nep-cba New Economics Papers
on Central Banking
Issue of 2021‒10‒25
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The transmission of euro area monetary policy to financially euroised countries By Moder, Isabella
  2. The persistent and generalised decline in the U. S. interest rates: an alternative interpretation By Capraro, Santiago; Panico, Carlo; Torres-Gonzalez, Luis Daniel
  3. The ECB's tracker: nowcasting the press conferences of the ECB By Marozzi, Armando
  4. An Analysis of Monetary and Macroprudential Policies in a DSGE Model with Reserve Requirements and Mortgage Lending By Ben-Gad, M.; Pearlman, J.; Sabuga, I.
  5. Macroprudential Policy during COVID-19: The Role of Policy Space By Katharina Bergant; Kristin Forbes
  6. The impact of the Bank of Canada’s Government Bond Purchase Program By Rohan Arora; Sermin Gungor; Joe Nesrallah; Guillaume Ouellet Leblanc; Jonathan Witmer
  7. Demographic Effects on Prices: Is Aging Deflationary? By Tomoki Isa
  8. The ECB’s Asset Purchase Programme: Theory, effects, and risks By Benigno Pierpaolo; Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello
  9. Not all shocks are created equal: assessing heterogeneity in the bank lending channel By Blattner, Laura; Farinha, Luísa; Nogueira, Gil
  10. How excessive endogenous money supply can contribute to global financial crises. By Shvets, Serhii
  11. The Internationalization of Domestic Banks and the Credit Channel of Monetary Policy By Morales, Paola; Osorio, Daniel; Lemus, Juan S.; Sarmiento Paipilla, Miguel
  12. The Impact of Remittances on Monetary Transmission Mechanisms during the Pre and Post-Conflict Eras in Sri Lanka By Jahan Abdul Raheem; Gazi M. Hassan; Mark J. Holmes
  13. The channels of banks’ response to negative interest rates By Whelsy Boungou; Paul Hubert
  14. Rethinking Exchange Rate Regimes By Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
  15. Better Two Eyes than One: A Synthesis Classification of Exchange Rate Regimes By Cécile Couharde; Carl Grekou
  16. Regional The Meaning of MMT By Françoise Drumetz; Christian Pfister

  1. By: Moder, Isabella
    Abstract: This paper provides a comprehensive analysis of the interest rate pass-through of euro area monetary policy to retail rates outside the euro area, contributing to the literature on the consequences of unofficial financial euroisation and on the transmission channels of monetary policy spillovers. The results suggest that in the long run, more than one third of all euro retail rates in euroised countries of central, eastern and south-eastern Europe (CESEE) are linked to the euro area shadow rate. Compared to euro area monetary policy, the share of cointegration of the domestic monetary policy rate is lower, suggesting that domestic central banks in euroised countries with independent monetary policy can only partially control the `euro part´ of the interest rate channel. Furthermore, euro area monetary policy shocks are fast and persistently transmitted into euro retail rates outside the euro area, which constitutes an additional channel of international shock transmission. JEL Classification: C22, C32, E43, E52, F42
    Keywords: EU integration, international monetary policy spillovers, monetary policy transmission, unofficial financial euroisation
    Date: 2021–10
  2. By: Capraro, Santiago; Panico, Carlo; Torres-Gonzalez, Luis Daniel
    Abstract: Interest rates in the USA and in other countries have experienced persistent and generalised declines since the 1980s. The main interpretations of this phenomenon ignore the role of monetary factors, such as financial and monetary policy. The essay proposes an alternative interpretation based on the choice of the Federal Reserve (FED) to conduct monetary policy by attributing high priority to financial-stability. The interaction between changes in financial regulation, the transformation of "specialized" banking into "universal", and the FED's concern with financial instability have led the central bank to add to the role of "lender of last resort" that of "lender of first resort" that systematically provides liquidity at a low cost to financial firms. This new conduct of monetary policy has produced the downward trend in interest rates.
    Keywords: interest rates, monetary policy, financial stability, change of financial regulation.
    JEL: E11 E12 E43 E44 E52 E58 G01 G21
    Date: 2021–10–13
  3. By: Marozzi, Armando
    Abstract: This paper proposes an econometric framework for nowcasting the monetary policy stance and decisions of the European Central Bank (ECB) exploiting the ow of conventional and textual data that become available between two consecutive press conferences. Decompositions of the updated nowcasts into variables' marginal contribution are also provided to shed light on the main drivers of the ECB's reaction function at every point in time. In out-of-sample nowcasting experiments, the model provides an accurate tracking of the ECB monetary policy stance and decisions. The inclusion of textual variables contributes significantly to the gradual improvement of the model performance. JEL Classification: E37, E47, E52
    Keywords: dynamic factor model, forecasting, monetary policy, natural language processing
    Date: 2021–10
  4. By: Ben-Gad, M.; Pearlman, J.; Sabuga, I.
    Abstract: We propose a general equilibrium framework that highlights the interaction of reserve requirements and a conventional monetary policy in a model that combines endogenous housing loan defaults and financial intermediation frictions due to the costs of enforcing contracts. We use the model to examine how the interaction of these policies affect (i) the credit and business cycle; (ii) the distribution of welfare between savers and borrowers; (iii) the overall welfare objectives when monetary and macroprudential policies are optimised together or separately. We find that models with an optimised reserve ratio rule are effective in reducing the sudden boom and bust of credit and the business cycle. We also find that there are a distributive implications of the introduction of reserve ratio where borrowers gain at the expense of savers. However, there is no difference in the overall welfare results whether monetary and macroprudential policies are optimised together or separately.
    Keywords: Reserve requirements; endogenous loan defaults; welfare
    Date: 2021
  5. By: Katharina Bergant; Kristin Forbes
    Abstract: This paper uses the initial phase of the COVID-19 pandemic to examine how macroprudential frameworks developed over the past decade performed during a period of heightened financial and economic stress. It discusses a new measure of the macroprudential stance that better captures the intensity of different policies across countries and time. Then it shows that macroprudential policy has been used countercyclically—with stances tightened during the 2010’s and eased in response to COVID-19 by more than previous risk-off periods. Countries that tightened macroprudential policy more aggressively before COVID, as well as those that eased more during the pandemic, experienced less financial and economic stress. Countries’ ability to use macroprudential policy, however, was significantly constrained by the extent of existing “policy space”, i.e., by how aggressively policy was tightened before COVID-19. The use of macroprudential tools was not significantly affected by the space available to use other policy tools (such as fiscal policy, monetary policy, FX intervention, and capital flow management measures), and the use of other tools was not significantly affected by the space available to use macroprudential policy. This suggests that although macroprudential tools are being used countercyclically and should therefore help stabilize economies and financial markets, there appears to be an opportunity to better integrate the use of macroprudential tools with other policies in the future.
    JEL: E58 E61 E63 F38 G18 G28
    Date: 2021–10
  6. By: Rohan Arora; Sermin Gungor; Joe Nesrallah; Guillaume Ouellet Leblanc; Jonathan Witmer
    Abstract: We assess the response of Government of Canada bond yields to the Bank of Canada’s initial announcement of the Government Bond Purchase Program (GBPP) as well as to the Bank’s later GBPP purchase operations.
    Keywords: Monetary policy; Monetary policy implementation; Monetary policy transmission
    JEL: E58 E63
    Date: 2021–10
  7. By: Tomoki Isa (Visiting Scholar, Policy Research Institute, Ministry of Finance Japan.)
    Abstract: Although the Bank of Japan has continued unconventional monetary easing over the years, it is still far from achieving the inflation target set by the central bank. On the back of this, there has been a growing interest in the relationship between demography and inflation, a relationship which conventional macroeconomics has not discussed much. Analyzing Japanese prefectural panel data, this paper examines demographic effects on inflation with linear regression based on the Phillips curve with some demographic variables. The result shows that the aging population has inflationary pressure on prices, while the declining population has deflationary pressure. The aging population also reduces the impact of population change and economic variation on prices, flattening the Phillips curve. As a result, this paper clarifies a multifaceted relationship between demography and inflation, suggesting that demography is not the main cause of deflation and low inflation in Japan.
    Keywords: inflation, deflation, Philipps curve, monetary policy, demography, aging population, population decline, old-age dependency ratio, Japanese economy
    JEL: C33 E31 E52 J11
    Date: 2021–07
  8. By: Benigno Pierpaolo; Canofari Paolo; Di Bartolomeo Giovanni; Messori Marcello
    Abstract: In response to the COVID-19 crisis, the ECB has relaunched a massive asset purchase programme within its combined-arms monetary strategy. This paper presents and discusses the theory and the evidence of the central bank’s asset purchases, mainly in the euro area. It analyses the role of asset purchase programmes in the ECB’s toolkit and the potential associated risks, focusing specifically on the problems of the programmes’ unwinding. Finally, the paper offers some possible alternatives to the asset purchase programme.
    Date: 2020–12
  9. By: Blattner, Laura; Farinha, Luísa; Nogueira, Gil
    Abstract: We provide evidence that the strength of the bank lending channel varies considerably across three major events in the European sovereign debt crisis - the Greek debt restructuring (PSI), outright monetary transactions (OMT), and quantitative easing (QE). We study how lending responds to each shock using detailed bank, firm, and household data from Portugal, a country that was directly exposed to the three events. While the price of sovereign debt securities increased in all three events, banks reduced sovereign debt holdings and realized accumulated capital gains only after QE. As a result, lending to final borrowers reacted more strongly to QE than to the PSI or OMT events. Our results suggest that asset purchases were more effective than signalling events at stimulating the bank lending channel. JEL Classification: E52, E58, G18, G21
    Keywords: asset purchases, bank lending channel, OMT, PSI, QE
    Date: 2021–10
  10. By: Shvets, Serhii
    Abstract: Financial crises have been a challenge for sustainable growth, given the frequency and intensity of the crisis shocks and their destructive consequences taken place in the last decades. The paper aims to study how the endogenously created excess money supply can contribute to global financial crises. The money supply creation is examined from the Quantity Theory of Money (QTM) and endogenous money perspective, namely Horizontalism, Structuralism, and Modern Money Theory. Considering the prices are not flexible in the short term, advanced volatility in the money market hinders the short-run ready balance between money supply and output. The overall result of money supply accommodation may be unpredictable if monetary authority and commercial banks do not pool their interests, and the money demand volatility becomes extremely high. Examining the correlation between money supply and output has distinguished neutral countries in creating extra liquid assets and countries that can be a potential trigger for excessive money supply volatility. Monitoring the dynamics of M3 and GDP has revealed that before the significant crisis periods of 1997-1998, 2007-2008, and 2019-2020, the money supply growth is more than 8%. The established critical level validates the potential contribution of the endogenously created excess money supply to global financial crises.
    Keywords: the quantity theory of money; endogenous money; financial crisis; monetary policy; quantitative easing
    JEL: B26 E41 E51 E52
    Date: 2021–06–24
  11. By: Morales, Paola; Osorio, Daniel; Lemus, Juan S.; Sarmiento Paipilla, Miguel (Tilburg University, School of Economics and Management)
    Date: 2021
  12. By: Jahan Abdul Raheem (University of Waikato); Gazi M. Hassan (University of Waikato); Mark J. Holmes (University of Waikato)
    Abstract: This study analyses the impact of remittances on the monetary transmission mechanism (MTM) of the Sri Lankan economy during its conflict and post-conflict eras, using monthly data from 1996 to 2009. In addition, the study focuses on how the impact of remittances varied over different intermediate transmission channels, especially credit, asset prices, and exchange rate, in transmitting monetary policy shocks to the economy. The SVAR model is used to analyse the impact of remittances in the transmission of monetary policy shock to real economic variables. The empirical findings reveal that remittances affect the MTM of Sri Lanka in the post-conflict period significantly and their impact on bank credit and asset prices is relatively more intense than the exchange rate channel in the post-conflict period. The findings of this study also suggest that conflict-driven migration and the consequent increase in the inflow of remittances could impact monetary policy measures through wealth and liquidity effects more after the end of the conflict.
    Keywords: remittances;monetary policy;transmission channels;conflict
    JEL: E5 E52 F24 D74
    Date: 2021–10–21
  13. By: Whelsy Boungou; Paul Hubert
    Abstract: Faced with a potential zero lower bound on deposit interest rates, how do banks pass on the fall in net interest income due to negative interest rates? This paper aims to investigate the different channels of banks’ responses to negative interest rates using a detailed breakdown of the profit and loss account of 3637 banks in 59 countries from 2011 to 2018. We find that the decrease in interest income due to negative interest rates is mitigated by an increase in non-interest income, but only partially. We find that banks respond to that shock by reducing the interest paid on non-customer deposit liabilities and their personnel expenses. We also show that banks’ responses are not instantaneous and that they adjust their response as negative interest rates persist over time such that how long negative interest rates are implemented matters. Finally, our results suggest that large banks with higher deposits and higher leverage ratios are the most affected by the implementation of negative interest rates.
    Keywords: Bank profitability, Interest flows, Non-interest flows, Deposits, Leverage
    JEL: C2 E5 G2
    Date: 2021
  14. By: Ethan Ilzetzki; Carmen M. Reinhart; Kenneth S. Rogoff
    Abstract: This paper employs an updated algorithm and database for classifying exchange rate and anchor currency choice, to explore the evolution of the global exchange rate system, including parallel rates, capital controls and reserves. In line with a large recent literature, we find that the dollar has become ever-more central as the de facto anchor or reference currencies for much of the world. Our discussion encompasses the history of anchor currency choice, methods for classifying exchange rate regimes, a detailed discussion of the evolution of regimes, the growing substitution of reserves for capital controls as a tool for exchange rate stabilization, the modern Triffin dilemma, and the surprising recent trend decline in volatility of exchange rates at the core of the system. It concludes with issues surrounding the rise of China.
    JEL: E5 F3 F4 N2
    Date: 2021–10
  15. By: Cécile Couharde; Carl Grekou
    Abstract: This paper proposes a new de facto classification of exchange rate regimes, the synthesis classification. The proposed framework has several advantages over existing de facto classifications. First, it offers a unified framework based on the most divergent classifications, the RR and LYS classifications, leading not only to a broader coverage but also to encompass a broad spectrum of exchange systems. Second, it fits better with the known history of exchange rate regimes developments in the post-Bretton Woods era. Among others, it brings an interesting nuance to the so-called hollowing-out hypothesis by showing that the evolution of de facto regimes —especially in emerging economies since the late 1990s— has essentially involved movement toward more tightly “managed” intermediate regimes and not a shift away from such regimes. As an illustration of the insightfulness of our classification, we empirically revisit the nexus between currency crises and exchange rate regimes. In addition to associate a higher probability of currency crisis to both intermediate and floating regimes, our classification, also displays better statistical performances than other classifications in predicting currency crises.
    Keywords: Currency crisis;De facto classifications;Exchange rate regimes;Probit model;ROC analysis
    JEL: E52 F33 F4 O24
    Date: 2021–10
  16. By: Françoise Drumetz; Christian Pfister
    Abstract: In the last few years in the U.S. and especially since the publication of Stephanie Kelton’s book, The Deficit Myth (Kelton, 2020) in Europe, the so-called Modern Monetary Theory (MMT) has been gaining prominence in the media and the public. This paper exposes the main proposals of MMT in the light of their doctrinal sources, also confronting them with economic facts and with other currents of economic thought. The first part deals with the approach to money and monetary policy developed by MMT, the second part with its recommendations regarding fiscal policy and aggregate demand management, the third part with the structural policies it advocates, the fourth part with the international aspects of MMT. The fifth part concludes. Overall, it appears that MMT is based on an outdated approach to economics and that the meaning of MMT is a more that of a political manifesto than of a genuine economic theory.
    Keywords: Chartalism, Fiscal Policy, Functional Finance, Modern Monetary Theory, Money, Monetary Policy, Structural Policies
    JEL: B52 E12 E42 E43 E51 E52 E62 E63 H39 H62 H63 I38 J68 Q58
    Date: 2021

This nep-cba issue is ©2021 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.