nep-cba New Economics Papers
on Central Banking
Issue of 2021‒11‒08
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. What to Target? Insights from a Lab Experiment By Isabelle Salle
  2. European Central Bank and Banco de España measures against the effects of COVID-19 on the monetary policy collateral framework, and their impact on Spanish counterparties By Jorge Escolar; José Ramón Yribarren
  3. The Transmission Mechanism of Quantitative Easing: A Markov-Switching FAVAR Approach By Luisa Corrado; Stefano Grassi; Enrico Minnella
  4. Bank risk-taking and monetary policy transmission : Evidence from China By Li, Xiaoming; Liu, Zheng; Peng, Yuchao; Xu, Zhiwei
  5. Inter-agency coordination bodies and the speed of prudential policy responses to the Covid-19 pandemic By Michael Brei; Blaise Gadanecz
  6. Joined at the hip: monetary and fiscal policy in a liquidity-dependent world By Guillermo Calvo; Andrés Velasco
  7. Testing for Spurious Dynamics in Structural Models with Applications to Monetary Policy By Mikhail Dmitriev; Manoj Atolia
  8. Anchoring of long-term inflation expectations: Do inflation target formulations matter? By Große Steffen, Christoph
  9. Talking in a language that everyone can understand? Transparency of speeches by the ECB Executive Board By Müller, Lena Sophia; Glas, Alexander
  10. Sticky Deposit Rates and Allocative Effects of Monetary Policy By Anne Duquerroy; Adrien Matray; Farzad Saidi
  11. Liquidity Regulation and Bank Risk By Foly Ananou; Dimitris Chronopoulos; Amine Tarazi; John Wilson
  12. Asset concentration risk and insurance solvency regulation By Regele, Fabian; Gründl, Helmut
  13. China's Transition to a Digital Currency: Does It Threaten Dollarization? By Ahmet Faruk Aysan; Nawaz Farrukh
  14. Early monetary policies of the Tokugawa shogunate and merchants f coping strategies: 1695?1736 By Atsuko Suzuki
  15. Does Quantitative Easing Affect People’s Personal Financial Situation and Economic Inequality? The View of the German Population By Hayo, Bernd
  16. Uncertainty and the Pandemic Shocks By Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
  17. Indebted Demand By Atif Mian; Ludwig Straub; Amir Sufi
  18. Financial flows, macro-prudential policies, capital restrictions and institutions: what do gravity equations tell us? By Jean-Charles Bricongne; Antoine Cosson; Albane Garnier-Sauveplane; Rémy Lecat; Irena Peresa; Yuliya Vanzhulova

  1. By: Isabelle Salle
    Abstract: This paper compares alternative monetary policy regimes within a controlled lab environment, where groups of participants are tasked with repeatedly forecasting inflation in a simple macroeconomic model featuring only the dynamics of interest rates, inflation and inflation expectations. Average-inflation targeting can approximate the price path observed under price-level targeting in the presence of disinflationary shocks and enable subjects to coordinate on simple heuristics that reflect the concern of the central bank for past inflation gaps. However, this depends on the exact specification of the policy rule. In particular, if the central bank considers more than two lags, subjects fail to form expectations that are consistent with the monetary policy rule, which results in greater inflation volatility. Reinforcing communication around the target helps somewhat anchor long-run inflation expectations.
    Keywords: Inflation targets; Monetary policy communications; Monetary policy framework
    JEL: C92 E31 E52 E7
    Date: 2021–10
  2. By: Jorge Escolar (Banco de España); José Ramón Yribarren (Banco de España)
    Abstract: In March and April 2020, the European Central Bank adopted a series of monetary policy measures aimed at providing liquidity support to the financial system and facilitating access to financing for the real economy to mitigate the adverse economic effects of COVID-19. Some of these measures focused on preserving and expanding the universe of assets that counterparties can use as collateral to participate in Eurosystem financing operations. This paper, after a brief summary of the collateral framework for monetary policy operations, studies the measures adopted in this connection by the European Central Bank and the Banco de España and their impact on Spanish counterparties. This study finds that, in overall terms, two measures stand out over the others in terms of the amount of collateral provided: the acceptance of partially government-guaranteed credit claims and the reduction in haircuts. Although all counterparties have been affected by the measures, the extent of the impact has differed widely, determined by the characteristics of the assets used as collateral and their management. Finally, the interaction between the different measures is analysed, since more than one can affect the eligibility and valuation of the same asset.
    Keywords: European Central Bank, Eurosystem, collateral, monetary policy, counterpartie.
    JEL: E42 E52 E58 G21 G32
    Date: 2021–10
  3. By: Luisa Corrado (DEF and CEIS, Università di Roma "Tor Vergata"); Stefano Grassi (DEF and CEIS, Università di Roma "Tor Vergata"); Enrico Minnella (Università di Roma "Tor Vergata")
    Abstract: This article assesses the impact of unconventional monetary policies and sheds light on their transmission mechanism in the United States. Using a three-variable Markov switching factor-augmented vector autoregression (MS-FAVAR) with time-varying transition probabilities and a shadow short-term interest rate, we allow our analysis to be free from arbitrary policy rate decisions and sample-splitting choices. By augmenting our informational set with variables able to grasp the functioning of Quantitative Easing, we can determine the differences between conventional and unconventional expansionary monetary policy shocks. Our results show a leading role for both the duration risk and the credit channels, a role for the default risk channel, and ultimately no evidence of the presence of a signaling channel during Quantitative Easing. We provide evidence that the large-scale asset purchase programs of the Federal Reserve effectively boosted the economy, mainly by modifying the term structure of the interest rates, thus providing strong economic stimulus throughout the financial sector.
    Keywords: Monetary Policy; Financial Crisis; Structural analysis; Non-linear FAVAR
    JEL: C54 E52 G01
    Date: 2021–10–21
  4. By: Li, Xiaoming; Liu, Zheng; Peng, Yuchao; Xu, Zhiwei
    Abstract: We study the impact of China’s 2013 implementation of Basel III on bank risk-taking and its responses to monetary policy shocks using confidential loan-level data from a large Chinese bank. Guided by theory, we use a difference-in-difference identification, exploiting cross-sectional differences in lending behaviors between high-risk and low-risk bank branches before and after the new regulations. We find that, through a risk-weighting channel, changes in regulations significantly reduced bank risk-taking, both on average and conditional on monetary policy easing. However, banks reduce risk-taking by increasing lending to ostensibly low-risk state-owned enterprises (SOEs) under government guarantees, despite their low average productivity.
    JEL: E52 G21 G28
    Date: 2021–10–29
  5. By: Michael Brei; Blaise Gadanecz
    Abstract: This paper investigates whether the presence of inter-agency coordination bodies for financial stability (IABs) has been associated with faster prudential policy responses to the Covid-19 pandemic. Using econometric analysis, we provide evidence that countries with IABs have enacted microprudential measures more quickly than countries without. This is not the case for macroprudential measures for which we find that IABs have been associated with slower responses. We conclude that IABs may have been useful as catalysts for the deployment of microprudential tools for macroprudential purposes.
    JEL: D02 D78 E58
    Date: 2021–10
  6. By: Guillermo Calvo; Andrés Velasco
    Abstract: We study the effects of monetary and fiscal policies when both money and government bonds provide liquidity services. Because money is the unit of account, the price of money is the inverse of the price level. If prices are sticky, so is the price of money in terms of goods, and this is one important reason why money is liquid and attractive. By contrast, the price of government bonds is free to jump and often does, especially in response to news about changes in fiscal policy and the supply of bonds. Those movements in government bond prices affect available liquidity, and that matters for aggregate demand, inflation and output. Under these conditions, bond-financed fiscal expansions can be contractionary, causing deflation and a temporary recession. To avoid those effects, changes in bond supply must be matched by changes in money supply and in the interest rate on money. We conclude that in a liquiditydependent world, fiscal and monetary policies are joined at the hip.
    JEL: E52 E62 E63
    Date: 2021–10
  7. By: Mikhail Dmitriev (Department of Economics, Florida State University); Manoj Atolia (Department of Economics, Florida State University)
    Abstract: We propose a universal and straightforward test for validating assumptions in the structural models. Structural models impose a causal structure, take data as an input, and then produce exact structural parameters. We simulate the new data while breaking the original causal structure. We then feed the model the simulated data and then see whether it produces different results. If its conclusions are the same, then the models’ implications are not sensitive to the underlying data, and the model fails the test. We then apply our test to the models analyzing monetary policy. We find out that simple SVARs successfully pass the test and can be used to identify monetary policy effects. On the other hand, DSGE models estimated via full-information methods such as Smets and Wouters (2007) fail the test and potentially force their conclusions on the data.
    Keywords: VARs, SVARs, DSGE, monetary policy
    JEL: C68 E44 E61
    Date: 2021–10
  8. By: Große Steffen, Christoph
    JEL: E42 E52 D84
    Date: 2021
  9. By: Müller, Lena Sophia; Glas, Alexander
    JEL: E52 E58
    Date: 2021
  10. By: Anne Duquerroy (Banque de France); Adrien Matray (Princeton University); Farzad Saidi (Boston University and CEPR)
    Abstract: This paper documents that monetary policy affects credit supply through banks’ cost of funding. Using administrative credit-registry and regulatory bank data, we find that banks can incur an increase in their funding costs of at least 30 basis points before they adjust their lending. For identification, we exploit the existence of regulated-deposit accounts in France whose interest rates are set by the government and are, thus, not directly affected by the monetary-policy rate.When banks’ funding cost increases and they contract their lending, we observe portfolio reallocations consistent with risk shifting: banks that depend on regulated deposits lend less to large firms, and relatively more to small firms and entrepreneurs.
    Keywords: Monetary-policy transmission; deposits; credit supply; SMEs; savings
    JEL: E23 E32 E44 G20 G21 L14
    Date: 2020–12
  11. By: Foly Ananou (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); Dimitris Chronopoulos (University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK); Amine Tarazi (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges); John Wilson (University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK)
    Abstract: In this paper, we investigate the impact of liquidity requirements on bank risk. We take advantage of the implementation of the Liquidity Balance Rule (LBR) in the Netherlands in 2003 and analyze its impact on bank default risk. The LBR was imposed on Dutch banks only and did not apply to other banks operating elsewhere within the Eurozone. Using this differential regulatory treatment to overcome identification concerns, we find that following the introduction of the LBR, the risk of Dutch banks declined relatively to counterparts not affected by the rule. Concomitantly, despite the lower cost of funding driven by the LBR, the profitability of Dutch banks decreased in comparison with other banks in Europe, as a result of a decrease in income accruing from interest-bearing activities. Our findings also indicate that relatively to unaffected banks, Dutch banks might not have actively tried to offset their loss in interest income by increasing interest rates of loans. However, better financing conditions allowed Dutch banks to increase the shares of deposits and capital on the liability side of their balance sheets.
    Keywords: Banking,liquidity regulation,Netherlands,propensity score matching,quasi-natural experiment,risk,stability
    Date: 2021–10–05
  12. By: Regele, Fabian; Gründl, Helmut
    Abstract: Historical evidence like the global financial crisis from 2007-09 highlights that sector concentration risk can play an important role for the solvency of insurers. However, current microprudential frameworks like the US RBC framework and Solvency II consider only name concentration risk explicitly in their solvency capital requirements for asset concentration risk and neglect sector concentration risk. We show by means of US insurers' asset holdings from 2009 to 2018 that substantial sectoral asset concentrations exist in the financial, public and real estate sector, and find indicative evidence for a sectoral search for yield behavior. Based on a theoretical solvency capital allocation scheme, we demonstrate that the current regulatory approaches can lead to inappropriate and biased levels of solvency capital for asset concentration risk, and should be revised. Our findings have also important implications on the ongoing discussion of asset concentration risk in the context of macroprudential insurance regulation.
    Keywords: Microprudential Insurance Regulation,Asset Concentration Risk,Systematic Risk,Idiosyncratic Risk,Sectoral Asset Diversification
    JEL: G01 G11 G22 G28
    Date: 2021
  13. By: Ahmet Faruk Aysan (HBKU - Hamad Bin Khalifa University); Nawaz Farrukh
    Abstract: This article provides a detailed introduction to China's launching of a digital currency. We conduct a comparative analysis concerning whether digital currency is a more stable and reliable currency than cryptocurrency and investigate whether a digital renminbi (or yuan) could replace the US dollar as a medium of exchange in international transactions. China has gained a first-mover advantage by rolling out a central bank digital currency (CBDC). But the outcome will depend on the US response as well as the future evolution of the US and Chinese economies. Most other articles on this topic focus on domestic use of the Chinese CBDC. But this study is unique in analyzing the prospects of a digital renminbi as a replacement for the US dollar in international commerce.
    Keywords: China,cryptocurrency,digital yuan,People's Bank of China,US. JEL Classifications: E42,E58,G28
    Date: 2021–10–05
  14. By: Atsuko Suzuki (Graduate School of Economics, Osaka University)
    Abstract: The Tokugawa monetary system was a new experience in Japanese history, and the Genroku debasement, which was necessitated by the exhaustion of gold and silver resources, was a new experiment for both the shogunate and merchants, the representatives of the townspeople. For the same reason, the shogunate had no choice but to implement a monetary policy gnominalistically, h but the merchants responded gmetallistically. h This was because the merchants valued money as bullion. The conflict between the shogunate and merchants played an important role in invigorating the Tokugawa economy. This study describes the historical economic situation.
    Keywords: commodity money, early modern Japan, fixed and floating exchange rates, Edo and Osaka, nominalistic and metallistic
    JEL: D46 E31 K42 N15 Z13
    Date: 2021–11
  15. By: Hayo, Bernd
    JEL: E58 E71 D31 Z1
    Date: 2021
  16. By: Pierpaolo Benigno; Paolo Canofari; Giovanni Di Bartolomeo; Marcello Messori
    Abstract: The Covid-19 pandemic shocks are an important source of uncertainty on several dimensions. These shocks influence the landscape, in which policymakers operates, and create further uncertainty on policy decisions and on their effectiveness. The aim of this paper is to offer some relative measures of the pandemic uncertainty, and to discuss the impact of this uncertainty on the possible evolution of European economies during the second wave of Covid-19. The emphasis is on the effectiveness of the policies implemented.
    Keywords: Covid19; Central banking; Recessions
    JEL: E32 E58 E65
    Date: 2021–10
  17. By: Atif Mian; Ludwig Straub; Amir Sufi
    Abstract: We propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. At the core of the theory is the simple yet under-appreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent perpetual youth model, we find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies-such as accommodative monetary policy-generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
    JEL: E21 E44 E6
    Date: 2021–10
  18. By: Jean-Charles Bricongne; Antoine Cosson; Albane Garnier-Sauveplane; Rémy Lecat; Irena Peresa; Yuliya Vanzhulova
    Abstract: This paper analyzes the impact on financial flows of institutional factors promoting financial integration such as European integration or trying to tame them such as capital control or macro-prudential policies. We use a detailed database of bilateral financial assets and construct gravity models, for foreign direct investment, portfolio flows and other investments. Capital control policies have limited and disparate effects, being particularly effective through restrictions on inward flows for destination countries. The impacts of macro-prudential measures are complex, with macro-prudential measures in the origin country financial sector having a positive impact on outward capital flows and macroprudential measures in destination countries having a negative impact on inward capital flows. European integration has played a positive role on financial flows. We also emphasize the benefits of cooperation between the origin and destination countries, both for capital control and macro-prudential measures.
    Keywords: Gravity Equation, International Financial Assets and Flows, Macro-Prudential Measures, Restrictions to Financial Flows, European Integration
    JEL: F38 G15
    Date: 2021

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