nep-cba New Economics Papers
on Central Banking
Issue of 2021‒08‒16
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The Mundellian trilemma and optimal monetary policy in a world of high capital mobility By Richard T. Froyen; Alfred V. Guender
  2. The financial market impact of ECB monetary policy press conferences - a text based approach By Parle, Conor
  3. The monetary policy strategy of the European Central Bank: Review and recommendations By Feld, Lars P.; Fuest, Clemens; Haucap, Justus; Schweitzer, Heike; Wieland, Volker; Wigger, Berthold U.
  4. Are households indifferent to monetary policy announcements? By Fiorella De Fiore; Marco Jacopo Lombardi; Johannes Schuffels
  5. Daily Monetary Policy Rules and the ECB's Medium-Term Orientation By Jens Klose
  6. Imperfect pass-through to deposit rates and monetary policy transmission By Polo, Alberto
  7. Optimal Monetary Policy and Incomplete Information: Does the Real Exchange Matter? By Rodrigo Caputo; Felipe Leal
  8. Qualitative and quantitative Central Bank communications and professional forecasts: Evidence from India By Ashima Goyal; Prashant Parab
  9. Economic Support during the COVID Crisis. Quantitative Easing and Lending Support Schemes in the UK By Mahmoud Fatouh; Simone Giansante; Steven Ongena
  10. A unified framework for CBDC design: remuneration, collateral haircuts and quantity constraints By Assenmacher, Katrin; Berentsen, Aleksander; Brand, Claus; Lamersdorf, Nora
  11. The Long-Term Effects of Capital Requirements By Gianni De Nicolo; Nataliya Klimenko; Sebastian Pfeil; Jean-Charles Rochet
  12. ECB communication as a stabilization and coordination device: evidence from ex-ante inflation uncertainty By Fernandes, Cecilia Melo
  13. Greening Monetary Policy: Evidence from the People's Bank of China By Macaire Camille,; Naef Alain.
  14. US Spillovers of US Monetary Policy: Information effects & Financial Flows By Santiago Camara
  15. Bank and non-bank financial institutions’ crossborder linkages: New evidence from international banking data By Emter, Lorenz; Killeen, Neill; McQuade, Peter
  16. Consumers' updating, policy shocks and public debt: An empirical assessment of state dependencies By Martin Geiger; Marios Zachariadis
  17. Monetary policy, neutrality and the environment By Faria, Joao Ricardo; McAdam, Peter; Viscolani, Bruno
  18. Ripple effects of monetary policy By Frederic Boissay; Emilia Garcia-Appendini; Steven Ongena
  19. Present Bias Amplifies the Household Balance-Sheet Channels of Macroeconomic Policy By David Laibson; Peter Maxted; Benjamin Moll
  20. Shock amplification in an interconnected financial system of banks and investment funds By Sydow, Matthias; Schilte, Aurore; Covi, Giovanni; Deipenbrock, Marija; Del Vecchio, Leonardo; Fiedor, Paweł; Fukker, Gábor; Gehrend, Max; Gourdel, Régis; Grassi, Alberto; Hilberg, Björn; Kaijser, Michiel; Kaoudis, Georgios; Mingarelli, Luca; Montagna, Mattia; Piquard, Thibaut; Salakhova, Dilyara; Tente, Natalia
  21. Reserve Accumulation, Growth and Financial Crises By Gianluca Benigno; Luca Fornaro; Michael Wolf
  22. Out of the window? Green monetary policy in China: window guidance and the promotion of sustainable lending and investment By Dikau, Simon; Volz, Ulrich
  23. Observing Enforcement: Evidence from Banking By Anya V. Kleymenova; Rimmy E. Tomy
  24. Carbon Taxation and Inflation: Evidence from the European and Canadian Experience By Maximilian Konradt; Beatrice Weder di Mauro
  25. Measuring heterogeneity in banks’ interest rate setting in Russia By Anna Burova; Alexey Ponomarenko; Svetlana Popova; Andrey Sinyakov; Yulia Ushakova
  26. Heterogeneous Loans and the Effect of Monetary Interventions By Gianluca Cafiso; Giulia Rivolta
  27. It takes two to dance: institutional dynamics and climate-related financial policies By Baer, Moritz; Campiglio, Emanuele; Deyris, Jérôme
  28. On the structural determinants of growth-at-risk By Martin Geiger; Elias Hasler; Martin Gächter

  1. By: Richard T. Froyen; Alfred V. Guender
    Abstract: This paper proposes that the Mundellian Trilemma remains valid despite the emergence of a world financial cycle. A clear distinction must be made between monetary policy independence and insulation of an open economy’s financial system. A flexible exchange rate allows an optimizing central bank to chart an independent course but does not insulate the domestic economy from foreign monetary or financial shocks. The gains from a flexible exchange rate may be considerable and vary in accordance with the mandate of the central bank. The Mundellian Trilemma highlights the acute shortage of policy instruments. We show that macroprudential policy in the form of an interest equalization tax, enhances the ability of an optimizing central bank to effectively stabilize domestic output and inflation in the presence of policy changes abroad and potentially destabilizing capital flows.
    Keywords: Mundellian Trilemma, policy independence, capital mobility, instrument shortage, capital controls
    JEL: E3 E5 F3
    Date: 2021–07
  2. By: Parle, Conor (Central Bank of Ireland)
    Abstract: Using methods from natural language processing I create two measures of the monetary policy tilt of the ECB entitled the “Hawk-Dove Indices”, that outline the beliefs of the ECB on the current state of the economy and the outlook for growth and inflation. These measures closely track interest rate expectations over the tightening and loosening cycle, and can provide a useful measure of monetary policy tilt at zero lower bound episodes and contains information about the state of the economy. I exploit the time lag between decision announcements and the ECB’s monetary policy press conference to assess the immediate financial market impact of changes in communication within the press conference, free from the effects of the shock from the monetary policy decision. Consistent with the literature on the information channel of monetary policy, I find a non-negligible positive (negative) effect on stock prices of a more hawkish (dovish) tone in the press conference, indicating that the ECB reveals “private information” during these press conferences, and that market participants internalise this as good (bad) news regarding the future state of the economy, rather than internalising a future potential increase (decrease) in interest rates. This effect is stronger prior to the introduction of formal forward guidance, suggesting that since then ECB communication has been less surprising to markets in recent times.
    Keywords: Monetary policy, communication, machine learning, natural language processing, event study, information effects
    JEL: E52 E58 C55
    Date: 2021–05
  3. By: Feld, Lars P.; Fuest, Clemens; Haucap, Justus; Schweitzer, Heike; Wieland, Volker; Wigger, Berthold U.
    Abstract: The European Central Bank (ECB) is currently conducting a review of its monetary policy strategy. The last formal review took place in 2003. Now the focus is on the extent to which this strategy has contributed in recent years to fulfill the mandate set out in the Treaties of the European Union and whether certain elements need to be adjusted. Against this background, the Kronberger Kreis, the academic advisory board of the Stiftung Marktwirtschaft (Market Economy Foundation), examines whether the ECB's monetary policy strategy still holds promise for success, whether its mandate should be reinterpreted and how the use of specific instruments should be assessed. In its analysis, the Kronberger Kreis draws on the experience of the financial crisis, the euro debt crisis and the coronavirus crisis and argues that greater attention should be paid to the side effects and proportionality of monetary policy measures. The central banks of the Eurosystem are now the largest creditors of the member states. Fiscal dominance of monetary policy should be avoided. The ECB's hierarchical mandate prioritizing price stability should not be called into question. The envisaged numerical target for consumer price inflation of below, but close to, two percent remains reasonable. However, the ECB should also consider other measures of inflation in its decisions and their communication. In addition, the ECB should rely more strongly on quantitative benchmarks (interest rate rules, money supply growth). The transparency of monetary policy could be significantly increased, for example, by publishing surveys and forecasts of the ECB's Governing Council. In principle, all measures must take into account the need to strengthen the independence of the ECB and the stability of the monetary union.
    Date: 2021
  4. By: Fiorella De Fiore; Marco Jacopo Lombardi; Johannes Schuffels
    Abstract: We study the impact of the Fed's monetary policy announcements on households' expectations by comparing responses to the Survey of Consumer Expectations before and after Federal Open Market Committee (FOMC) meetings, over the period 2013-2019. We find that Fed decisions affect expectations of interest rates on savings accounts, particularly for respondents with high financial and numerical literacy. The impact of monetary policy announcements on inflation expectations is muted, even in response to some of the most relevant meetings of the FOMC that took place during that period. Expectations of personal financial conditions are barely affected. Our results stand in contrast to experimental studies that find strong effects of monetary policy and other macroeconomic news on expectations of households receiving a specific treatment, suggesting that the news naturally reaching the general population may provide weaker signals.
    Keywords: households, monetary policy, central bank communication, inflation expectations, survey data
    Date: 2021–08
  5. By: Jens Klose (THM Business School Giessen)
    Abstract: This article develops the first granular database on daily real-time inflation rates and output. Four different European forecast sources and three computation methods are applied to calculate those daily data. These are used in two types of monetary policy rules, for three different interest rates as the dependent variable. The results indicate that the main source of differences in the forecast horizons and response coeffcients is not the data sources or the computation method but, rather, the monetary policy rule applied and the interest rate used. That is, the results differ if unconventional monetary policies are considered. Moreover, the results tend to be time-varying; that is, sudden shifts in the optimal forecast horizon can be identified, leading to substantially altered policy rules.
    Keywords: Monetary policy rules, ECB, medium-term orientation
    JEL: E52 E58
    Date: 2021
  6. By: Polo, Alberto (Bank of England)
    Abstract: I document three salient features of the transmission of monetary policy shocks: imperfect pass-through to deposit rates, impact on credit spreads, and substitution between deposits and other bank liabilities. I develop a monetary model consistent with these facts, where banks have market power on deposits, a duration-mismatched balance sheet, and a dividend-smoothing motive. Deposit demand has a dynamic component, as in the literature on customer markets. A financial friction makes non-deposit funding supply imperfectly elastic. The model indicates that imperfect pass-through to deposit rates is an important source of amplification of monetary policy shocks.
    Keywords: Monetary policy transmission; deposit rates; banks; market power
    JEL: E43 E52 G21
    Date: 2021–07–30
  7. By: Rodrigo Caputo; Felipe Leal
    Abstract: In a small economy, with complete markets and domestic price stickiness, a monetary policy rule that reacts to domestic inflation implements the efficient allocation, as long as it also reacts to the natural rate of interest. In this case, a policy response to the exchange rate or any other foreign variable is inefficient. We show that, when the central bank is unable to observe the natural rate of interest, a domestic inflation targeting rule that reacts also to the real exchange rate is optimal. This rule is able to fully stabilize domestic inflation and, at the same time, induces efficient movements in relative prices (terms of trade) through nominal devaluations. Indeterminacy can arise, but a stronger policy response to domestic inflation can prevent this from happening.
    Date: 2021–06
  8. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Prashant Parab (Indira Gandhi Institute of Development Research)
    Abstract: We analyze the influence of qualitative and quantitative communications of the Reserve Bank of India on inflation expectations of professional forecasters, and draw out implications for the impact of policy variables on expectations. Estimating Carroll-type epidemiological models of expectation formation, we find large speed of adjustment of professional forecasters' expectations. Analysis of the determinants of inflation forecasts, inflation surprises and forecaster disagreement reveals significant influence of quantitative RBI communications in the form of inflation projections. This effect is prominent for shorter horizon forecasts and after the adoption of flexible inflation targeting regime. Macroeconomic fundamentals like lagged inflation and Repo rate too play a significant role in influencing inflation forecasts. Choice of words in the RBI monetary policy statements has more impact since October 2016, after monetary policy committee became the decision-making body.
    Keywords: Inflation expectations, Survey of professional forecasters, Central bank
    JEL: E31 E52 E58
    Date: 2021–04
  9. By: Mahmoud Fatouh (Bank of England); Simone Giansante (University of Bath - School of Management); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))
    Abstract: We investigate how the interaction of the Brexit and COVID waves of the Bank of England’s quantitative easing with the leverage ratio capital requirements or government COVID lending support schemes affected bank business lending. We find that the former QE programme was particularly successful in increasing lending to nonfinancial businesses, except for QE-banks subject to the UK leverage ratio, suggesting that the latter ratio incentivized QE-banks to lend to business anyway. The government schemes helped expand lending especially to SMEs post QE COVID, indicating that complementing QE with other credit easing programmes can improve its impact on lending to the real economy. During COVID-stress, changes to the UK leverage ratio supported better market-making in securities markets, and additional QE liquidity boosted stronger repo market intermediation.
    Keywords: Monetary policy, quantitative easing, bank lending, COVID-19
    JEL: E51 G21
    Date: 2021–04
  10. By: Assenmacher, Katrin; Berentsen, Aleksander; Brand, Claus; Lamersdorf, Nora
    Abstract: We study the macroeconomic effects of central bank digital currency (CBDC) in a dynamic general equilibrium model. Timing and information frictions create a need for inside (bank deposits) and outside money (CBDC) to finance production. To steer the quantity of CBDC, the central bank can set the lending and deposit rates for CBDC as well as collateral and quantity requirements. Less restrictive provision of CBDC reduces bank deposits. A positive interest spread on CBDC or stricter collateral or quantity constraints reduce welfare but can contain bank disintermediation, especially if the elasticity of substitution between bank deposits and CBDC is small. JEL Classification: E58, E41, E42, E51, E52
    Keywords: central bank digital currency, monetary policy, search and matching
    Date: 2021–07
  11. By: Gianni De Nicolo (Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)); Nataliya Klimenko (University of Zurich); Sebastian Pfeil (Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Erasmus Research Institute of Management (ERIM)); Jean-Charles Rochet (Swiss Finance Institute; University of Geneva - Geneva Finance Research Institute (GFRI); University of Zurich - Swiss Banking Institute (ISB))
    Abstract: We build a stylized dynamic general equilibrium model with financial frictions to analyze costs and benefits of capital requirements in the short-term and long-term. We show that since increasing capital requirements limits the aggregate loan supply, the equilibrium loan rate spread increases, which raises bank profitability and the market-to-book value of bank capital. Hence, banks build up larger capital buffers which (i) lowers the public losses in case of a systemic crisis and (ii) restores the banking sector’s lending capacity after the short-term credit crunch induced by tighter regulation. We confirm our model’s dynamic implications in a panel VAR estimation, which suggests that bank lending has even increased in the long-run after the implementation of Basel III capital regulation.
    Keywords: Bank capital requirements, credit crunch, systemic risk
    JEL: E21 E32 F44 G21 G28
    Date: 2021–06
  12. By: Fernandes, Cecilia Melo
    Abstract: This paper investigates the impact of ECB communication of its assessment of the economic outlook on ex-ante inflation uncertainty and sheds light on how central bank information shocks operate. The paper finds that ECB communication of new outlook information not only reduces professional forecasters’ disagreement (i.e., the cross-sectional dispersion of their average point forecasts of inflation) but also makes forecasters less uncertain about their own beliefs, thus reducing ex-ante average individual uncertainty. By combining and exploiting these types of ex-ante inflation uncertainty, results suggest that central bank information acts as a “coordination device” able to influence opinions and actions. Most importantly, it generates a “stabilizer effect” by substantially decreasing the dispersion among the inflation point forecasts, which converge towards their unconditional aggregate mean. The results of this paper not only help to explain the impact of new central bank information, but they are also useful for policymakers to define a communication strategy that attenuates ex-ante inflation uncertainty in the most effective way. JEL Classification: D83, E52, E58, E65, G14
    Keywords: central bank communication, euro area, ex-ante inflation uncertainty, inflation expectations
    Date: 2021–08
  13. By: Macaire Camille,; Naef Alain.
    Abstract: In June 2018, the People’s Bank of China (PBoC) decided to include green financial bonds into the pool of assets eligible as collateral for its Medium Term Lending Facility. The PBoC also gave green financial bonds a “first-among-equals” status. We measure the impact of the policy on the yield spread between green and non-green bonds. We show that pre-reform trends are minor, meaning that both green and non-green bonds yields evolved similarily at the time of the reform. Using a difference-in-differences approach, we show that the policy increased the spread by 46 basis points. Our approach differs from the literature in that we match bonds under review with non-green bonds with similar characteristics and issued by the same firm, which improves the relevance of firm fixed-effects. We also specifically investigate the impact on green bonds. The granularity of the data (daily) also allows us to conduct a dynamic analysis by dividing the sample into weekly, monthly and quarterly observations. Our results also show that the impact of the reform starts to materialize after three weeks, has a maximum effect after three months, and has a persistent effect over six months.
    Keywords: People’s Bank of China, Central Bank Collateral Framework, Green Bonds, Bond Yields, Greenium.
    JEL: E52 E58 Q51 Q54 G12 G18
    Date: 2021
  14. By: Santiago Camara
    Abstract: This paper presents evidence of an informational effect in changes of the federal funds rate around FOMC announcements by exploiting exchange rate variations for a panel of emerging economies. For several FOMC announcements dates, emerging market economies' exchange rate strengthened relative to the US dollar, in contrast to what the standard theory predicts. These results are in line with the information effect, which denote the Federal Reserve's disclosure of information about the state of the economy. Using Jarocinski \& Karadi 2020's identification scheme relying on sign restrictions and high-frequency surprises of multiple financial instruments, I show how different US monetary policy shocks imply different spillovers on emerging markets financial flows and macroeconomic performance. I emphasize the contrast in dynamics of financial flows and equity indexes and how different exchange rate regimes shape aggregate fluctuations. Using a structural DSGE model and IRFs matching techniques I argue that ignoring information shocks bias the inference over key frictions for small open economy models.
    Date: 2021–08
  15. By: Emter, Lorenz (Central Bank of Ireland); Killeen, Neill (Central Bank of Ireland); McQuade, Peter (Central Bank of Ireland)
    Abstract: This Note examines the factors associated with global banks’ cross-border claims on non-bank financial institutions. In line with the substantial growth of non-bank financial intermediation internationally, banks’ cross-border claims on non-bank financial institutions have grown rapidly in recent years. As a global hub for non-bank financial intermediation, Ireland hosts a large share of the non-bank financial institutions captured within these international banking data. Our results suggest that tightening (loosening) monetary policy can decrease (increase) cross-border bank claims on non-bank financial institutions at a global level. Moreover, we find that the tightening of borrower-based macroprudential policies is associated with an increase in cross-border bank flows to non-bank financial institutions. Our findings illustrate the potential for cross-border spillovers from changes to monetary and macroprudential policies and the importance of closely monitoring cross-border linkages between banks and non-bank financial institutions. Our findings also highlight the need for developing and operationalising the macroprudential policy framework for non-bank financial intermediation given the potential for spillover effects across the financial system.
    Date: 2021–06
  16. By: Martin Geiger (Liechtenstein-Institut); Marios Zachariadis (University of Cyprus)
    Abstract: We assess the impact of fiscal and monetary policy shocks on US survey-based consumer expectations within states of low and high public debt. Following an unexpected increase in government spending, consumption intentions rise in the low-debt state and fall in the highdebt state. Overall, such a shock has adverse e ects on expectations in high-debt states. Similarly, contractionary monetary policy shocks induce pessimistic expectations in the highdebt state but not in the low-debt state. The estimated responses suggest that higher public debt fuels considerations regarding its repayment, giving rise to state dependencies in the updating of expectations in response to both fiscal and monetary policy shocks.
    Keywords: expectations, rational inattention, Ricardian, fiscal theory of the price level
    JEL: E31 E52 E62 E63
  17. By: Faria, Joao Ricardo; McAdam, Peter; Viscolani, Bruno
    Abstract: We study the interaction between monetary and fiscal policies in a Ramsey-Sidrauski model augmented with environmental capital. Equilibrium solutions are studied through the “Green Golden Rule”. Despite the non-separability of money in utility and intertemporally non-separable preferences, money is environmentally neutral. Policy impacts the environment via the marginal rate of transformation rather than the marginal rate of substitution between consumption and environment. Fiscal policies, lump sum and distortionary, under a balanced budget, are also environmentally non-neutral. Only under a non-balanced budget, when deficits are monetized, is money environmentally non-neutral. In alternative approaches (Cash-in-Advance, Transactions Costs), money is environmentally non-neutral. JEL Classification: E52, E62, H23
    Keywords: cash in advance, Chichilnisky et al. conjecture, environmental capital, Friedman rule, green golden rule, Ramsey-Sidrauski, transactions costs
    Date: 2021–07
  18. By: Frederic Boissay; Emilia Garcia-Appendini; Steven Ongena
    Abstract: Is conventional monetary policy transmitted through the demand for and supply of intermediate goods in an economy? Analyzing unique US data on corporate linkages, we document that downstream and upstream corporate financial health are instrumental for the transmission of monetary policy. Our estimates suggest that contractionary changes in monetary conditions lead to reductions in both the demand and the supply of all financially constrained business partners, thereby creating bottlenecks, which induce the linked firms themselves to curtail their own activities ("ripple effects"). Overall, our estimates suggest that changes in monetary conditions may have a quantitatively larger impact on firms' operations through the changes in demand and supply induced by constrained business partners than through the firms' own financial conditions.
    Keywords: monetary policy transmission, supply chain, aggregate demand, cost channel
    Date: 2021–08
  19. By: David Laibson; Peter Maxted; Benjamin Moll
    Abstract: We study the effects of monetary and fiscal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households' marginal propensity to consume (MPC), present bias increases the impact of fiscal policy. Present bias also amplifies the effect of monetary policy but, at the same time, slows down the speed of monetary transmission. Interest rate cuts incentivize households to conduct cash-out refinances, which become targeted liquidity-injections to high-MPC households. But present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates.
    JEL: D14 D15 E03 E2 E21 E5 E62 E71 G4
    Date: 2021–07
  20. By: Sydow, Matthias; Schilte, Aurore; Covi, Giovanni; Deipenbrock, Marija; Del Vecchio, Leonardo; Fiedor, Paweł; Fukker, Gábor; Gehrend, Max; Gourdel, Régis; Grassi, Alberto; Hilberg, Björn; Kaijser, Michiel; Kaoudis, Georgios; Mingarelli, Luca; Montagna, Mattia; Piquard, Thibaut; Salakhova, Dilyara; Tente, Natalia
    Abstract: This paper shows how the combined endogenous reaction of banks and investment funds to an exogenous shock can amplify or dampen losses to the financial system compared to results from single-sector stress testing models. We build a new model of contagion propagation using a very large and granular data set for the euro area. Based on the economic shock caused by the Covid-19 outbreak, we model three sources of exogenous shocks: a default shock, a market shock and a redemption shock. Our contagion mechanism operates through a dual channel of liquidity and solvency risk. The joint modelling of banks and funds provides new insights for the assessment of financial stability risks. Our analysis reveals that adding the fund sector to our model for banks leads to additional losses through fire sales and a further depletion of banks’ capital ratios by around one percentage point. JEL Classification: D85, G01, G21, G23, L14
    Keywords: fire sales, liquidity, overlapping portfolios, price impact, stress testing
    Date: 2021–08
  21. By: Gianluca Benigno; Luca Fornaro; Michael Wolf
    Abstract: We present a model that reproduces two salient facts characterizing the international monetary system: Fast growing emerging countries i) run current account surpluses, ii) accumulate international reserves and receive net private in flows. We study a two-sector, tradable and nontradable, small open economy. There is a growth externality in the tradable sector and agents have imperfect access to international financial markets. By accumulating foreign reserves, the government induces a real exchange rate depreciation and a reallocation of production towards the tradable sector that boosts growth. Financial frictions generate imperfect substitutability between private and public debt flows so that private agents do not perfectly offset the government policy. The possibility of using reserves to provide liquidity during crises amplifies the positive impact of reserve accumulation on growth. The optimal reserve management en- tails a fast rate of reserve accumulation, as well as higher growth and larger current account surpluses compared to the economy with no policy intervention. The model is also consistent with the negative relationship between in flows of foreign aid and growth observed in low income countries.
    Keywords: foreign reserve accumulation, gross capital flows, growth, financial crises, allocation, puzzle, exchange rate undervaluation
    JEL: F31 F32 F41 F43
    Date: 2021–07
  22. By: Dikau, Simon; Volz, Ulrich
    Abstract: Chinese monetary and financial authorities have been among the pioneers in promoting green finance. This paper investigates the use of one specific monetary policy tool, namely window guidance, by the People’s Bank of China (PBC) and the China Banking Regulatory Commission (CBRC) to encourage financial institutions to expand credit to sustainable activities and curb lending to heavy-polluting industries. We investigate window guidance targets for the period 2001-2020 and find that ‘green window guidance’ was used by the CBRC from at least 2006 and by the PBC from 2007 to discourage lending to carbon-intensive and polluting industries and/or to increase support to sustainable activities. Both authorities stopped discouraging lending to carbon-intensive/polluting industries in 2014. Sustainable objectives were subsequently also removed from the PBC’s list of priority sectors at the start of 2019, ending the practice of green window guidance in China. Sustainability-enhancing window guidance targets were replaced and formalised through new ‘Guidelines for Establishing the Green Financial System’, reflecting efforts to move away from controls-based towards market-based policy instruments. Based on this analysis, the paper draws four lessons for the design of green finance policies for other countries that seek to enhance sustainable finance and mitigate climate change and related risks.
    Keywords: sustainable finance; central banking and financial supervision; China; Centre for Climate Change Economics and Policy; ES/P005241/1; ES/R009708/1; 71661137002
    JEL: G10 G20 G30 Q01 Q50
    Date: 2021–05–14
  23. By: Anya V. Kleymenova; Rimmy E. Tomy
    Abstract: This paper finds that the disclosure of supervisory actions is associated with changes in regulators' enforcement behavior. Using a novel sample of enforcement decisions and orders (EDOs) and the setting of the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which required the public disclosure of EDOs, we find that U.S. bank regulators issue more EDOs, intervene sooner, and rely more on publicly observable signals after the disclosure regime change. The content of EDOs also changes, with documents becoming more complex and boilerplate. Our results are stronger in counties with higher news circulation, indicating that disclosure plays an incremental role in regulators' changing behavior. We evaluate the main potentially confounding changes around FIRREA, including the S\\&L crisis and competition from thrifts, and find robust results. We also study changes in bank outcomes following the regime change and find that uninsured deposits decline at EDO banks, especially for banks with EDOs covered in the news. Finally, we observe that bank failure accelerates despite improvements in capital ratios and asset quality.
    Keywords: Disclosure; Enforcement actions; Regulatory incentives; Banking
    JEL: G21 G28
    Date: 2021–08–02
  24. By: Maximilian Konradt (IHEID, Graduate Institute of International and Development Studies, Geneva); Beatrice Weder di Mauro (IHEID, Graduate Institute of International and Development Studies, Geneva)
    Abstract: What is the effect of climate policies on inflation and economic activity? Answering this question is critical for central banks trying to achieve price stability. This paper studies the experience from existing carbon taxes in Canada and Europe, introduced over the last 30 years. Based on two separate empirical approaches, we find that carbon taxes do not have to be inflationary and may even have deflationary effects. In particular, our evidence suggests that the increase in energy prices was more than offset by a fall in the prices of services and other non-tradables. Our results are robust for Europe and Canada, as well as a number of different country groupings. At least in case of British Columbia, a contraction in household incomes and expenditures, in particular among the richer households, could explain the deflationary effect.
    Keywords: Carbon taxes; carbon pricing; inflation; monetary policy; climate change
    JEL: E31 E50 Q54 Q43
    Date: 2021–08–12
  25. By: Anna Burova (Bank of Russia, Russian Federation); Alexey Ponomarenko (Bank of Russia, Russian Federation); Svetlana Popova (Bank of Russia, Russian Federation); Andrey Sinyakov (Bank of Russia, Russian Federation); Yulia Ushakova (Bank of Russia, Russian Federation)
    Abstract: We use credit registry data on all corporate loans issued by all Russian banks since 2017 to decompose the bank interest spreads into a common factor, as well as borrower and lender-related components while controlling for loan characteristics. We find that variation in loan rates associated with lender-specific factors (heterogeneity of banks) and borrower-specific factors (heterogeneity of borrowers) is substantial. We use the identified bank-specific components to measure fragmentation of the corporate credit market in Russia. We illustrate the developments in the Russian credit market during the pandemic using the obtained estimates. The results indicate that heterogeneity in banks’ interest rate setting is high and increased in the early stage of the pandemic. The range of borrower-related premiums charged by banks also widened (mostly due to increase in rates of loans to companies in sectors presumably affected by the pandemic). Finally, our results suggest that banks tightened non-interest loan conditions during the pandemic.
    Keywords: bank interest margin, bank interest spread, corporate credit, credit registry, financial stability, credit market fragmentation, Russian banking sector in the pandemic.
    JEL: E44 E51 E52 E58 G21 G28
    Date: 2021–07
  26. By: Gianluca Cafiso; Giulia Rivolta
    Abstract: The amount of credit in the economy is a heterogeneous aggregate that can be analyzed across different dimensions. Considering such dimensions provides insights into the effect of monetary policy interventions because the credit components are observed to respond differently. Several possible motivations are behind such a differential response and those relate to either demand and supply factors intrinsic to the transmission mechanism of monetary policy. Our objective is to unveil such a differential response across a couple of relevant dimensions and discuss the possible causes behind what observed. The analysis refers to the US and is based on a vector auto-regression estimated using Bayesian techniques and identified with a combination of sign and zero-restrictions.
    Keywords: bank loans, non-bank loans, monetary interventions, households, corporate business, non-corporate business, Bayesian VAR
    JEL: E44 E51 G20 G21 C11
    Date: 2021
  27. By: Baer, Moritz; Campiglio, Emanuele; Deyris, Jérôme
    Abstract: This article studies how institutional dynamics might affect the implementation of climate-related financial policies. First, we propose a three-dimensional framework to distinguish: i) motives for policy implementation (prudential or promotional); ii) policy instruments (informational, incentive or coercive); and iii) implementing authorities (political or delegated). Second, we use this framework to show how sustainable financial interventions in certain jurisdictions - most notably, Europe - rely solely on informational policies to achieve both promotional and prudential objectives. Policymakers in other jurisdictions - e.g., China - also implement incentive or coercive financial policies to achieve promotional objectives. Third, we identify two main institutional explanations for this European ‘promotional gap’: i) limited control of political authorities on financial dynamics; and ii) strong powers and independence of delegated authorities. This governance configuration leads to an institutional deadlock in which only measures fitting with both political and delegated authorities’ objectives can be implemented. Finally, we discuss the scenarios that might originate from the current institutional setting. We identify three possible evolutionary paths: i) a drift towards a green financial technocracy; ii) a re-politicization of delegated authorities; iii) a move towards fiscal-monetary coordination.
    Keywords: sustainable finance; climate change; low-carbon transition; central banks; financial supervisors; delegation; Centre for Climate Change Economics and Policy; 853050
    JEL: E44 E58 G28 G18 G14
    Date: 2021–04–22
  28. By: Martin Geiger (Liechtenstein-Institut); Elias Hasler (Liechtenstein Financial Market Authority); Martin Gächter (Liechtenstein Financial Market Authority)
    Abstract: We examine structural differences in growth vulnerabilities across countries resulting from time-varying financial risk. Considering differences in trade openness, financial sector size, the public spending ratio and government effectiveness, our findings suggest the existence of both a structural gap as well as a risk sensitivity gap when estimating growth-at-risk (GaR) across countries. Hence, structural factors do not only drive level-differences in GaR, but also give rise to differences in the responsiveness of GaR to varying levels of risk. Furthermore, we show that structural factors affect the term structure of GaR, with the impact of structural characteristics varying over the forecasting horizon. A proper understanding of structural factors in the context of the GaR framework is particularly important to facilitate the use of the concept in macroprudential policy.
    Keywords: Growth-at-risk; vulnerable growth; structural factors; macroprudential policy
    JEL: E27 E32 E44 F43 G01 G20 G28

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