nep-cba New Economics Papers
on Central Banking
Issue of 2021‒10‒04
thirty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Revisiting Thailand's Monetary Policy Model for an Integrated Policy Analysis By Pongpitch Amatyakul; Tosapol Apaitan; Savaphol Hiruntiaranakul; Nuwat Nookhwun
  2. The effects of the ECB's pandemic-related monetary policy measures By Nelimarkka, Jaakko; Laine, Olli-Matti
  3. Macroprudential policy and the sovereign-bank nexus in the euro area By Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
  4. Reserve Bank of India’s Pandemic Responses By Chakraborty, Lekha S
  5. From SMP to PEPP: a further look at the risk endogeneity of the Central Bank By Marco Fruzzetti; Giulio Gariano; Gerardo Palazzo; Antonio Scalia
  6. COVID Response: The Fed’s Central Bank Swap Lines and FIMA Repo Facility By Mark Choi; Linda S. Goldberg; Robert Lerman; Fabiola Ravazzolo
  7. Can the Federal Reserve Effectively Target Main Street? Evidence from the 1970s Recession By John Kandrac
  8. Money Creation and Banking: Theory and Evidence By Heon Lee
  9. Sovereign debt crisis, fiscal consolidation, and active central bankers in a monetary union By Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  10. The Bias and Efficiency of the ECB Inflation Projections: a State Dependent Analysis By Eleonora Granziera; Pirkka Jalasjoki; Maritta Paloviita
  11. Monetary Policy and Exchange Rate Response: Evidence from Shock-based SVAR with Uncertainty Measures? By Cheolbeom Park; Seungyoo Shin
  12. More Money for Some: The Redistributive Effects of Open Market Operations By Christian Bustamante
  13. Shortterm impacts and interaction of macroprudential policy tools By Shaun de Jager; Riaan Ehlers; Keabetswe Mojapelo; Pieter Pienaar
  14. Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?) By Jeremy B. Rudd
  15. Have Consumers’ Long-Run Inflation Expectations Become Un-Anchored? By Olivier Armantier; Fatima Boumahdi; Leo Goldman; Gizem Koşar; Jessica Lu; Giorgio Topa; Wilbert Van der Klaauw
  16. International Reserve Management, Global Financial Shocks, and Firms’ Investment in Emerging Market Economies By Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
  17. COVID Response: The Term Asset-Backed Securities Loan Facility By Elizabeth Caviness; Ankur Goyal; Woojung Park; Asani Sarkar
  18. COVID Response: The Money Market Mutual Fund Facility By Kenechukwu E. Anadu; Marco Cipriani; Ryan M. Craver; Gabriele La Spada
  19. Peer Monitoring vs. Search Costs in the Interbank Market: Evidence from Payment Flow Data in Norway By Jon H. Findreng
  20. Systemic risk in interbank networks: disentangling balance sheets and network effects By Alessandro Ferracci; Giulio Cimini
  21. A Tale of Two Bailouts: Effects of TARP and PPP on Subprime Consumer Debt By Allen N. Berger; Onesime Epouhe; Raluca Roman
  22. Low inflation bends the Phillips curve around the world: Extended results By Kristin J. Forbes; Joseph E. Gagnon; Christopher G. Collins
  23. Liquidity Provision and Co-insurance in Bank Syndicates By Kevin F. Kiernan; Vladimir Yankov; Filip Zikes
  24. COVID Response: The Paycheck Protection Program Liquidity Facility By Desi Volker
  25. Banking-Crisis Interventions, 1257-2019 By Andrew Metrick; Paul Schmelzing
  26. Analysing euro area inflation outlook with the Phillips curve By Oinonen, Sami; Vilmi, Lauri
  27. On the nature of monetary and price inflation and hyperinflation By Laurence Francis Lacey
  28. Information frictions in inflation expectations among five types of economic agents By Camille Cornand; Paul Hubert
  29. A Nash Equilibrium for Differential Games with Moving-horizon Strategies By Enrico Saltari; Willi Semmler; Giovanni Di Bartolomeo
  30. COVID Response: The Primary and Secondary Corporate Credit Facilities By Nina Boyarchenko; Caren Cox; Richard K. Crump; Andrew Danzig; Anna Kovner; Or Shachar; Patrick Steiner
  31. COVID Response: The Main Street Lending Program By David M. Arseneau; Jose Fillat; Molly Mahar; Donald P. Morgan; Skander J. Van den Heuvel
  32. COVID Response: The Commercial Paper Funding Facility By Nina Boyarchenko; Richard K. Crump; Anna Kovner; Deborah Leonard

  1. By: Pongpitch Amatyakul (Bank of Thailand); Tosapol Apaitan (Bank of Thailand); Savaphol Hiruntiaranakul (Bank of Thailand); Nuwat Nookhwun (Bank of Thailand)
    Abstract: The constraints facing conventional monetary policy during the recent COVID-19 pandemic accelerate the central banks' use of integrated policy, using multiple tools to fulfill their macroeconomic objectives. This paper, therefore, aims to improve Thailand's monetary policy model for conducting policy analyses involving multiple tools. We embed macro-financial linkages into our model, which facilitate the identification of various policy tools at the central bank's disposal. The model also features multiple sources of nonlinearity, including an effective lower bound (ELB) constraint, to better capture economic dynamics during crises. We allow for a joint calibration of several tools, including conventional interest rate policy, foreign exchange (FX) intervention, macroprudential regulations and financial measures. Last, given a greater emphasis on financial stability, we attempt to measure macro-financial tail risks, which permit an analysis of policy trade-offs in addressing risks to financial stability. We show three applications of our model to shed light on potential gains from policy complementarity during the aftermath of COVID-19 pandemic: first, assessing the role of financial measures and FX intervention in supporting economic recovery; second, evaluating the interactions of monetary and macroprudential policies in maintaining financial stability; third, showing roles of fiscal policy as the ELB constraint binds.
    Keywords: Monetary Policy, Integrated Policy Framework, Semi-structural Model, Financial Stability
    JEL: C32 E37 E52 E58
    Date: 2021–09
  2. By: Nelimarkka, Jaakko; Laine, Olli-Matti
    Abstract: We assess the macroeconomic impact of pandemic-related monetary policy measures of the ECB. Conditioning on counterfactual interest rate paths that would have materialised in the absence of the policies, the macroeconomic effects are measured using structural vector autoregressions. In the framework, multiple monetary policy measures may simultaneously be analysed. According to our results, the asset purchase programmes implemented during the crisis have increased the annual GDP growth by approximate 2 percentage points in 2020-2021 and inflation by 0.5 percentage points. The longer-term refinancing operations have contributed positively but more mildly to the economic activity.
    Keywords: Monetary policy,Covid-19,ECB,structural VAR,policy evaluation
    JEL: C32 C54 E43 E52 E58
    Date: 2021
  3. By: Hristov, Nikolay; Hülsewig, Oliver; Kolb, Benedikt
    Abstract: We explore how changes in capital-based macroprudential regulation affect theexposure of national banking sectors to domestic government debt in the euro area,thus strengthening or weakening the sovereign-bank nexus. To do so, we construct ameasure of macroprudential policy based on theMacroprudential Policy EvaluationDatabaseand estimate responses to theunsystematiccomponent of macroprudentialpolicy in panel vector autoregressive models for euro area 'core" and 'periphery"countries. Our main finding suggests that an unsystematic capital-based macro-prudential policy tightening increases banks' exposure to domestic sovereign bondsin the periphery countries and so deepens the sovereign-bank nexus. By contrast,banks in the core countries expand their loan portfolios rather than adjusting theirdomestic sovereign bond holdings in response to the shock. We show that this re-sult can be tied to the theoretical literature and investigate several transmissionchannels. Our results are highly robust to changes in the econometric setup and themacroprudential indicator used.
    Keywords: macroprudential policy,euro area,sovereign-bank nexus,panel vector autore-gressive model
    JEL: C33 G21 G28
    Date: 2021
  4. By: Chakraborty, Lekha S
    Abstract: Extraordinary time requires extraordinary policy responses. As the Reserve Bank of India Governor Shri Shaktikanta Das puts it upfront, RBI has responded to a pandemic with “whatever it takes to” narrative and has done “heavy lifting” in terms of policy rates adjustments, liquidity infusion, and the regulatory mechanisms. The covid-19 is a dual crisis - a public health crisis and a macroeconomic crisis. Through the Great Lockdown strategy, we have systematically flattened the curve and moving towards growth recovery. However, strengthening fiscal and monetary linkages is crucial for the sustainability of the economic recovery. The pandemic economics of central banks is twofold. One is the focus on measures that relate to instantaneous economic “firefighting”: for instance, how to adjust the policy rates and also to ensure liquidity infusion into the system to stabilize the market reactions. The second is the long-term policy imperatives, including the regulatory mechanisms. As this crisis is of an unprecedented scale, it calls for unprecedented policy responses. The central banks have responded to the crisis within a “life versus livelihood” framework. This paper analyses the pandemic responses by the central bank of India and its new monetary policy framework of inflation targeting; and concludes with policy suggestions.
    Keywords: Central Bank , Pandemic policy , Covid19, Inflation Targeting, New Monetary Policy framework
    JEL: E52 G28 H63
    Date: 2021
  5. By: Marco Fruzzetti (Bank of Italy); Giulio Gariano (Bank of Italy); Gerardo Palazzo (Bank of Italy); Antonio Scalia (Bank of Italy)
    Abstract: This paper examines the evolution of credit risk arising from monetary policy operations and ELA on the Eurosystem balance sheet over the last decade. We employ a dynamic, market-driven risk model relying on the expected default frequencies for sovereigns, banks and corporates provided by Moody’s Analytics. Dependence between defaults is modeled with a multivariate Student t distribution with time-varying parameters. We find that at the end of 2020, risk is slightly above its average value in 2010 and approximately equal to one quarter of the value measured at the peak of the sovereign debt crisis in 2012, notwithstanding the threefold increase in the Eurosystem monetary policy exposure occurred since then. This is due to the launch of the OMT and PEPP, which succeeded in quelling market turmoil, thereby reducing the Eurosystem’s own balance sheet credit risk. The OMT in particular has had a long lasting effect in lowering sovereign risk in the euro area. Our findings support the view that, in periods of severe financial distress, risk for a central bank is largely endogenous.
    Keywords: financial risk measurement, unconventional monetary policy, ELA, sovereign risk, Eurosystem financial risk
    JEL: E58 E52 C15
    Date: 2021–10
  6. By: Mark Choi; Linda S. Goldberg; Robert Lerman; Fabiola Ravazzolo
    Abstract: Building on the facility design and application experience from the period of the global financial crisis, in March 2020 the Federal Reserve eased the terms on its standing swap lines in collaboration with other central banks, reactivated temporary swap agreements, and then introduced the new Foreign and International Monetary Authorities (FIMA) repo facility. While these facilities share similarities, they are different in their operations, breadth of counterparties and potential span of effects. This article provides key details on these facilities and evidence that the central bank swap lines and FIMA repo facility can reduce strains in global dollar funding markets and U.S. Treasury markets during extreme stress events.
    Keywords: swap line; dollar; liquidity; repo; Federal Reserve lending facilities
    JEL: F33 F34 G28
    Date: 2021–09–01
  7. By: John Kandrac
    Abstract: Modern central bankers confront a challenge of providing economic stimulus even when the policy rate is constrained by a lower bound. This challenge has led to substantial innovation by policymakers and a proliferation of new policy tools. In this paper, I offer evidence on the efficacy of a new tool known as funding for lending, which provides banks with subsidized funding to make additional loans. I focus on a historical episode from the United States in which the Federal Reserve provided banks with steeply subsidized loans to promote the expansion of credit within their local communities. I show that the cheap funding succeeded in generating more lending by countering banks' excessive liquidity preference. The additional credit benefited the real economy. Local areas enjoyed higher rates of small business formation and more rapid employment growth. Finally, I show that the cost of the subsidy provided by the government was more than offset by the additional payroll taxes paid out of higher wages and salaries. These results suggest that funding for lending programs deserve consideration for the modern central banker's toolkit and demonstrate that certain unconventional tools can offer monetary policymakers the means to pursue more targeted objectives.
    Keywords: Monetary policy; Funding for lending; Bank lending; Countercyclical policy; Discount window
    JEL: G28 G21 E58 E52
    Date: 2021–09–24
  8. By: Heon Lee
    Abstract: This paper develops a monetary-search model where the money multiplier is endogenously determined. I show that when the central bank pays interest on reserves, the money multiplier and the quantity of the reserve can depend on the nominal interest rate and the interest on reserves. The calibrated model can explain the evolution of the money multiplier and the excess reserve-deposit ratio in the pre-2008 and post-2008 periods. The quantitative analysis suggests that the dramatic changes in the money multiplier after 2008 are driven by the introduction of the interest on reserves with a low nominal interest rate.
    Date: 2021–09
  9. By: Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: This paper examines the impact of exogenous shocks on sovereign debts in an incomplete monetary union. We assume that financial stability is a public good which can be undermined by sovereign debt problems in fragile (peripheral) members. Our model shows that, unlike the common misconception, active monetary policies do not induce the peripheral government to relax its fiscal constraints; on the contrary, these policies tend to incentivize fiscal discipline by reducing the cost of balance consolidation. Active monetary policies, in fact, partially reallocate the stabilization costs from the periphery to the core of the union, preserving the common good and facilitating fiscal discipline in the periphery.
    Keywords: Core-periphery models; Stability in a monetary union; Risk sharing; Monetary union institutions; Unconventional policies
    JEL: E02 E58 E63 E65
    Date: 2021–09
  10. By: Eleonora Granziera; Pirkka Jalasjoki; Maritta Paloviita
    Abstract: We test for bias and efficiency of the ECB inflation forecasts using a confidential dataset of ECB macroeconomic quarterly projections. We investigate whether the properties of the forecasts depend on the level of inflation, by distinguishing whether the inflation observed by the ECB at the time of forecasting is above or below the target. The forecasts are unbiased and efficient on average, however there is evidence of state dependence. In particular, the ECB tends to overpredict (underpredict) inflation at intermediate forecast horizons when inflation is below (above) target. The magnitude of the bias is larger when inflation is above the target. These results hold even after accounting for errors in the external assumptions. We also find evidence of inefficiency, in the form of underreaction to news, but only when inflation is above the target. Our findings bear important implications for the ECB forecasting process and ultimately for its communication strategy.
    Keywords: forecast evaluation, forecast eciency, ination forecasts, central bank communication
    JEL: C12 C22 C53 E31 E52
    Date: 2021–04–28
  11. By: Cheolbeom Park (Department of Economics, Korea University, Seoul, Republic of Korea); Seungyoo Shin (Department of Economics, Boston University, Boston, Massachusetts, US?)
    Abstract: We examine the response of the exchange rate to monetary policy shocks using structural vector autoregression (SVAR). The SVAR approach employed in this study differs from the approaches used in previous studies in that we add uncertainty measures and employ shock-based identification constraints. Using structural shocks that are in accordance with the event and external variable constraints, we demonstrate that the US real effective exchange rate appreciates immediately in response to contractionary monetary policy shocks, with the maximum appreciation occurring within 1 to 2 quarters. We also provide evidence that recursive identification restrictions or the exclusion of any one of the two types of uncertainty measure can generate anomalous responses by the exchange rate. We further show via variance decomposition that monetary policy shocks explain a substantial portion of exchange rate variability, although they are not the most dominant driving force behind this variability.
    Keywords: Exchange rate, Monetary policy, Structural vector autoregressive, Uncovered interest rate parity
    JEL: C32 E52 F31 F41
    Date: 2021
  12. By: Christian Bustamante
    Abstract: Using a general equilibrium search-theoretic model of money, I study the distributional effects of open market operations. In my model, heterogeneous agents trade bilaterally among themselves in a frictional market and save using cash and illiquid short-term nominal government bonds. Wealth effects generate slow adjustments in agents’ portfolios following their trading activity in decentralized markets, giving rise to a persistent and nondegenerate distribution of assets. The model reproduces the distribution of asset levels and portfolios across households observed in the data, which is crucial to quantitatively assess the incidence of monetary policy changes at the individual level. I find that an open market operation targeting a higher nominal interest rate requires increasing the relative supply of bonds, raising the ability of agents to self-insure against idiosyncratic shocks. As a result, in the long run, inequality falls, and the inefficiencies in decentralized trading shrink. This leads agents that are relatively poor and more liquidity-constrained to benefit the most by increasing their consumption and welfare.
    Keywords: Inflation and prices; Monetary policy; Monetary policy implementation; Monetary policy transmission
    JEL: E21 E32 E52
    Date: 2021–09
  13. By: Shaun de Jager; Riaan Ehlers; Keabetswe Mojapelo; Pieter Pienaar
    Abstract: Short-term impacts and interaction of macroprudential policy tools
    Date: 2021–09–27
  14. By: Jeremy B. Rudd
    Abstract: Economists and economic policymakers believe that households' and firms' expectations of future inflation are a key determinant of actual inflation. A review of the relevant theoretical and empirical literature suggests that this belief rests on extremely shaky foundations, and a case is made that adhering to it uncritically could easily lead to serious policy errors.
    Keywords: Phillips curve; Expectations; Inflation; Wage determination; Wage-price spiral
    JEL: E31 E52
    Date: 2021–09–24
  15. By: Olivier Armantier; Fatima Boumahdi; Leo Goldman; Gizem Koşar; Jessica Lu; Giorgio Topa; Wilbert Van der Klaauw
    Abstract: With the recent surge in inflation since the spring there has been an increase in consumers’ short-run (one-year ahead) and, to a lesser extent, medium-run (three-year ahead) inflation expectations (see Survey of Consumer Expectations). Although this rise in short- and medium-run inflation expectations is relevant for policymakers, it does not provide direct evidence about “un-anchoring” of long-run inflation expectations. Roughly speaking, inflation expectations are considered un-anchored when long-run inflation expectations change significantly in response to developments in inflation or other economic variables, and begin to move away from levels consistent with the central bank’s (implicit or explicit) inflation objective. In that case, actual inflation can become unmoored and risks drifting persistently away from the central bank’s objective. Well-anchored long-run inflation expectations therefore represent an important measure of the success of monetary policy. In this post, we look at the current anchoring of consumers’ long-run inflation expectations using novel data from the Survey of Consumer Expectations (SCE). Our results suggest that in August 2021 consumers’ five-year ahead inflation expectations were as well anchored as they were two years ago, before the start of the pandemic.
    Keywords: inflation expectations; anchoring
    JEL: E31 D84
    Date: 2021–09–24
  16. By: Joshua Aizenman; Yin-Wong Cheung; Xingwang Qian
    Abstract: We examine the effects of active international reserve management (IRM) conducted by central banks of emerging market economies (EMEs) on firm investment in the presence of global financial shocks. Using firm level data from 46 EMEs from 2000 to 2018, we document four findings. First, active IRM positively affects firm investment - the effect strengthens with the magnitude of adverse external financial shocks. Second, financially constrained firms, compared with unconstrained ones, are less responsive to active IRM. Third, our results suggest that the country credit spread is a plausible causal channel of the positive IRM effect on firm investment. Fourth, the policies of capital controls and exchange rate managements are complementary to the IRM – it is beneficial to form a macro policy mix including active IRM to safeguard firm investment against global financial shocks. Further, our results indicate the IRM effect on firm investment is both statistical and economical significance and is relevant to the aggregate economy.
    JEL: F36 F42 F61 G31
    Date: 2021–09
  17. By: Elizabeth Caviness; Ankur Goyal; Woojung Park; Asani Sarkar
    Abstract: The COVID-19 pandemic disrupted the asset-backed securities (ABS) market, resulting in higher spreads on ABS and briefly halting the issuance of some ABS. On March 23, 2020, the Federal Reserve established the Term Asset-Backed Securities Loan Facility (TALF) to support the flow of credit to consumers and businesses by re-enabling the issuance of ABS. In this paper, we describe how TALF works, how much it was used, and its effect on the issuance and spreads of TALF-eligible securities relative to those of TALF-ineligible securities. We find that both the introduction of TALF and its subsequent expansion were associated with statistically significant declines in the spreads of TALF-eligible relative to TALF-ineligible ABS. However, the facility did not have a statistically significant effect on issuance. Finally, we compare TALF with an earlier version of the facility that was implemented during the global financial crisis and discuss lessons learned from implementing the program.
    Keywords: TALF; COVID crisis; Fed facility; securitization; ABS market; Federal Reserve lending facilities; COVID-19
    JEL: G01 G18 G23
    Date: 2020–09–01
  18. By: Kenechukwu E. Anadu; Marco Cipriani; Ryan M. Craver; Gabriele La Spada
    Abstract: In this article, we discuss the run on prime money market funds (MMFs) that occurred in March 2020, at the onset of the COVID-19 pandemic, and describe the Money Market Mutual Fund Liquidity Facility (MMLF), which the Federal Reserve established in response to it. We show that the MMLF, like a similarly structured Federal Reserve facility established during the 2008 financial crisis, was an important tool in stemming investor outflows from MMFs and restoring calm in short-term funding markets. The usage of the facility was higher by funds that suffered larger outflows. After the facility’s introduction, outflows from prime MMFs decreased more for those funds that had a larger share of illiquid securities. Importantly, following the introduction of the MMLF, interest rates on MMLF-ineligible securities decreased at a slower rate than those on MMLF-eligible securities, even after controlling for credit risk.
    Keywords: COVID-19; money market funds; runs; Federal Reserve lending facilities
    JEL: G23 G28 G11
    Date: 2021–09–01
  19. By: Jon H. Findreng
    Abstract: Bilateral payment flows between banks may provide private information about a borrowing bank’s liquidity position. This paper analyses whether private information on the bilateral payment flow of central bank reserves foster peer monitoring or whether the information is used to reduce search costs in the unsecured interbank market. In the former, banks with outflows of liquidity are penalized by their counterparties, while in the latter, these banks benefit through reduced search costs to find a liquidity provider. I use data from Norges Bank’s real time gross settlement system over the period 2012 to 2015 to identify unsecured overnight interbank loans and payment flows. The results suggest that banks are using private information from payment flows to reduce search costs and not for peer monitoring. This has important implications for regulators’ assessment of the pros and cons of a centralized versus a decentralized interbank market.
    Keywords: peer monitoring, search cost, unsecured overnight interbank market, interest rates, central bank liquidity policy, OTC markets
    JEL: G21 E42 E43 E58
    Date: 2021–05–29
  20. By: Alessandro Ferracci; Giulio Cimini
    Abstract: We study the difference between the level of systemic risk that is empirically measured on an interbank network and the risk that can be deduced from the balance sheets composition of the participating banks. Using generalised DebtRank dynamics, we measure observed systemic risk on e-MID network data (augmented by BankFocus information) and compare it with the expected systemic of a null model network, obtained through an appropriate maximum-entropy approach constraining relevant balance sheet variables. We show that the aggregate levels of observed and expected systemic risks are usually compatible but differ significantly during turbulent times (in our case, after the default of Lehman Brothers and the VLTRO implementation by the ECB). At the individual level instead, banks are typically more or less risky than what their balance sheet prescribes due to their position in the network. Our results confirm on one hand that balance sheet information used within a proper maximum-entropy network models provides good systemic risk estimates, and on the other hand the importance of knowing the empirical details of the network for conducting precise stress tests of individual banks, especially after systemic events.
    Date: 2021–09
  21. By: Allen N. Berger; Onesime Epouhe; Raluca Roman
    Abstract: High levels of subprime consumer debt can create social problems. We test the effects of the Troubled Asset Relief Program (TARP) and Paycheck Protection Program (PPP) bailouts during the Global Financial Crisis and COVID-19 crisis, respectively, on this debt. We use over 11 million credit bureau observations of individual consumer debt combined with banking, bailout, and local market data. We find that subprime consumers with more TARP institutions in their markets had significantly increased debt burdens following these bailouts. In contrast, PPP bailouts were associated with reduced subprime consumer debt. Findings are robust to addressing identification concerns, and yield policy implications regarding bailout structures and strings attached to bailout funds.
    Keywords: Household Debt; Subprime Consumer Debt; Banking; Bailouts; TARP; PPP; Financial
    JEL: G01 G28 D10 D12 E58
    Date: 2021–09–23
  22. By: Kristin J. Forbes (Massachusetts Institute of Technology (MIT)); Joseph E. Gagnon (Peterson Institute for International Economics); Christopher G. Collins (Morgan Stanley)
    Abstract: This paper revises and extends PIIE Working Paper 20-6. It continues to find strong support for a Phillips curve that becomes nonlinear when inflation is "low"—which our baseline model defines as less than 3 percent. The nonlinear curve is steep when output is above potential (slack is negative) but flat when output is below potential (slack is positive) so that further increases in economic slack have little effect on inflation. This finding is consistent with evidence of downward nominal wage and price rigidity. When inflation is high, the Phillips curve is linear and relatively steep. These results are robust to placing the threshold between the high and low inflation regimes at 2, 3, or 4 percent inflation or for a threshold based on country-specific medians of inflation. In this nonlinear model, international factors play a large role in explaining headline inflation (albeit less so for core inflation), a role that has been increasing since the global financial crisis.
    Keywords: economic slack, globalization, output gap, price dynamics
    JEL: E31 E37 E52 E58 F62
    Date: 2021–09
  23. By: Kevin F. Kiernan; Vladimir Yankov; Filip Zikes
    Abstract: We study the capacity of the banking system to provide liquidity to the corporate sector in times of stress and how changes in this capacity affect corporate liquidity management. We show that the contractual arrangements among banks in loan syndicates co-insure liquidity risks of credit line drawdowns and generate a network of interbank exposures. We develop a simple model and simulate the liquidity and insurance capacity of the banking network. We find that the liquidity capacity of large banks has significantly increased following the introduction of liquidity regulation, and that the liquidity co-insurance function in loan syndicates is economically important. We also find that borrowers with higher reliance on credit lines in their liquidity management have become more likely to obtain credit lines from syndicates with higher liquidity. The assortative matching on liquidity characteristics has strengthened the role of banks as liquidity providers to the corporate sector.
    Keywords: Liquidity insurance; Liquidity regulation; Interbank networks; Syndicated credit lines
    JEL: G21 G18 L14
    Date: 2021–09–24
  24. By: Desi Volker
    Abstract: To bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP), the Federal Reserve, with the backing of the Secretary of the Treasury, established the Paycheck Protection Program Liquidity Facility (PPPLF). The facility was intended to supply liquidity to financial institutions participating in the PPP and thereby provide relief to small businesses and help them maintain payroll. In this article, we lay out the background and rationale for the creation of the facility, cover the salient features of the PPP and the PPPLF, and analyze the facility’s loan take-up. Our findings suggest that the PPPLF played an important role in expanding the supply of credit to smaller banks and nondepository institutions and that these institutions were more likely to originate PPP loans to businesses on the smaller end of the scale.
    Keywords: PPP; PPPLF; SBA; CARES Act; Federal Reserve lending facilities
    JEL: G0 G2 G21 G23 G28
    Date: 2021–09–01
  25. By: Andrew Metrick; Paul Schmelzing
    Abstract: We present a new database of banking-crisis interventions since the 13th century. The database includes 1886 interventions in 20 categories across 138 countries, covering interventions during all of the crises identified in the main banking-crisis chronologies, while also cataloguing a large number of interventions outside of those crises. The data show a gradual shift over the past centuries from the traditional interventions of a lender-of-last-resort, suspensions of convertibility, and bank holidays, towards a much more prominent role for capital injections and sweeping guarantees of bank liabilities. Furthermore, intervention frequencies and sizes suggest that the crisis problem in the financial sector has indeed reached an apex during the post-Bretton Woods era – but that such trends are part of a more deeply entrenched development that saw global intervention frequencies and sizes gradually rise since at least the late 17th century.
    JEL: G01 G28
    Date: 2021–09
  26. By: Oinonen, Sami; Vilmi, Lauri
    Abstract: This paper presents the New Keynesian Phillips Curve (NKPC) -based framework for analysing euro area inflation outlook. Our NKPC specification, that relies on market- and survey-based inflation expectations, explains well euro area inflation dynamics. Its forecasting performance is also comparable to the performance of the ECB's official forecasts in both short- and long-horizons. Overall, the NKPC is a useful tool for monitoring euro area inflation outlook. Thanks to its fast and light updating procedure it provides almost real-time information on inflation outlook.
    Keywords: euro area,inflation expectations,inflation forecasting,Phillips curve
    JEL: E31 E37
    Date: 2021
  27. By: Laurence Francis Lacey
    Abstract: Monetary inflation is a sustained increase in the money supply than can result in price inflation, which is a rise in the general level of prices of goods and services. The objectives of this paper were to develop economic models to (1) predict the annual rate of growth in the US consumer price index (CPI), based on the annual growth in the US broad money supply (BMS), the annual growth in US real GDP, and the annual growth in US savings, over the time period 2001 to 2019; (2) investigate the means by which monetary and price inflation can develop into monetary and price hyperinflation. The hypothesis that the annual rate of growth in the US CPI is a function of the annual growth in the US BMS minus the annual growth in US real GDP minus the annual growth in US savings, over the time period investigated, has been shown to be the case. However, an exact relationship required the use of a non-zero residual term. A mathematical statistical formulation of a hyperinflationary process has been provided and used to quantify the period of hyperinflation in the Weimar Republic, from July 1922 until the end of November 1923.
    Date: 2021–08
  28. By: Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Paul Hubert (OFCE - Observatoire français des conjonctures économiques - Sciences Po - Sciences Po)
    Abstract: We compare disagreement in expectations and the frequency of forecast revisions among five categories of agents: households, firms, professional forecasters, policymakers and participants to laboratory experiments. We provide evidence of disagreement among all categories of agents. There is however a strong heterogeneity across categories: while policymakers and professional forecasters exhibit low disagreement, firms and households show strong disagreement. This translates into a heterogeneous frequency of forecast revision across categories of agents, with policymakers revising more frequently their forecasts than firms and professional forecasters. Households last revise less frequently. We are also able to explore the external validity of experimental expectations.
    Keywords: inflation expectations,information frictions,disagreement,forecast revisions,experimental forecasts,survey forecasts,central bank forecasts
    Date: 2021–09–22
  29. By: Enrico Saltari; Willi Semmler; Giovanni Di Bartolomeo
    Abstract: Our paper aims at introducing a moving-horizon interaction in a strategic context. We assume that, in each instant of time, players can predict the effects of their actions and those of their opponents on a finite moving horizon. We define an equilibrium concept which is consistent in this setting and develop an appropriate algorithm to compute it by using nonlinear model predictive control techniques. Focusing on the length of forecasting horizon, we propose two economic interpretations for our equilibrium, based on the limited rationality and political economy literature.To provide some practical insights of our approach, we consider a debt stabilization game in a monetary union.
    Keywords: Strategic interactions; Non–linear models; Model predictive control; Fiscal and monetary policy; Public debt
    JEL: C61 C72
    Date: 2021–09
  30. By: Nina Boyarchenko; Caren Cox; Richard K. Crump; Andrew Danzig; Anna Kovner; Or Shachar; Patrick Steiner
    Abstract: The Federal Reserve introduced the Primary Market Corporate Credit Facility (PMCCF) and the Secondary Market Corporate Credit Facility (SMCCF) in response to the severe disruptions in corporate bond markets triggered by the COVID-19 pandemic and subsequent economic shutdowns. The Corporate Credit Facilities (CCFs) were designed to work together to restore functioning of credit markets, with an overarching goal of facilitating credit provision to the non-financial corporate sector of the U.S. economy. This paper provides an overview of the CCFs, including detailing the facilities’ design, documenting their operations and usage, and describing their impact on corporate bond markets.
    Keywords: Federal Reserve; corporate bond markets; corporate credit facilities; PMCCF; SMCCF; Federal Reserve lending facilities
    JEL: G12 G18 G19
    Date: 2021–09–01
  31. By: David M. Arseneau; Jose Fillat; Molly Mahar; Donald P. Morgan; Skander J. Van den Heuvel
    Abstract: The Main Street Lending Program was created to support credit to small and medium-sized businesses and nonprofit organizations that were harmed by the pandemic, particularly those that were unsupported by other pandemic-response programs. It was the most direct involvement in the business loan market by the Federal Reserve since the 1930s and 1940s. Main Street operated by buying 95 percent participations in standardized loans from lenders (mostly banks) and sharing the credit risk with them. It would end up supporting loans to more than 2,400 borrowers and co-borrowers across the United States, with an average loan size of $9.5 million and total volume of $17.5 billion. This article describes the facility's goals, its design, the challenges and constraints that shaped its reach, and the characteristics of its borrowers and lenders. We conclude with some lessons learned for future policymakers and facility designers.
    Keywords: Main Street Lending Program; COVID-19; credit demand; bank loans; bank capital; small businesses; Federal Reserve lending programs
    JEL: E3 E58 G2
    Date: 2021–09–01
  32. By: Nina Boyarchenko; Richard K. Crump; Anna Kovner; Deborah Leonard
    Abstract: The Federal Reserve reestablished the Commercial Paper Funding Facility (CPFF 2020) in response to the disruptions in the commercial paper market triggered by the COVID-19 pandemic and subsequent economic shutdowns. The CPFF 2020 was designed to support market functioning and provide a liquidity backstop for the commercial paper market. This paper provides an overview of the CPFF 2020, including detailing the facility’s design, documenting its usage, and describing its impact on commercial paper markets. In addition, we compare the market conditions and facility design in CPFF 2020 to that of the original CPFF facility.
    Keywords: Federal Reserve; commercial paper market; CPFF; Federal Reserve lending facilities
    JEL: G12 G18 G19
    Date: 2021–09–01

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