nep-cba New Economics Papers
on Central Banking
Issue of 2021‒11‒01
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary and Financial Perspectives on Retail CBDC in the Thai Context By Thitima Chucherd; Chanokkarn Mek-yong; Nalin Nookhwun; Passawuth Nuntnarumit; Natta Piyakarnchana; Suparit Suwanik
  2. A Structural Measure of the Shadow Federal Funds Rate By Callum J. Jones; Mariano Kulish; James Morley
  3. Price Stickiness Heterogeneity and Equilibrium Determinacy By Jae Won Lee; Woong Yong Park
  4. Retail CBDC purposes and risk transfers to the central bank By Romain Baeriswyl; Samuel Reynard; Alexandre Swoboda
  5. Does Monetary Policy Affect Mergers and Acquisitions? By Horn, Carl-Wolfram; Fischer, Johannes J.
  6. Experience-Based Heterogeneity in Expectations and Monetary Policy By Radke, Lucas; Wicknig, Florian
  7. Central Banks and Inflation: Where Do We Stand and How Did We Get Here? By Karl Whelan
  8. Inflation, Interest, and the Secular Rise in Wealth Inequality in the U.S.: Is the Fed Responsible? By Edward N. Wolff
  9. Macroeconomic Effects of Quantitative Easing Using Mid-sized Bayesian Vector Autoregressions By Maciej Stefański
  10. Phase-Dependent Monetary and Fiscal Policy By Kamalyan, Hayk
  11. Bank Runs, Fragility, and Credit Easing By Manuel Amador; Javier Bianchi
  12. Forecasting Inflation and Output Growth with Credit-Card-Augmented Divisia Monetary Aggregates By William Barnett; Sohee Park
  13. The IRB approach and bank lending to firms By Raffaele Gallo
  14. Inflation at Risk in Thailand By Maneerat Gongsiang; Pongpitch Amatyakul
  15. The Real Consequences of Macroprudential FX Regulations By Hyeyoon Jung
  16. How deep are the deep parameters? By Andrea Passalacqua; Paolo Angelini; Francesca Lotti; Giovanni Soggia
  17. The relationship between Financial Inclusion and Monetary Stability in Mozambique: Analysis based on an Error Correction Model (VECM) By Carla Fernandes; Maria Rosa Borges; Esselina Macome; Jorge Caiado
  18. Are banks still 'too big to fail'? - A market perspective By Nicole Allenspach; Oleg Reichmann; Javier Rodriguez-Martin

  1. By: Thitima Chucherd; Chanokkarn Mek-yong; Nalin Nookhwun; Passawuth Nuntnarumit; Natta Piyakarnchana; Suparit Suwanik
    Abstract: This paper explores three monetary and financial issues of retail central bank digital currency (CBDC) in the Thai context. The first insight shows that opportunities in the digital age may arise for Thai citizens and businesses to reap the benefits of a more efficient form of public money and financial innovation. It is possible for Thai citizens to quickly adopt unremunerated CBDC for transactional use within a decade. Second, we point out that there are several ways to utilize retail CBDC for enhancing monetary policy effectiveness, namely, through the bank rate channel and the introduction of new monetary policy tools. Nevertheless, monetary policy should not be the first and foremost objective for the central bank to issue CBDC as there are other factors to consider. These included impacts on the central bank balance sheet and monetary operations, especially for remunerated CBDC. Disintermediation and liquidity risks for Thai financial institutions are also key concerns, which are discussed in the third part. We assess that the risks to the banking sector are low in normal periods, but the well-designed CBDC features are necessary to prevent mounting liquidity risks in distressed periods.
    Keywords: CBDC; Digital Currency; Digital Money; Financial Landscape; Monetary Policy; Financial Stability
    JEL: E41 E42 E52 E58 G21
    Date: 2021–05
  2. By: Callum J. Jones; Mariano Kulish; James Morley
    Abstract: We propose a shadow policy interest rate based on an estimated structural model that accounts for the zero lower bound. The lower bound constraint, if expected to bind, is contractionary and increases the shadow rate compared to an unconstrained systematic policy response. By contrast, forward guidance and other unconventional policies that extend the expected duration of zero-interest-rate policy are expansionary and decrease the shadow rate. By quantifying these distinct effects, our structural shadow federal funds rate better captures the stance of monetary policy given economic conditions than a shadow rate based only on the term structure of interest rates.
    Keywords: Zero lower bound; Forward guidance; Shadow rate; Monetary policy
    JEL: E52 E58
    Date: 2021–10–07
  3. By: Jae Won Lee; Woong Yong Park
    Abstract: This paper shows that the requirement for monetary policy to achieve equilibrium determinacy is substantially loosened when price change frequencies are heterogeneous. The result holds both in a simple sticky price model with the constant elasticity of substitution aggregator and no trend inflation and in an extended model with a variable elasticity of substitution aggregator that permits trend inflation at the historical level. With a realistic cross-sectional distribution of the price change frequency, monetary policy can achieve equilibrium determinacy with much weaker responses to inflation. We then revisit the debate on the role of monetary policy in the transition from the Great Inflation to the Great Moderation in the postwar US economy. The evidence that the US economy was subject to self-fulfilling expectations-driven fluctuations in the pre-Volcker period and that the systematic shift in the monetary policy rule has played a decisive role in stabilizing inflation is found to be much weakerthan previously concluded in the literature.
    Keywords: Heterogeneity in Price Stickiness; Equilibrium Determinacy; Sectoral Relative Price Dispersion; Monetary Policy; Great Inflation
    JEL: E12 E31 E43 E52 N12
    Date: 2021–10
  4. By: Romain Baeriswyl; Samuel Reynard; Alexandre Swoboda
    Abstract: The issuance of retail central bank digital currency (CBDC) entails a transfer of risk from commercial banks to the central bank. While this paper does not provide an overall assessment on whether or not to issue a retail CBDC, it analyzes how different mechanisms to limit the risk transfer, such as an unattractive interest rate on retail CBDC, a quantity ceiling or preventing convertibility of cash and reserves into CBDC, have different effects on the ability of retail CBDC to fulfil its intended purposes. In particular, these mechanisms hinder the use of CBDC as a medium of exchange. Specific aspects of demand and challenges related to a potential retail CBDC in Switzerland, namely, a small open economy with a safe-haven currency and a low level of government debt, are discussed.
    Keywords: Retail central bank digital currency
    JEL: E42 E52 E58
    Date: 2021
  5. By: Horn, Carl-Wolfram; Fischer, Johannes J.
    JEL: E44 E52 G34 E22
    Date: 2021
  6. By: Radke, Lucas; Wicknig, Florian
    JEL: D84 E32 E37 E52 E70
    Date: 2021
  7. By: Karl Whelan
    Abstract: The inability of central banks to attain their target inflation rates in recent years has raised questions about the extent to which central banks can control the inflation process. This paper discusses the evolution of thought and evidence since the 1960s on the determinants of inflation and the role that should be played by central banks. The paper highlights the roles played by two streams of thought associated with Milton Friedman: Monetarist theories predicting a key role for monetary aggregates in determining inflation and the rise in popularity of the expectations-augmented Phillips curve. We discuss influence of the latter in determining the modern consensus on central bank institutions and the relative roles for fiscal and monetary policies. We conclude with a discussion of macroeconomic developments of the past decade and current policy options to stimulate the economy and restore inflation to its target levels, including the merits of “helicopter money”.
    Keywords: Inflation; Central banks; Phillips curve; Milton Friedman
    JEL: E31 E52 E58
    Date: 2021–08
  8. By: Edward N. Wolff
    Abstract: Two hallmarks of U.S. monetary policy since the 1981-1982 recession have been declining interest rates and moderation in inflation. Coincident with these trends has been a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. This paper analyzes the connection between these two developments on the basis of the Survey of Consumer Finances. Contrary to expectations, the paper finds that these two monetary effects have reduced wealth inequality rather than increasing it. The effect is sizeable, with the Gini coefficient declining by 0.045 over these years. Asset price changes and debt devaluation accounted for 72.6 percent of the advance of mean wealth over 1983-2019. They also would have led to a 204.9 percent gain in median wealth, compared to the actual rise of 23.4 percent. Moreover, they have helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature in which estimates range from a weak negative effect on inequality to neutral, small positive, and strong positive. In terms of methodology, this paper differs from previous work by focusing on only the direct effects of interest rate changes and inflation on the household balance sheet.
    JEL: D31 H31 J15
    Date: 2021–10
  9. By: Maciej Stefański
    Abstract: The paper estimates macroeconomic effects and decomposes transmission channels of quantitative easing in the United States using 15-variable Bayesian vector autoregressive model with stochastic search variable selection prior, distinguishing between Treasury bond purchases, mortgage-backed securities purchases and Operation Twist. A positive quantitative easing shock has a strong, negative impact on unemployment and no impact on prices, with Treasury purchases and Operation Twist found to be more effective than purchases of mortgage-backed securities. Opposite to the assumptions usually made in the literature, quantitative easing transmits to the real economy mostly via the stock market instead of long-term rates. Among numerous extensions to the baseline model, spillbacks are found to account for 40% of the impact of Treasury purchases on unemployment and commercial paper purchases have similar effects on the economy as purchases of Treasury bonds and mortgage-backed securities. However, baseline estimates are not found to be very robust, and thus substantial uncertainty regarding the macroeconomic effects of QE persists.
    Keywords: unconventional monetary policy, large-scale asset purchases, QE, GDP, unemployment, United States, stochastic search variable selection, transmission channels, spillbacks, commercial paper.
    JEL: E52 E58
    Date: 2021–10
  10. By: Kamalyan, Hayk
    Abstract: This paper studies how the effects of monetary and fiscal policy vary depending on the business cycle phase. It shows that in a medium-scale DSGE model, estimated on US data, monetary policy has a stronger impact on the economy in downturns and booms. Labor and capital income taxes display similar patterns. Government expenditure shocks and consumption tax shocks, on the contrary, have a stronger impact on output in depressions and recoveries. The paper also shows that accounting for the source of business cycle fluctuations is potentially important when assessing state-dependence in policy transmission.
    Keywords: business cycle phases, phase-dependent policy, monetary policy, fiscal policy
    JEL: E31 E32 E37 E52 E62
    Date: 2021–10–24
  11. By: Manuel Amador; Javier Bianchi
    Abstract: We present a tractable dynamic macroeconomic model of self-fulfilling bank runs. A bank is vulnerable to a run when a loss of investors' confidence triggers deposit withdrawals and leads the bank to default on its obligations. We analytically characterize how the vulnerability of an individual bank depends on macroeconomic aggregates and how the number of banks facing a run affects macroeconomic aggregates in turn. In general equilibrium, runs can be partial or complete, depending on aggregate leverage and the dynamics of asset prices. Our normative analysis shows that the effectiveness of credit easing and its welfare implications depend on whether a financial crisis is driven by fundamentals or by self-fulfilling runs.
    JEL: E44 E58 F34 G01 G21 G33
    Date: 2021–10
  12. By: William Barnett (Department of Economics, University of Kansas and Center for Financial Stability, New York City); Sohee Park (Department of Economics, University of Kansas)
    Abstract: This paper investigates the performance of the Credit-Card-Augmented Divisia monetary aggregates in forecasting U.S. inflation and output growth at the 12-month horizon. We compute recursive and rolling out-of-sample forecasts using an Autoregressive Distributed Lag (ADL) model based on Divisia monetary aggregates. We use the three available versions of those monetary aggregate indices, including the original Divisia aggregates, the credit card-augmented Divisia, and the credit-card-augmented Divisia inside money aggregates. The source of each is the Center for Financial Stability (CFS). We find that the smallest Root Mean Square Forecast Errors (RMSFE) are attained with the credit-card-augmented Divisia indices used as the forecast indicators. We also consider Bayesian vector autoregression (BVAR) for forecasting annual inflation and output growth.
    Keywords: Divisia, Credit-Card-Augmented Divisia, Monetary Aggregates, Forecasting, Bayesian vector autoregression, Inflation, Output Growth.
    JEL: C32 C53 E31 E47 E51
    Date: 2021–10
  13. By: Raffaele Gallo (Bank of Italy, Directorate General for Economics, Statistics and Research.)
    Abstract: This paper examines the impact of the regulatory approach adopted to calculate capital requirements on banks’ lending policies. Since the capital absorption of loans to high-risk borrowers is greater under the internal ratings-based (IRB) method than under the standardized approach (SA), IRB banks may raise interest rates and reduce credit to riskier borrowers following their regulatory regime shift. The analysis examines banks’ lending policies around each of the shifts that occurred between 2007 and 2017. First, in a context of declining rates and credit growth, banks adopting the IRB approach decreased interest rates (credit) less (more) for riskier than for safer borrowers when compared with SA intermediaries. Second, an existing credit relationship with a high-risk borrower is more likely to end after the shift. Third, the results at the firm level suggest that high-risk borrowers partly compensated the reduction in bank credit by obtaining funds from SA institutions, but that they were not able to offset the rise in their average cost of credit because of the significant costs involved in switching lenders.
    Keywords: credit risk regulation, interest rates, bank credit, internal rating model.
    JEL: G20 G21 G28 G32
    Date: 2021–10
  14. By: Maneerat Gongsiang; Pongpitch Amatyakul
    Abstract: Using monthly Thai data from 2003–2020, we examine the determinants of the future distribution of inflation. We evaluate how different risk factors predict 1-year- ahead future distributions of CPI inflation and its components. Risk factors come from 5 different groups of variables: inflation expectations, domestic economic activity, global economic activity, financial conditions, and component-specific factors. We obtain points on the future distributions of inflation through quantile regressions and fitting those points with skewed-t distributions. Our focus is on the outlook in the tails of the distribution, which recent literature referred to as `inflation-at-risk.' We find, as expected, that the whole inflation distribution has shifted lower, and thus the probability of negative inflation has increased markedly in recent years. There is a structural break around 2015 that affects both the distributions of inflation and their determinants. This structural break makes it challenging to make out-of-sample forecasts, thus, we focus on in-sample evaluation and explanations. For risk factors, we observe that the tightening of financial conditions and the decreasing world production are prominent sources of downside risks to inflation. Inflation expectations also play a smaller role in the lower quantiles, signaling its lower effectiveness in anchoring actual inflation during disinflationary periods. Finally, high global and domestic economic activity can be effective in decreasing downside risks in the lower tail, providing policy makers a way to counter these risks by stimulating the economy.
    Keywords: Inflation Determinants; Central Bank Policies
    JEL: E31 E52
    Date: 2021–04
  15. By: Hyeyoon Jung
    Abstract: I exploit a natural experiment in South Korea to examine the real effects of macroprudential foreign exchange (FX) regulations designed to reduce risk-taking by financial intermediaries. By using crossbank variation in the regulation's tightness, I show that it causes a reduction in the supply of FX derivatives (FXD) and results in a substantial decline in exports for the firms that were heavily relying on FXD hedging. I offer a mechanism in which imbalances in hedging demand, banks' costly equity financing, and firms' costly switching of banking relationships play a central role in explaining the empirical findings.
    Keywords: real effects; macroprudential policy; international finance; derivatives hedging; FX risk management
    JEL: D14 E44 G15 G28 G32
    Date: 2021–10–01
  16. By: Andrea Passalacqua (Board of Governors of the Federal Reserve System); Paolo Angelini (Bank of Italy); Francesca Lotti (Bank of Italy); Giovanni Soggia (Bank of Italy)
    Abstract: We show that bank supervision reduces distortions in credit markets and generates positive spillovers for the real economy. Exploiting the quasi-random selection of inspected banks in Italy, we show that financial intermediaries are more likely to reclassify loans as non-performing after an audit. Moreover, they change their lending policies as the composition of new lending shifts toward more productive firms. As a result, productive firms invest more in labor and capital, while underperforming firms are more likely to exit the market. Taken together, our results show that bank supervision is an important complement to regulation in improving credit allocation.
    Keywords: bank supervision, inspections, credit allocation, real effects.
    JEL: G22 G28
    Date: 2021–10
  17. By: Carla Fernandes; Maria Rosa Borges; Esselina Macome; Jorge Caiado
    Abstract: The present work aims to assess the existence of the relationship between financial inclusion and monetary stability in Mozambique based on the analysis of the vector correction error model (VECM) for the period from 2005 to 2020. The indicators used in the study follow the approach taken by Mbutor and Uba (2013), Lapukent (2015), Lenka and Bairwa (2016) and Hung (2016). In addition to indicators of traditional banking institutions, this article goes further by also incorporating indicators relating to services of electronic money institutions with the objective of capturing the impact of digital financial services on financial inclusion and their role in financial stability. The study presents results consistent with economic theory. The long-term VEC model proved to be statistically significant and confirmed the existence of a long-term relationship between financial inclusion and monetary stability. It also revealed that the deviation of the CPI from its long-term equilibrium is adjusted at a speed of 10.19%. The coefficients of the short-term VEC model were negative for the variables of branches and bank accounts. The coefficients of agents and EMI accounts were not positive, and their shocks are removed after 6 quarters, after which the expected negative sign is observed achieving monetary stability.
    Keywords: Financial Inclusion; Monetary Stability; VEC Model; Digital Financial Services JEL Classification: G20, G21, G28.
    Date: 2021–01
  18. By: Nicole Allenspach; Oleg Reichmann; Javier Rodriguez-Martin
    Abstract: This paper aims at deriving the market's assessment as to whether banks worldwide still benefit from a Too Big To Fail (TBTF) subsidy. Such a subsidy reflects the market's expectation of government support in the event of a crisis and results in reduced funding costs for the benefiting bank. To capture this effect, we use two different extensions of the Merton (1974) framework. We find that large banks benefit from a TBTF subsidy, while large nonfinancial firms do not. This subsidy has declined somewhat since the Global Financial Crisis (GFC) but remains larger than before the crisis. These conclusions also hold when considering Contingent Convertible (CoCos) and bail-in bonds as fully loss-absorbing. Moreover, we find differences in the TBTF subsidy across jurisdictions and provide evidence that these can to a large extent be explained by differences in bank health.
    Keywords: Banking, too big to fail, CreditEdge, CreditGrades
    JEL: G12 G18 G21
    Date: 2021

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