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on Central Banking |
| By: | Federico Bassi; Andrea Boitani (Università Cattolica del Sacro Cuore; Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore) |
| Abstract: | A BMW model is augmented with a credit market affected by banks’ balance sheet and used to assess the dynamic performance of an economy in the face of demand and financial shocks under different assumptions about the interactions between monetary and macroprudential policy. We show that the regulatory bank’s capital requirement has a multiplier effect that interferes with monetary policy, thus influencing the credit market and the output gap, and this multiplier effect varies according to the institutional arrangements in which macroprudential and monetary policies are embedded. In particular, we find that cooperation between monetary policy and macroprudential policy delivers the best overall stabilization outcomes in the face of both negative demand and bank equity shocks, if such shocks are not highly persistent. As shock persistence increases, non-cooperation or a simple leaning against the wind monetary policy outperform cooperation. However, adding countercyclical capital buffers in the macroprudential toolkit reinstates the original ranking of institutional arrangements with cooperation dominating overall. |
| Keywords: | Financial Frictions, Monetary Policy, Macroprudential Policy, Policy Coordination. |
| JEL: | E44 E52 E58 E61 G21 G28 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ctc:serie1:def110&r= |
| By: | Maih, Junior; Mazelis, Falk; Motto, Roberto; Ristiniemi, Annukka |
| Abstract: | We analyse the implications of asymmetric monetary policy rules by estimating Markov-switching DSGE models for the euro area (EA) and the US. The estimations show that until mid-2014 the ECB’s response to inflation was more forceful when inflation was above 2% than below 2%. Since then, the ECB’s policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed’s policy, which has responded more strongly in times of crisis. We compute an optimal simple rule for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades. JEL Classification: E52, E58, E31, E32 |
| Keywords: | Bayesian Estimation, effective lower bound, Inflation targeting, Markov-switching DSGE, optimal monetary policy |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212587&r= |
| By: | Kengo Nutahara |
| Abstract: | The main objective of this paper is to investigate monetary policy response to asset price in a sticky price economy where the trend inflation rate is non-zero. We find that monetary policy response to asset price is helpful for achieving equilibrium determinacy if the trend inflation is negative (i.e., deflation) and sufficiently low. If this is not the case, monetary policy response to asset price becomes a source of equilibrium indeterminacy. We also find that monetary policy response to asset price can be helpful for equilibrium determinacy even if the trend inflation is positive in the case where the nominal wage is also sticky, and the parameter values are consistent with recent micro evidence. |
| Date: | 2021–06 |
| URL: | http://d.repec.org/n?u=RePEc:cnn:wpaper:21-004e&r= |
| By: | Maria Chiara Cucciniello (Roma Tre University); Matteo Deleidi (Roma Tre University); Enrico Sergio Levrero |
| Abstract: | In light of the literature on the ‘price puzzle’, this paper shows that a positive effect of a tightening of monetary policy on the level of prices should be considered a normal phenomenon rather than an ‘anomaly’ or a ‘specific regime phenomenon’ connected to passive behaviour of the Central Bank in response to changes in the inflation rate. In order to assess this effect of monetary policy on the level of prices, we estimate SVAR models based on US monthly data for the period 1959-2018. Alternative measures of price and inflation expectations are also taken into consideration to avoid feasible spurious correlation. Finally, all selected models are estimated along four different sub-samples to consider different monetary policy regimes. Our findings show that the ‘price puzzle’ exists irrespective of both the passive (active) behaviour of the Central Bank and the inclusion of price expectations. |
| Keywords: | Price Puzzle, Structural Vector Autoregressions, United States |
| JEL: | B22 E31 E43 E44 E52 |
| Date: | 2021–07 |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0262&r= |
| By: | Chadha, Jagjit S.; Corrado, Luisa; Meaning, Jack; Schuler, Tobias |
| Abstract: | In response to the coronavirus (Covid-19) pandemic, there has been a complementary approach to monetary and fiscal policy in the United States with the Federal Reserve System purchasing extraordinary quantities of securities and the government running a deficit of some 17% of projected GDP. The Federal Reserve pushed the discount rate close to zero and stabilised financial markets with emergency liquidity provided through a new open-ended long-term asset purchase programme. To capture the interventions, we develop a model in which the central bank uses reserves to buy much of the huge issuance of government bonds and this offsets the impact of shutdowns and lockdowns in the real economy. We show that these actions reduced lending costs and amplified the impact of supportive fiscal policies. We then run a counterfactual analysis which suggests that if the Federal Reserve had not intervened to such a degree, the economy may have experienced a significantly deeper contraction as a result from the Covid-19 pandemic. JEL Classification: E31, E40, E51 |
| Keywords: | Covid-19, monetary-fiscal interaction, non-conventional monetary policy, quantitative easing |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212588&r= |
| By: | Michal Franta; Jan Libich |
| Abstract: | We put forward a novel macro-financial empirical modelling framework that can examine the tails of distributions of macroeconomic variables and the implied risks. It does so without quantile regression, also allowing for non-normal distributions. Besides methodological innovations, the framework offers a number of relevant insights into the effects of monetary and macroprudential policy on downside macroeconomic risk. This is both from the short-run perspective and from the long-run perspective, which has been remained unexamined in the existing Macro-at-Risk literature. In particular, we estimate the conditional and unconditional US output growth distribution and investigate the evolution of its first four moments. The short-run analysis finds that monetary policy and financial shocks render the conditional output growth distribution asymmetric, and affect downside risk over and above their impact on the conditional mean that policymakers routinely focus on. The long-run analysis indicates, among other things, that US output growth left-tail risk showed a general downward trend in the two decades preceding the Global Financial Crisis, but has started rising in recent years. Our examination strongly points to post-2008 unconventional monetary policies (quantitative easing) as a potential source of elevated long-run downside tail risk. |
| Keywords: | Downside tail risk, growth-at-risk, macroeconomic policy, macro-financial modeling, non-normal distribution, threshold VAR, US output growth |
| JEL: | C53 C54 E32 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2021/3&r= |
| By: | Gyozo Gyongyosi (Leibniz Institute for Financial Research SAFE; Kiel Institute for the World Economy); Steven Ongena (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)); Ibolya Schindele (BI Norwegian Business School; Central Bank of Hungary) |
| Abstract: | We study how monetary conditions change the supply by banks of mortgage credit to households. We exploit the widespread presence of foreign currency mortgages in Hungary and study this country`s comprehensive credit registry. Changes in monetary conditions not only affect the supply of credit in volume, but also in its currency and risk composition. Hence, we establish a “bank‐lending‐to‐households” channel of monetary policy that is heterogeneous. While the availability of foreign currency mortgages weakens the domestic bank‐lending channel overall, weakly capitalized domestic banks relying on swap transactions for their foreign currency lending are more sensitive to changes in monetary conditions. |
| Keywords: | Bank balance‐sheet channel, household lending, monetary policy, foreign currency lending. |
| JEL: | E51 F3 G21 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:chf:rpseri:rp2164&r= |
| By: | Natalia Poiatti (Instituto de Relações Internacionais - USP) |
| Abstract: | This paper investigates how the announcements of the European Central Bank have impacted the cost of sovereign borrowing in central and peripheral European countries. Using the xtbreak command (Ditzen, Karavias and Westerlund, 2021) in Stata, we tested whether the variations of European sovereign spreads can be explained by economic fundamentals in a model that allows for two structural breaks: the first, when investors realized the fiscal sustainability of the EMU should be understood in a decentralized fashion, when the ECB announced it would not bail out Greece; the second, when the ECB realized the existence of the euro was in check and announced it would be able to financial assist the countries in financial trouble. We show that a model that allows for structural breaks after the ECB announcements can explain most of the variations in European sovereign spreads. |
| Date: | 2021–09–12 |
| URL: | http://d.repec.org/n?u=RePEc:boc:usug21:11&r= |
| By: | Greenwood, John (The Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise) |
| Abstract: | The purpose of this paper is to clarify the relation between money and interest rates. In section 1, the author examines the empirical validity of Keynes’s claims for his liquidity preference theory by looking at the relation between changes in interest rates and changes in the quantity of money. In section 2, the author considers Irving Fisher’s findings. Fisher, whose studies had mostly preceded Keynes, had shown that over any longer-term horizon the relation between money and interest rates was exactly the reverse of Keynes’ hypothesis of short-term liquidity preference. A reconciliation is proposed that treats Keynes’ theory as a short-term, liquidity effect, and Fisher’s results, which incorporate the effect of inflation or inflation expectations, as the longer-term determinant of interest rates. In section 3, the author applies the resulting combined theory of the relation between money and interest rates to five case studies in recent decades: two from Japan, and one each from the Eurozone, the U.K. and the U.S. The conclusion is that interest rates are a highly misleading guide to the stance of monetary policy; it is invariably better to rely on the growth rate of a broad definition of money when assessing the stance of monetary policy |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:ris:jhisae:0190&r= |
| By: | Silvia Albrizio (Banco de España); Iván Kataryniuk (Banco de España); Luis Molina (Banco de España); Jan Schäfer (CEMFI) |
| Abstract: | The use of central bank liquidity lines has gained momentum since the global financial crisis in order to provide liquidity in foreign exchange markets, while at the same time preventing threats to financial stability and negative spillbacks. US dollar swap lines are well studied, but much less is known about the effects of liquidity lines in euros. We use a difference-in-differences strategy to show that the announcement of ECB euro liquidity lines has a direct positive signalling effect since the premium paid by foreign agents to borrow euros in FX markets decreases up to 76 basis points relative to currencies not covered by these facilities. Additionally, the paper provides suggestive evidence that these facilities generate positive spillbacks to the euro area since domestic bank equity prices increase by 6.7% in euro area countries highly exposed via banking linkages to countries whose currencies are targeted by liquidity lines. |
| Keywords: | liquidity facilities, central banks swap and repo lines, spillbacks |
| JEL: | E44 E58 F33 G15 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2125&r= |
| By: | Irma Alonso (Banco de España); Pedro Serrano (Universidad Carlos III de Madrid); Antoni Vaello-Sebastià (Universitat des Illes Balears) |
| Abstract: | This article analyzes the impact of the unconventional monetary policies (UMPs) of four major central banks (the Fed, ECB, BoE and BOJ) on the probability of future market crashes. We exploit the heterogeneity of different UMP actions to disentangle their influence on reducing the ex ante perception of extreme events (tail risks) using the information contained in risk-neutral densities from the most liquid stock index options. The empirical findings show that the announcement of UMPs reduces the risk-neutral probability of extreme events across various horizons and thresholds, supporting the hypothesis of the risk-taking channel. Interestingly, foreign UMP actions also prove to be significant variables affecting domestic tail risks, mainly at longer horizons. These results reveal a cross-border effect of foreign UMPs on domestic tail risks. Finally, the dynamics of the UMPs are captured by a structural model that confirms a transitory impact of UMPs on market tail risk perceptions. |
| Keywords: | unconventional monetary policy, risk-neutral density, tail risk, event study, SVAR |
| JEL: | E44 E58 G01 G10 G14 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:2127&r= |
| By: | Okano, Eiji; Eguchi, Masataka |
| Abstract: | In this paper, we analyze the effects of money-financed (MF) fiscal stimulus and compare them with those resulting from a conventional debt-financed (DF) fiscal stimulus in a small open economy. We find that in normal times which is a period when a zero lower bound (ZLB) on the nominal interest rate is not applicable, MF fiscal stimulus is effective in increasing output. In a liquidity trap where the ZLB is applicable, even though the decrease in both consumer price index (CPI) inflation and output is more severe than in a closed economy when there is no fiscal response, MF fiscal stimulus is effective in stabilizing both. Accordingly, we show that even in an imperfect pass-through environment including a liquidity trap, an increase in government expenditure under MF fiscal stimulus is effective. In contrast, our policy implications concerning an increase in government expenditure under DF fiscal stimulus lie opposite to Gali, Jordi (2020), “The Effects of a Money-financed Fiscal Stimulus,” Journal of Monetary Economics, 115, 1-19, assuming a closed economy. In normal times, an increase in government expenditure under the DF scheme in a small open economy is more effective than in a closed economy, although Gali (2020) argues that it is much less effective. In a liquidity trap, an increase in government expenditure under the DF scheme is less effective, also in contrast to Gali (2020). We find that even in an imperfect pass-through environment, an increase in government expenditure under DF fiscal stimulus is not effective. Thus, in a small open economy, MF fiscal stimulus is not always essential in normal times, and in a liquidity trap, MF fiscal stimulus is more important than what Gali (2020) suggests because DF fiscal stimulus is not effective, irrespective of nominal exchange rate pass-through. |
| Keywords: | Fiscal Stimulus; Money Financing; Debt Financing; Zero Lower Bound; Imperfect Pass-through |
| JEL: | E31 E32 E52 E62 F41 |
| URL: | http://d.repec.org/n?u=RePEc:cpm:dynare:070&r= |
| By: | Beau Soederhuizen (CPB Netherlands Bureau for Economic Policy Analysis); Bert Kramer (CPB Netherlands Bureau for Economic Policy Analysis); Harro van Heuvelen (CPB Netherlands Bureau for Economic Policy Analysis); Rob Luginbuhl (CPB Netherlands Bureau for Economic Policy Analysis) |
| Abstract: | Capital buffers help banks to absorb financial shocks. This reduces the risk of a banking crisis. However, on the other hand capital requirements for banks can also lead to social costs, as rising financing costs can lead to higher interest rates for customers. In this research we make an exploratory analysis of the costs and benefits of capital buffers for groups of European countries. In this study, we estimate the optimal level of capital for banks in the euro area. As far as we know, we are the first to investigate this for the euro area. The optimal level results from a trade-off between the social costs and benefits of capital requirements. Depending on technical assumptions, we find an optimal capital buffer between 15 and 30 percent. Despite this considerable spread, the estimated optimum is in all cases higher than the current minimum requirements of Basel III. We also find significant heterogeneity in the optimum between euro area Member States. For Member States with a more stable economy and a banking sector that can easily attract funding we find lower optimal capital ratios. |
| JEL: | C33 C54 E44 G15 G21 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpb:discus:429&r= |
| By: | Daniel H. Cooper; Vaishali Garga; Maria Jose Luengo-Prado |
| Abstract: | We study the mortgage cash flow channel of monetary policy transmission under fixed-rate mortgage (FRM) versus adjustable-rate mortgage (ARM) regimes by comparing the United States with primarily long-term FRMs and Spain with primarily ARMs that automatically reset annually. We find a robust transmission of mortgage rate changes to spending in both countries but surprisingly a larger effect in the United States—and provide two explanations for this finding. First, there are channels of transmission other than the mortgage cash flow effect since other interest rates co-move with the mortgage rate. Second, while mortgage resets in Spain are automatic and typically small, mortgagors in the United States must actively refinance to lock in lower rates. As a result, the mortgage cash flow effect in Spain is homogeneous across mortgagors and symmetric for rate increases and decreases, whereas in the United States the effect is largest when rates decline, especially for households identified as likely refinancers. |
| Keywords: | consumption; intertemporal household choice; monetary policy transmission; adjustable-rate mortgages; fixed-rate mortgages |
| JEL: | D15 E21 E52 |
| Date: | 2021–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:93056&r= |
| By: | Thomas R. Michl (Colgate University, Department of Economics); Hyun Woong Park (Denison University, Department of Economics) |
| Abstract: | With an emphasis on contributing to macroeconomic pedagogy we examine the collateral multiplier by comparing it to the traditional money multiplier in a simplified framework of traditional banking and shadow banking in which government bonds are the core assets. While the money multiplier is a measure of the ability of the banking system to intermediate sovereign debt by creating deposits, the collateral multiplier is a measure of the shadow banking system’s ability to inter- mediate sovereign debt by creating shadow money. It also measures the degree of re-use of sovereign debt as collateral. In this setup, the collateral multiplier is defined as the ratio between dealer banks’ matched book repo activity relative to their trading book. Using the New York Fed’s Primary Dealer Statistics data, we empirically estimate the collateral multiplier for U.S. Treasury repo collateral. Our model and empirical results shed light on the transmission mechanisms of monetary policy channeled through shadow banks and on the U.S. Treasuries market turmoil induced by COVID-19 in March 2020. |
| Keywords: | shadow banks, collateral multiplier, rehypothecation, Treasury bond, repo. |
| JEL: | A2 E51 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2021-12&r= |
| By: | Farmer, J. Doyne; Goodhart, C. A. E.; Kleinnijenhuis, Alissa M. |
| Abstract: | The 2007-2008 financial crisis forced governments to choose between the unattractive alternatives of either bailing out a systemically important bank (SIB) or allowing it to fail disruptively. Bail-in has been put forward as an alternative that potentially addresses the too-big-to-fail and contagion risk problems simultaneously. Though its efficacy has been demonstrated for smaller idiosyncratic SIB failures, its ability to maintain stability in cases of large SIB failures and system-wide crises remains untested. This paper’s novelty is to assess the financial-stability implications of bail-in design, explicitly accounting for the multilayered networked nature of the financial system. We present a model of the European financial system that captures all five of the prevailing contagion channels. We demonstrate that it is essential to understand the interaction of multiple contagion mechanisms and that financial institutions other than banks play an important role. Our results indicate that stability hinges on the bank-specific and structural bail-in design. On one hand, a welldesigned bail-in buttresses financial resilience, but on the other hand, an ill-designed bail-in tends to exacerbate financial distress, especially in system-wide crises and when there are large SIB failures. Our analysis suggests that the current bail-in design may be in the region of instability. While policy makers can fix this, the political economy incentives make this unlikely. |
| Keywords: | bail-in; bail-in deisgn; contagion; default; financial crisis; financial networks; political economy; resolution; systemically important banks; too big to fail |
| JEL: | F3 G3 |
| Date: | 2021–09–03 |
| URL: | http://d.repec.org/n?u=RePEc:ehl:lserod:111903&r= |
| By: | Esra Nur Ugurlu (Department of Economics, University of Massachusetts Amherst) |
| Abstract: | This paper analyzes the structural change implications of consumer credit expansions in a dual-sector open economy growth model. Policy-induced increases in banks’ willingness and ability to lend result in new consumer lending, boosting consumption demand and average wages in the nontradable sector. Under the assumptions of fixed relative wages and mark-up pricing, wage pressures translate into inflationary pressures. The central bank, acting under the sole target of controlling inflation, raises the interest rate to contain inflationary pressures. This intervention causes a real exchange rate appreciation, followed by a loss of international competitiveness in the tradable sector. This way, the model illustrates that consumer credit expansions can trigger premature deindustrialization, shifting sectoral structure in favor of the nontradable sector. The formal model is inspired by the Turkish economy that experienced a notable expansion of consumer credit between 2002-2013. |
| Keywords: | Consumer credit, structural change, economic growth, inflation targeting, real exchange rate |
| JEL: | E58 F43 L16 O11 O41 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ums:papers:2021-14&r= |
| By: | Paolo Di Martino (Department of Economics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino, Italy) |
| Abstract: | This paper reconstructs the history of direct interventions to support the exchange rate performed by Italian banks of issue between 1880 and 1913. The paper, based on coeval documents, shows how in Italy "central banks" played an active role over the whole period targeting, in particular, the price of public bonds traded internationally as the difference between this price and the one in domestic markets could activate arbitrages able to influence the exchange rate. The paper shows that the end- result of these interventions depended on the interconnection between three variables: the volume of Italian bonds traded internationally, the amount of forex reserves held by "central banks", and the trust in the Italian public finances. |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:tur:wpapnw:072&r= |