Dimitrov, Ivan; Giglio, Carla; Groß, Johannes; Lampe, Max; Sarychev, Andrei; Tarbé, Matthieu; Vagliano, Gianluca; Volk, Matjaz
    Abstract: This paper assesses the macroeconomic implications of the Basel III finalisation for the euro area, employing a large-scale semi-structural model encompassing over 90 banks and 19-euro area economies. The new regulatory framework will influence banks’ reactions to economic conditions and, as a result, affect the ability of the banking system to amplify or dampen economic shocks. The assessment covers the entire distribution of conditional economic predictions to measure the cost and benefit of the reforms. Looking at the means of conditional forecasts of output growth provides an indication of the costs of the reform, namely a transitory reduction in euro area gross domestic product (GDP) and in lending to the non-financial private sector. Looking at the lower percentile of output growth forecasts, i.e. growth at risk, captures the long-term benefits of the Basel III finalisation package in terms of improved resilience and the ability of the banking system to supply lending to the real economy under adverse conditions. These permanent growth-at-risk benefits ultimately outweigh the short-term costs of the reform. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector, Basel III finalisation, impact assessment, real-financial feedback mechanism, regulatory policy
    Date: 2021–07
  31. By: Selva Bahar Baziki; Tanju Capacioglu
    Abstract: We study the effect of two counter-cyclical credit policies on banks’ lending decisions using a unique matched bank-firm-loan micro level data. These two policy actions; the implementation of commercial real estate loan-to-value (LTV) ratio and an expansion of a collateral guarantee scheme, stand out as they give banks the freedom of choice over which customers would be subject to the policy and to what degree. When faced with a tightening LTV policy banks elect to issue loans above the LTV cap to firms with better credit history and with whom they had a longer established relationship while charging higher interest rates. Firms constrained by the policy see an increase in their other borrowing while the policy is in effect, suggesting the existence of credit spillover across loan types. In the second policy, banks again prefer firms with healthier credit histories and with whom they have a longer relationship into the credit guarantee scheme. In contrast to the existing literature, we do not see a preference for riskier firms under the scheme. At the same time, among the recipients of scheme loans, those with stronger relationships but relatively lower past credit performance have larger amounts of loans. Scheme loans are issued for larger amounts, longer periods and at higher interest rates compared to loans issued to non-participating firms during the same period. Finally, we show that the increase in scheme utilization has resulted in lower other corporate credit and general-purpose loans in banks with larger utilization rates.
    Keywords: Macroprudential policy, Commercial real estate, Corporate loans, Loan-to-value, Relationship banking, Credit guarantee funds
    JEL: E51 E61 G20 G21 G28 G32
    Date: 2021
  32. By: Georgiadis, Georgios; Le Mezo, Helena; Mehl, Arnaud; Tille, Cédric
    Abstract: The US dollar plays a dominant role in the invoicing of international trade, albeit not an exclusive one as more than half of global trade is invoiced in other currencies. Of particular interest are the euro, with a large role, and the renminbi, with a rising role. These two currencies are well suited to contrast the roles of economic fundamentals and policies, as European policy makers have taken a neutral stance in contrast to the promotion of the international role of the renminbi by the Chinese authorities. We assess the drivers of invoicing using the most recent and comprehensive data set for 115 countries over 1999-2019. We find that standard mechanisms that foster use of a large economy's currency predicted by theory – i.e. strategic complementarities in price setting and integration in cross-border value chains – underpin use of the dollar and the euro for trade with the United States and the euro area. These mechanisms also support the role of the dollar, but not the euro, in trade between non-US and non-euro area countries, making the dollar the globally dominant invoicing currency. Fundamentals and policies have played a contrasted role for the use of the renminbi. We find that China's integration into global trade has further strengthened the dominant status of the dollar at the expense of the euro. At the same time, the establishment of currency swap lines by the People's Bank of China has been associated with increases in renminbi invoicing, with an adverse effect on dollar use that is larger than for the euro. JEL Classification: F14, F31, F44
    Keywords: dominant currency paradigm, international trade invoicing, markets vs. policies
    Date: 2021–07
  33. By: Henry Penikas (Bank of Russia, Russian Federation); Anastasia Skarednova (Alfa-Bank, Russian Federation); Mikhail Surkov (Bank of Russia, Russian Federation)
    Abstract: The recently finalized Basel Framework continues allowing banks to use internal data and models to define risk estimates and use them for the capital adequacy ratio computation. World-wide there are above two thousand banks running the Basel internal models. However, there are countries that have none of such banks. For them there exists a dilemma. Namely, which transition path to adopt out of the two. The voluntarily one as in the EU or the mandatory one as in the US. Our objective is to take the investor perspective and benchmark those two modes. Thus, we wish to find whether there is a premium for any of them, or perhaps that they are equivalent. The novelty of our research is the robust estimate that investors prefer mandatory transition style to the voluntarily one. Such a preference is reflected in the rise of the mean return and decline in stock volatility for the transited banks in the US and right the opposite consequences in the EU. However, we should be cautious in interpreting our findings. Such a preference may not only be the premium for the breakage of the vicious cycle and the ultimate improvement in the banks’ risk-management systems and the overall financial stability. It may also hold true if and only if the mandatory transition for particular institutions is accompanied by a restriction for other banks in the region to transit. Our findings are of value primarily to the emerging economies like Argentine and Indonesia.
    Keywords: Basel II, Basel III, BCBS, CAR, difference-in-difference, D-SIB, G-SIB, IRB, risk-weight.
    JEL: C21 G12 G17 G18 G21
    Date: 2021–07
  34. By: van Buggenum, Hugo (Tilburg University, Center For Economic Research)
    Keywords: inside and outside money; Risk; policy; Investment; new monetarism
    Date: 2021
  35. By: van Buggenum, Hugo (Tilburg University, School of Economics and Management)
    Date: 2021
  36. By: Hulya Saygili; Aysun Turkvatan
    Abstract: The recent literature debates the significance of different regimes of inflation and trade linkages in explaining the relationship between inflation and alternative reference indicators. This paper contributes to this literature in several respects. First, it explores which states of the reference indicators are more related with low, normal or high regimes of inflation. Second, it takes globalization into account and performs the analysis for goods and services in the consumer basket classified with respect to their trade openness and content of intermediate imports: tradable/non-tradable items and items with low/high imported intermediate share. It applies Markov regime-switching models to determine the states of inflation and reference series then compare probability scores of matching different regimes of inflation and different regimes of reference indicators. Third, it computes Consumer Price Indices in tradable/non-tradable and low/high imported intermediate details for an emerging country, Turkey which distinguishes from the others with high trade openness, high global integration rate and implementation of inflation targeting regime.
    Keywords: Inflation regimes, Tradable/non-tradable inflation, Markov regime-switching models, Probability score analysis
    JEL: E31 F41 C11
    Date: 2021
  37. By: Nicola Amendola (Università di Roma Tor Vergata, Italy); Lorenzo Carbonari (Università di Roma Tor Vergata, Italy); Leo Ferraris (Università di Milano-Bicocca, Italy)
    Abstract: We examine a theoretical model of liquidity with three assets - money, government bonds and equity- that are used for transaction purposes. Money and bonds complement each other in the payment system. The liquidity of equity is derived as an equilibrium outcome. Liquidity cycles arise from the loss of confidence of the traders in the liquidity of the system. Both open market operations and credit easing play a beneficial role for different purposes.
    Keywords: Money, Bonds, Equity, Liquidity, Credit Easing
    JEL: E40
    Date: 2021–07
  38. By: Dmitry Matveev; Francisco Ruge-Murcia
    Abstract: This paper examines the conjecture that an increase in tariffs in a flexible exchange rate regime leads to the appreciation of the local currency. We focus on the reaction of the exchange rate market to tweets by U.S. President Donald Trump regarding possible tariff increases on Canadian and Mexican goods. The anticipation of trade restrictions leads to the U.S. dollar appreciating by 0.023% and 0.051% vis-à-vis the Canadian dollar and Mexican peso within five minutes of the tweet, and comparable percentages for forward rates up to five years ahead. Exchange rate appreciation may mitigate the expenditure-switching intended by the protectionist policy.
    Keywords: Exchange rates; Trade integration
    JEL: F31
    Date: 2021–07
  39. By: Suss, Joel (Bank of England); Angeli, Marilena (Bank of England); Eckley, Peter (Bank of England)
    Abstract: Using a novel regulatory dataset, we study board and senior manager diversity of gender, age and nationality in UK banks. Gender diversity increased steadily over the last two decades, albeit from a very low base and to only 20% by the end of 2020. Moreover, we find evidence of a ‘glass ceiling’, with the proportion of females increasing more slowly in the most influential roles. Age and nationality diversity changed less over time. Empirical results suggest that gender and nationality diversity are related to positive risk and performance outcomes, whereas the reverse is true for age diversity. However, these findings are derived from analysing differences between banks, which exhibit substantially more variation than changes in diversity within banks over time. When we only exploit variation in diversity within banks, we do not find any relationship between diversity and outcomes.
    Keywords: Diversity; bank risk; supervision
    JEL: G21 M14
    Date: 2021–07–07
  40. By: Heng Chen; Walter Engert; Marie-Hélène Felt; Kim P. Huynh; Gradon Nicholls; Daneal O'Habib; Julia Zhu
    Abstract: We use consumer surveys conducted in April, July and November 2020 to study how the COVID-19 pandemic affected the demand for cash and the use of various methods of payment. Continuing from Chen et al. (2020, 2021), we use data from the Bank Note Distribution System (BNDS) to track how the amount of cash in circulation changed throughout 2020. The November 2020 survey included a three-day payment diary. We compare this diary with similar diaries from 2009, 2013 and 2017 to study long-term trends in cash use and payment methods.
    Keywords: Bank notes; Central bank research; Coronavirus disease (COVID-19); Digital currencies and fintech; Econometric and statistical methods
    JEL: C12 E4 O54
    Date: 2021–07
  41. By: David Jones (University of East Anglia); Corrado Di Maria (University of East Anglia); Simone Valente (University of East Anglia)
    Abstract: Does financial intermediation affect structural change? We investigate both theoretically and empirically whether financial development accelerates structural change during the post-industrialization phase where employment, value-added and expenditure shares change towards services and away from manufacturing. We build a dynamic general equilibrium model where firms and households face different types of intermediation costs, and structural change can be driven by mutually independent technology differences { exogenous productivity gaps or asymmetric factor elasticities { as well as by learning-by-doing. Besides suggesting a stronger impact of financial development when productivity is endogenous and services are labor-intensive, all the model specifications robustly predict that exogenous reductions in intermediation costs { e.g., deregulation shocks { accelerate the pace and extent of structural change. We test this prediction empirically by examining the effects of state by- state bank branching deregulation in the United States in the 1970-1990s period. Using a range of estimation techniques including synthetic control methods { pooled, augmented, and with staggered treatment { we show that bank branching deregulation accelerated the structural change that was already underway, i.e., services account for a greater share of output and employment than they would have in the absence of deregulation.
    Keywords: Economic growth, structural change, nancial development, banking deregulation
    JEL: O14 O16 O41 O47 G28
    Date: 2021–07–29
  42. By: Aimola, Akingbade U; Odhiambo, Nicholas M
    Abstract: Inflationary tendencies of public debt have been the cause of an unsettling debate among policymakers in Nigeria. Using the autoregressive distributed lag (ARDL) framework, this study attempts to investigate the impact of total public debt on inflation in Nigeria for the period 1983?2018. The cointegrating regression results reveal evidence of a stable long-run relationship among inflation, total public debt, money supply, interest rate, economic growth, trade openness, and private investment in the presence of structural breaks. Empirical results show that the impact of public debt on inflation is statistically insignificant, irrespective of whether the regression was in the short or the long run. Hence, the study concludes that inflation in Nigeria could be driven by other factors other than public debt.
    Keywords: public debt; inflation; ARDL; Nigeria.
    Date: 2021–07

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