nep-cba New Economics Papers
on Central Banking
Issue of 2021‒11‒15
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Optimal monetary policy mix at the zero lower bound By Bonciani, Dario; Oh, Joonseok
  2. Mixing QE and Interest Rate Policies at the Effective Lower Bound: Micro Evidence from the Euro Area By Christian Bittner; Alexander Rodnyansky; Farzad Saidi; Yannick Timmer
  3. TLTROs and collateral availability in Italy By Paola Antilici; Annino Agnes; Gianluca Mosconi
  4. A Model for Central Bank Digital Currencies: Implications for Bank Funding and Monetary Policy By Schiller, Jonathan; Gross, Jonas
  5. Optimal Monetary Policy According to HANK By Sushant Acharya; Edouard Challe; Keshav Dogra
  6. The Limits of Model-Based Regulation By Behn, Markus; Haselmann, Rainer; Vig, Vikrant
  7. Does money growth tell us anything about inflation? By Leonardo Cadamuro; Francesco Papadia
  8. Mark my words: the transmission of central bank communication to the general public via the print media By Munday, Tim; Brookes, James
  9. Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases By Xu Zhang
  10. Diverse Policy Committees Can Reach Underrepresented Groups By D'Acunto, Francesco; Fuster, Andreas; Weber, Michael
  11. Optimal monetary policy in a two-country new Keynesian model with deep consumption habits By Okano, Mitsuhiro
  12. Does regulation only bite the less profitable? Evidence from the too-big-to-fail reforms By Goel, Tirupam; Lewrick, Ulf; Mathur, Aakriti
  13. Liquidity, Capital Pledgeability and Inflation Redistribution By Paola Boel; Julian Diaz; Daria Finocchiaro
  14. A post Keynesian perspective on the eco zone project: Liquidity premia and external financial fragility in the West African Economic and Monetary Union, Ghana and Nigeria By Lampe, Florian; Löscher, Anne
  15. It's not always about the money, sometimes it's about sending a message: Evidence of Informational Content in Monetary Policy Announcements By Yong Cai; Santiago Camara; Nicholas Capel
  16. The ECB's Policy, the Recovery Fund and the Importance of Trust: The Case of Greece By Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos
  17. The Case for a Normatively Charged Approach to Regulating Shadow Banking - Multipolar Regulatory Dialogues as a Means to Detect Tail Risks and Preclude Regulatory Arbitrage By Thiemann, Matthias; Tröger, Tobias
  18. The Existential Trilemma of EMU in a Model of Fiscal Target Zone By Pompeo Della Posta; Roberto Tamborini
  19. The interactions of monetary and fiscal policies on inflation dynamics: A case of Ghana By Leshoro, Temitope Lydia A
  20. The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity By Granja, João; Leuz, Christian

  1. By: Bonciani, Dario (Bank of England); Oh, Joonseok (Freie Universität Berlin)
    Abstract: Long-term asset purchases carried out by central banks increase the consumption volatility of households holding long-term debt. For this reason, monetary authorities should not just aim at stabilising inflation and the output gap but also mitigate the volatility of their balance sheet. In response to negative demand shocks at the zero lower bound (ZLB), the optimal monetary policy consists of a mix of forward guidance and mild adjustments in the balance sheet. The presence of balance-sheet policies reduces the optimal ZLB duration and significantly improves social welfare. Mitigating the effectiveness of forward guidance calls for a more substantial balance-sheet expansion and a shorter ZLB duration. If a central bank only aims to stabilise inflation and the output gap, welfare losses are significantly larger than under the optimal policy and balance-sheet policies only improve welfare if the weight on output-gap stabilisation is relatively large. Last, simple implementable policy rules can achieve welfare outcomes close to those under the optimal policy.
    Keywords: Optimal monetary policy; unconventional monetary policy; quantitative easing; forward guidance
    JEL: E52 E58 E61
    Date: 2021–10–22
  2. By: Christian Bittner; Alexander Rodnyansky; Farzad Saidi; Yannick Timmer
    Abstract: In the presence of negative monetary-policy rates and a zero lower bound on deposit rates, banks that are more exposed to central banks’ asset-purchase programs reduce their lending to the real economy by more than their counterparts. When banks face a lower bound on customer deposit rates, an asset swap between securities and reserves reduces banks’ net worth as the cost of holding reserves cannot be matched with a reduction in their cost of funding. Exploiting euro-area syndicated lending data and the German credit registry, we provide evidence that deposit-reliant banks with relatively higher funding costs and greater exposure to large-scale asset purchases reduce corporate lending relatively more, have lower stock returns, and rebalance their interbank lending from safe to risky countries.
    Keywords: negative interest rates, quantitative easing, unconventional monetary policy, bank lending channel
    JEL: E52 E58 G21
    Date: 2021
  3. By: Paola Antilici (Bank of Italy); Annino Agnes (Bank of Italy); Gianluca Mosconi (Bank of Italy)
    Abstract: In response to the Covid-19 pandemic, the ECB has adopted a broad set of measures aimed at ensuring that banks maintain wide access to central bank liquidity. In an environment where refinancing operations are conducted under a full allotment regime, it is important to analyse whether collateral scarcity might have influenced participation in the TLTRO-III operations and the contribution made by collateral easing measures. The analysis shows that the collateral availability of the Italian banking system proved to be adequate and it allowed Italian banks to benefit from the favorable conditions introduced under the TLTRO-III programme. For almost all the banks, the absence of collateral easing measures would not have been a restricting factor on a full TLTRO-III take-up. Such interventions have allowed banks to increase the usage of non-marketable assets as collateral and have reduced their reliance on more liquid assets. Empirical evidence suggests that the monetary policy package, together with the fiscal measures adopted by the government, have helped to support bank lending to the real economy.
    Keywords: TLTRO, central bank collateral, collateral easing, central bank credit operations.
    JEL: E52 E58
    Date: 2021–11
  4. By: Schiller, Jonathan; Gross, Jonas
    JEL: E42
    Date: 2021
  5. By: Sushant Acharya; Edouard Challe; Keshav Dogra
    Abstract: We study optimal monetary policy in an analytically tractable Heterogeneous Agent New Keynesian model with rich cross-sectional heterogeneity. Optimal policy differs from that in a representative agent model because monetary policy can affect consumption inequality by reducing both idiosyncratic consumption risk and the inequality that arises from households’ unequal exposures to aggregate shocks. Simple target criteria summarize the planner’s trade-off between consumption inequality, productive efficiency and price stability. Mitigating consumption inequality requires putting some weight on stabilizing the level of output and correspondingly reducing the weights on the output gap and the price level relative to an economy without inequality.
    Keywords: Economic models; Monetary policy
    JEL: E21 E30 E52 E63
    Date: 2021–11
  6. By: Behn, Markus; Haselmann, Rainer; Vig, Vikrant
    Abstract: Using loan-level data from Germany, we investigate how the introduction of model-based capital regulation affected banks' ability to absorb shocks. The objective of this regulation was to enhance financial stability by making capital requirements responsive to asset risk. Our evidence suggests that banks 'optimized' model-based regulation to lower their capital requirements. Banks systematically underreported risk, with under reporting being more pronounced for banks with higher gains from it. Moreover, large banks benefitted from the regulation at the expense of smaller banks. Overall, our results suggest that sophisticated rules may have undesired effects if strategic misbehavior is difficult to detect.
    Keywords: capital regulation,internal ratings,complexity of regulation,Basel regulation
    JEL: G01 G21 G28
    Date: 2021
  7. By: Leonardo Cadamuro; Francesco Papadia
    Abstract: Economists and central bankers no longer consider monetary aggregates relevant for inflation forecasts. We explain this neglect by advancing and testing the hypothesis that monetary aggregates are only relevant for inflation in unsettled monetary and inflationary conditions. When inflation is basically stable around the central bank target (1.9 percent), as it has been in most of the last two decades, there is no apparent relationship between monetary aggregates and inflation....
    Date: 2021–11
  8. By: Munday, Tim (University of Oxford); Brookes, James (Bank of England)
    Abstract: We ask how central banks can change their communication in order to receive greater newspaper coverage. We write down a model of news production and consumption in which news generation is endogenous because the central bank must draft its communication in such a way that newspapers choose to report it, while still retaining the message the central bank wishes to convey to the public. We use our model to show that standard econometric techniques that correlate central bank text with measures of news coverage in order to determine what causes central bank communication to be reported on will likely prove to be biased. We use techniques from computational linguistics combined with an event-study methodology to measure the extent of news coverage a central bank communication receives, and the textual features that might cause a communication to be more (or less) likely to be considered newsworthy. We consider the case of the Bank of England, and estimate the relationship between news coverage and central bank communication implied by our model. We find that the interaction between the state of the economy and the way in which the Bank of England writes its communication is important for determining news coverage. We provide concrete suggestions for ways in which central bank communication can increase its news coverage by improving readability in line with our results.
    Keywords: Central bank communication; print media; high-dimensional estimation; natural language processing
    JEL: C01 C55 C82 E43 E52 E58
    Date: 2021–10–27
  9. By: Xu Zhang
    Abstract: This paper evaluates the effects of forward guidance and large-scale asset purchases (LSAP) when the nominal interest rate reaches the zero lower bound. I investigate the effects of the two policies in a dynamic new Keynesian model with financial frictions adapted from Gertler and Karadi (2011, 2013), with changes implemented so that the framework delivers realistic predictions for the effects of each policy on the entire yield curve. I then match the change that the model predicts would arise from a linear combination of the two shocks with the observed change in the yield curve in a 30-minute window around Federal Reserve announcements, allowing me to identify the separate contributions of each shock to the effects of the announcement. My estimates imply that LSAP was more important in influencing output and inflation than forward guidance.
    Keywords: Business fluctuations and cycles; Central bank research; Econometric and statistical methods; Interest rates
    JEL: E5 G0
    Date: 2021–11
  10. By: D'Acunto, Francesco; Fuster, Andreas; Weber, Michael
    Abstract: Increasing the diversity of policy committees has taken center stage worldwide, but whether and why diverse committees are more effective is still unclear. In a randomized control trial that varies the salience of female and minority representation on the Federal Reserve's monetary policy committee, the FOMC, we test whether diversity affects how Fed information influences consumers' subjective beliefs. Women and Black respondents form unemployment expectations more in line with FOMC forecasts and trust the Fed more after this intervention. Women are also more likely to acquire Fed-related information when associated with a female official. White men, who are overrepresented on the FOMC, do not react negatively. Heterogeneous taste for diversity can explain these patterns better than homophily. Our results suggest more diverse policy committees are better able to reach underrepresented groups without inducing negative reactions by others, thereby enhancing the effectiveness of policy communication and public trust in the institution.
    Date: 2021
  11. By: Okano, Mitsuhiro
    Abstract: This study develops a two-country new Keynesian (NK) model that incorporates deep habits in consumption and investigates the macroeconomic dynamics under the optimal coordinated monetary policy. We show that in response to the structural shocks, the central bank changes the interest rate significantly in the two-country open economy model compared with the closed economy where the central bank is reluctant to move interest rates. When a deep consumption habit exists, the international central bank can exploit the terms of trade externalities. Habit formation might boost the expenditure switching effect, which differentiates the aggressiveness of the central bank between closed and open economies with deep habit. Moreover, we showed that the deviations from the law of one price, or the goods-specific real exchange rate, generated endogenously by the deep habit are significantly related to the degree of home bias. In particular, the deviations fully disappeared when there is no home bias.
    Keywords: Optimal monetary policy; Deep habit; Policy coordination; Commitment;
    JEL: E52 E58 F41
    Date: 2021–10–17
  12. By: Goel, Tirupam (Bank for International Settlements); Lewrick, Ulf (Bank for International Settlements); Mathur, Aakriti (Bank of England)
    Abstract: Profitability underpins the opportunity cost of shrinking assets and the ability to generate capital. It thus shapes banks’ responses to higher capital requirements. We present a stylised model to formalise this insight and test our theoretical predictions on a cornerstone of the too-big-to-fail reforms. Leveraging textual analysis to identify the treatment date, we show that less profitable banks reduced their systemic importance as intended by regulation. Those close to the regulatory thresholds that determine bank-specific capital surcharges – a source of exogenous variation in the regulatory treatment – shrunk by even more. In contrast, more profitable banks continued to expand.
    Keywords: Global systemically important bank (G-SIB); textual analysis; capital regulation; systemic risk; bank profitability; difference-in-differences (DD)
    JEL: G21 G28 L51
    Date: 2021–10–29
  13. By: Paola Boel; Julian Diaz; Daria Finocchiaro
    Abstract: We study the redistributive effects of expected inflation in a microfounded monetary model with heterogeneous discount factors and collateral constraints. In equilibrium, this heterogeneity leads to borrowing and lending. Model assumptions also guarantee a tractable distribution of money and capital holdings. Several results emerge from our analysis. First, in this framework expected inflation is detrimental to capital accumulation. Second, expected inflation affects borrowing and lending when collateral constraints are present, thus also inducing redistributive effects through credit. Third, we find this channel to be regressive when we calibrate our model using US data. This is because the drop in borrowers’ capital caused by inflation is larger when capital is used as collateral.
    Keywords: money; heterogeneity; collateral constraint; welfare cost of inflation
    JEL: E40 E50
    Date: 2021–11–10
  14. By: Lampe, Florian; Löscher, Anne
    Abstract: The paper treats the eco currency union project in West Africa and its implications for monetary policies against the backdrop of the international monetary order from a post-Keynesian perspective. The eco zone project envisions a common monetary union of the West African Economic and Monetary Union (WAEMU), i.e. the independent Western subzone of the CFA franc union, and the remaining non-CFA countries of the Economic Community of West African States (ECOWAS) with Nigeria and Ghana as the economically most important member states. The literature on the international currency hierarchy developed by Latin-American structuralists and the post-Keynesian Berlin School of thought focuses on the notion of a currency-specific liquidity premium that structurally determines the interest rate level in the corresponding currency areas. Based on this set of literature, we conduct a comparison between the liquidity premia of the Western CFA-franc, the Nigerian naira and the Ghanaian cedi to make conjectures about what implications a common ECOWAS currency union would have regarding monetary policy space. Being a non-pecuniary variable, the liquidity premium cannot be observed directly. We therefore approximate the liquidity premium by calculating differences in interest rates such as the central bank's base rate, the coupon rate on T-bills and bonds and the interest rate spread between Eurobonds and bonds denominated in local currency. Besides, we use balance of payment data to identify external financial fragilities that might become a crucial factor for monetary policy due to an increasing financialisation in West African economies. We find that investors demand structurally higher yields on bonds originating in Ghana and Nigeria than in the CFA-franc zone. One could interpret this as the CFA-franc conveying over a higher liquidity premium because it has to have lower yields rates to compensate for liquidity-differences to financial assets denominated in the US dollar or euro. However, another explanation is that expectations about the future developments of the cedi's and naira's exchange value by investors are more pessimistic in comparison to that of the CFA-franc. This is rooted in two major factors: Firstly, under the current arrangement, France still has leeway in monetary policy making and acts as exchange rate stabiliser by pushing for restrictive monetary policies and guaranteeing foreign exchange reserve provision. Secondly, the estimation of external financial fragility in the CFA-franc zone and Nigeria shows that the naira implies a greater risk of sudden devaluation due to a higher exposure to mobile liabilities vis-à-vis its asset endowments.
    Keywords: West African Economic and Monetary Union,CFA franc,eco zone,international currency hierarchy,external financial fragility
    JEL: E12 F33 F41 G11 O57
    Date: 2021
  15. By: Yong Cai; Santiago Camara; Nicholas Capel
    Abstract: This paper introduces a transparent framework to identify the informational content of FOMC announcements. We do so by modelling the expectations of the FOMC and private sector agents using state of the art computational linguistic tools on both FOMC statements and New York Times articles. We identify the informational content of FOMC announcements as the projection of high frequency movements in financial assets onto differences in expectations. Our recovered series is intuitively reasonable and shows that information disclosure has a significant impact on the yields of short-term government bonds.
    Date: 2021–11
  16. By: Vasiliki Dimakopoulou; George Economides; Apostolis Philippopoulos
    Abstract: This paper, using a microfounded macroeconomic model that embeds the key features of the Greek economy, studies the efficacy of the various policy measures taken, at national and EU level, to cushion the economic effects of the pandemic shock. The paper attempts to give quantitative answers to questions like: What are the effects of these policies and, especially, what are the implications of the fiscal transfers and grants from the Recovery Fund and the quantitative policies of the ECB, like the PEPP, for the Greek economy? Do they help the real economy and, if yes, by how much? What would have happened had these measures not taken? How costly will be the re-emergence of the fear of debt default and risk premia?
    Keywords: central banking, fiscal policy, international lending, pandemic
    JEL: E50 E60 F30
    Date: 2021
  17. By: Thiemann, Matthias; Tröger, Tobias
    Abstract: This paper contributes to the debate on the adequate regulatory treatment of non-bank financial intermediation (NBFI). It proposes an avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation at the same time. We argue for a normative approach to supervision that can overcome the proverbial race between hare and hedgehog in financial regulation and demonstrate how such an approach can be implemented in practice. We first show that regulators should primarily analyse the allocation of tail risk inherent in NBFI. Our paper proposes to apply regulatory burdens equivalent to prudential banking regulation if the respective transactional structures become only viable through indirect or direct access to (ad hoc) public backstops. Second, we use insights from the scholarship on regulatory networks as communities of interpretation to demonstrate how regulators can retrieve the information on transactional innovations and their risk-allocating characteristics that they need to make the pivotal determination. We suggest in particular how supervisors should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the risk-allocating features of evolving transactional structures. Finally, this paper uses the example of credit funds as non-bank entities economically engaged in credit intermediation to illustrate the merits of the proposed normative framework and to highlight that multipolar regulatory dialogues are needed to shed light on the specific risk-allocating characteristics of recent contractual innovations.
    Keywords: shadow banking,regulatory arbitrage,principles-based regulation,credit funds,prudential supervision,non-bank financial intermediation
    JEL: G21 G28 H77 K22 K23 L22
    Date: 2020
  18. By: Pompeo Della Posta; Roberto Tamborini
    Abstract: The lesson of the sovereign debt crises of the 2010s, and of the outbreak of the COVID- 19 pandemic is that EMU irreversibility, if not to remain a wishful statement in the founding treaties, necessitates to be completed by carefully designed ramparts for extraordinary times beside regulations for ordinary times. In this paper we wish to contribute to this line of thought in two points. First, we highlight that when exposed to large, systemic shocks the EMU faces a trilemma: its integrity can only be saved by relaxing either monetary orthodoxy, or fiscal orthodoxy, or both. We elaborate this concept by means of a fiscal target-zone model, where EMU member governments are willing to abide with the commitment to debt stability under the no-bailout clause only up to an upper bound of their feasible fiscal effort. Second, we show that EMU completion means providing a monetary and/or fiscal emergency backstop to the irreversibility principle. Drawing on the target-zone literature, we show how these devices can be designed in a consistent manner that minimises their extension and mitigates the moral hazard concerns. The alternative to these devices is not retaining both the EMU irreversibility and the twin orthodoxies, but reformulating the treaties with explicit and regulated exit procedures
    Date: 2021
  19. By: Leshoro, Temitope Lydia A
    Abstract: Ghana is the second African country to adopt the inflation targeting framework, after South Africa. The country experienced persistently high levels of inflation, exceeding 100 percent in the early 1980s. The inflation rate has, however, fallen and remained below 20 percent since the adoption of the inflation targeting regime in 2007, and it was as low as one digit in some years. Given the importance of the interaction of monetary policy and fiscal policy in achieving price stability and economic growth of any economy, this study therefore examines whether the monetary or fiscal policy is effective in determining the inflation dynamics in Ghana, using annual data over the period 1980 to 2020. The study adopted the vector error correction mechanism (VECM) and the innovation accounting technique of the impulse response function (IRF) and the variance decomposition (VD), which analyses the dynamic relationship among variables. The results obtained shows that fiscal policy is ineffective and insignificant in determining inflation dynamics in Ghana, while monetary policy appears to be effective, more dominant and highly statistically significant. The importance of the adoption of the inflation targeting was also highlighted. Policy recommendations were provided based on the findings of this study.
    Keywords: monetary policy, fiscal policy, inflation, vector error correction mechanism, impulse response function, variance decomposition, Ghana.
    Date: 2021–10
  20. By: Granja, João; Leuz, Christian
    Abstract: An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through capital but can also correct deficiencies in bank management and lending practices, leading to more lending and a reallocation of loans.
    Keywords: Bank regulation,Enforcement,Loan losses,Aggregate outcomes,Prudential oversight,Business lending,Entry and exit
    JEL: E44 E51 G21 G28 G31 G38 K22 K23 L51 M41 M48
    Date: 2020

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