nep-cba New Economics Papers
on Central Banking
Issue of 2022‒01‒03
twenty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Comparative analysis of quantitative easing and money-financed fiscal stimulus By Jan Lutynski
  2. Monetary policy and endogenous financial crises By F. Boissay; F. Collard; Jordi Galí; C. Manea
  3. Revisiting the Monetary Sovereignty Rationale for CBDCs By Skylar Brooks
  4. Twenty Years of Unconventional Monetary Policies: Lessons and Way Forward for the Bank of Japan By Mr. Niklas J Westelius
  5. Does the Central Bank of Peru Respond to Exchange Rate Movements? A Bayesian Estimation of a New Keynesian DSGE Model with FX Interventions By Gabriel Rodríguez; Paul Castillo; Harumi Hasegawa; Hernán B. Garrafa-Aragón
  6. Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design By Jonathan Chiu; Mohammad Davoodalhosseini
  7. Macroprudential Policy Interlinkages By Johannes Matschke
  8. Dilemma and global financial cycle: Evidence from capital account liberalisation episodes By Li, Xiang
  9. Central Bank Transparency and Disagreement in Inflation Expectations By Shunichi Yoneyama
  10. Zero Lower Bound on Inflation Expectations By Yuriy Gorodnichenko; Dmitriy Sergeyev
  11. Technology adoption and the bank lending channel of monetary policy transmission By Hasan, Iftekhar; Li, Xiang
  12. Debt Maturity Heterogeneity and Investment Responses to Monetary Policy By Minjie Deng; Min Fang
  13. Macroprudential policies and Brexit: A welfare analysis By Margarita Rubio
  14. Unconventionally green: A monetary policy between engagement and conflicting goals By Liebich, Lena; Nöh, Lukas; Rutkowski, Felix Joachim; Schwarz, Milena
  15. The Bureau for Economic Research's inflation expectations surveys: Know your data By Monique Reid; Pierre Siklos
  16. Remittance Flows and U.S. Monetary Policy By Immaculate Machasio; Peter Tillmann
  17. Capital controls and the volatility of the renminbi covered interest deviation By Jinzhao Chen; Zhitao Lin; Xingwang Qian
  18. The financial origins of non-fundamental risk By Sushant Acharya; Keshav Dogra; Sanjay R. Singh
  19. Scenario-Free Analysis of Financial Stability with Interacting Contagion Channels By Farmer, J. Doyne; Kleinnijenhuis, Alissa; Wetzer, Thom; Wiersema, Garbrand
  20. Moderating Macroeconomic Bubbles Under Dispersed Information By Jonathan J Adams
  21. China's Easily Overlooked Monetary Transmission Mechanism:Real Estate Monetary Reservoi By Xiao Shuguang; Lai Xinglin
  22. Capital Controls and the Global Financial Cycle By Marina Lovchikova; Johannes Matschke

  1. By: Jan Lutynski (Group for Research in Applied Economics (GRAPE))
    Abstract: I study two types of unconventional monetary policy: quantitative easing (QE) and money-financed fiscal stimulus (MFFS), in a modified New Keynesian framework. I compare their effectiveness in stabilizing output and inflation when monetary policy is constrained by the effective lower bound. Money-financed fiscal stimulus performs better than quantitative easing, except the case of the TFP shock. It tends to cause lower inflation and output volatility. Nevertheless, it might be substantially more problematic in implementation as it demands cooperation between the central bank and the fiscal authority. Real reserve targeting (RRT) delivers similar outcomes as quantitative easing but is easier to implement.
    Keywords: unconventional monetary policy, quantitative easing, money-financed fiscal stimulus,
    JEL: E21 E30 E50 E58 E61
    Date: 2021
  2. By: F. Boissay; F. Collard; Jordi Galí; C. Manea
    Abstract: We study whether a central bank should deviate from its objective of price stability to promote financial stability. We tackle this question within a textbook New Keynesian model augmented with capital accumulation and microfounded endogenous financial crises. We compare several interest rate rules, under which the central bank responds more or less forcefully to inflation and aggregate output. Our main findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (through aggregate demand) and in the medium run (through savings and capital accumulation). Second, a central bank can both reduce the probability of a crisis and increase welfare by departing from strict inflation targeting and responding systematically to fluctuations in output. Third, financial crises may occur after a long period of unexpectedly loose monetary policy as the central bank abruptly reverses course.
    Keywords: Financial crisis, monetary policy
    Date: 2021–12
  3. By: Skylar Brooks
    Abstract: As currently articulated, the monetary sovereignty argument for central bank digital currencies (CBDCs) rests on the idea that without them, private and foreign digital monies could displace domestic currencies (a process called currency substitution), threatening the central bank’s monetary policy and lender-of-last-resort (LLR) capabilities. This rationale provides a crucial but incomplete picture of what is at stake in terms of monetary sovereignty. This paper seeks to expand and enhance this picture in three ways. The first is by looking at the consequences of currency substitution that go beyond the functions of a central bank—important considerations that have received less attention in public CBDC discussions. The second is by exploring key differences in monetary policy and LLR capabilities across currency-issuing countries or regions. More specifically, the paper highlights the variation in the degree of monetary sovereignty and the consequences that different countries face should they lose it. The third way is by assessing not only the implications but also the risks of currency substitution and showing how these are also likely to vary across countries. Contrasting the consequences and risks of substitution, the paper concludes by noting a potential inverse relationship between the impact and probability of losing monetary sovereignty.
    Keywords: Debt management; Digital currencies and fintech; Exchange rate regimes; Financial stability; Monetary policy
    JEL: E41 E42 E52 E58 H12 H63
    Date: 2021–12
  4. By: Mr. Niklas J Westelius
    Abstract: The Bank of Japan has used unconventional monetary policies to fight deflation and stabilize the financial system since the late 1990s. While the Bank of Japan’s reflation efforts have evolved over time, inflation and inflation expectations have remained stubbornly low. This paper examines the evolution of monetary policy in Japan over the past twenty years, in order to draw relevant lessons and propose ways to strengthen the Bank of Japan’s policy framework. In doing so the analysis focuses on three aspects of monetary policy: objectives and goals; policy strategies; and the communication framework. Moreover, the paper discusses coordination between monetary, fiscal, and financial policies, and how the corresponding institutional design could be strengthened.
    Keywords: Japan;unconventional monetary policy;Bank of Japan;inflation expectations;WP;BoJ staff;inflation expectation;Policy objective;price stability target;inflation target;JGB Holdings;overshooting commitment;Policy strategy; BoJ's willingness; BoJ's policy; BoJ's overshooting commitment; BoJ's inflation; Price stabilization; Inflation; Inflation targeting; Financial sector stability; Unconventional monetary policies; Global
    Date: 2020–11–08
  5. By: Gabriel Rodríguez (Departamnento de Economía, Pontificia Universidad Católica del Perú.); Paul Castillo (Banco Central de Reserva, Pontificia Universidad Católica del Perú.); Harumi Hasegawa (Pontificia Universidad Católica de Chile); Hernán B. Garrafa-Aragón (Escuela de Ingeniería Estadística de la Universidad Nacional de Ingeniería)
    Abstract: This paper assess the role played by the exchange rate and FX intervention in setting monetary policy interest rates in Peru. We estimate a Taylor rule that includes inflation, output gap and the exchange rate using a New Keynesian DSGE model that follows closely Schmitt-Grohé and Uribe (2017). The model is extended to include an explicit sterilized FX intervention rule as in Faltermeier et al. (2017). The main empirical results show, for the pre Inflation Targeting (IT) and IT periods, that the model that clearly outperforms in terms of marginal log density, features a Taylor rule that does not respond to changes in the nominal exchange rate and an active use of FX intervention by the Central Bank. We also find that the coefficient associated with the response of the Taylor rule to inflation is close to 2 and the one associated with the output gap is greater than 1; and that FX intervention has become more responsive to exchange rate fluctuations during the IT period. Finally, the estimated IRFs shows that FX intervention has contributed to reduce the volatility of GDP in response to productivity and terms of trade shocks in Peru. JEL Classification-JE: C22, C52, F41.
    Keywords: Small Open Economy; Taylor Rule; Monetary Policy Rule; Exchange Rate; Bayesian Methodology; Peruvian Economy; FX interventions; New Keynesian DSGE Model.
    Date: 2021
  6. By: Jonathan Chiu; Mohammad Davoodalhosseini
    Abstract: Should a central bank digital currency (CBDC) be issued? Should its design be cash- or deposit-like? To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking and welfare. Our model introduces new general equilibrium linkages across different types of retail transactions as well as a novel feedback effect from transactions to deposit creation. The general equilibrium effects of a CBDC are decomposed into three channels: payment efficiency, price effects and bank funding costs. We show that a cash-like CBDC is more effective than a deposit-like CBDC in promoting consumption and welfare. Interestingly, a cash-like CBDC can also crowd in banking, even in the absence of bank market power. In a calibrated model, at the maximum, a cash-like CBDC can increase bank intermediation by 5.8% and capture up to 25% of the payment market. In contrast, a deposit-like CBDC can crowd out banking by up to 2.6%, thereby grabbing a market share of about 16.7%.
    Keywords: Digital currencies and fintech; Monetary policy; Monetary policy framework
    JEL: E58
    Date: 2021–12
  7. By: Johannes Matschke
    Abstract: Emerging markets are concerned about sudden stops in international capital flows, which may lead to severe recessions associated with vicious spirals of currency depreciations and tightening borrowing constraints. A common prescription is to impose macroprudential policies, including prudential capital controls, to limit international borrowing especially in foreign currency. This paper analyzes the supportive role of macroprudential policies geared toward the domestic financial market, suggesting that emerging markets should resort to a wide mix of policies, even when the domestic financial market is frictionless. A simple formula provides further insights: domestic and international macroprudential policies are imperfect complements rather than substitutes, due to distinctive characteristics of foreign and domestic currency bonds. Furthermore, the relative importance of domestic macroprudential regulation increases in the return of domestic bonds.
    Keywords: Macroprudential Policies; Capital Controls; Emerging Markets; Welfare
    JEL: F34 F41 E44 D62
    Date: 2021–09–30
  8. By: Li, Xiang
    Abstract: By focusing on the episodes of substantial capital account liberalisation and adopting a new methodology, this paper provides new evidence on the dilemma and global financial cycle theory. I first identify the capital account liberalisation episodes for 95 countries from 1970 to 2016, and then employ an augmented inverse propensity score weighted (AIPW) estimator to calculate the average treatment effect (ATE) of opening capital account on the interest rate comovements with the core country. Results show that opening capital account causes a country to lose its monetary policy independence, and a floating exchange rate regime cannot shield this effect. Moreover, the impact is stronger when liberalising outward and banking flows.
    Keywords: average treatment effect,capital control,global financial cycle,monetary policy autonomy,propensity score matching,trilemma
    JEL: E52 F32 F33 F42
    Date: 2021
  9. By: Shunichi Yoneyama (Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: This paper measures the transparency of the Federal Reserve Board (FRB) regarding its target inflation rate before its adoption of inflation targeting using data on the disagreement in inflation expectations among U.S. consumers. We construct a model of inflation forecasters employing the frameworks of both an unobserved components model and a noisy information model. We estimate the model and extract the transparency of the FRB regarding the target as the standard deviation of the heterogeneous noise in the inflation trend signal, where the trend proxies the FRB's inflation target. The results show a great improvement in transparency after the mid-1990s as well as its significant contribution to the decline in the disagreement in long- horizon inflation expectations.
    Keywords: Central bank transparency, forecast disagreement, inflation dynamics, imperfect information
    JEL: E50 E37 D83
    Date: 2021–12
  10. By: Yuriy Gorodnichenko; Dmitriy Sergeyev
    Abstract: We document a new fact: in U.S., European and Japanese surveys, households do not expect deflation, even in environments where persistent deflation is a strong possibility. This fact stands in contrast to the standard macroeconomic models with rational expectations. We extend a standard New Keynesian model with a zero-lower bound on inflation expectations. Unconventional monetary policies, such as forward guidance, are weaker. In liquidity traps, the government spending output multiplier is finite, and adverse aggregate supply shocks are not expansionary. The possibility of confidence-driven liquidity traps is attenuated.
    JEL: E5 E7 G4
    Date: 2021–11
  11. By: Hasan, Iftekhar; Li, Xiang
    Abstract: This paper studies whether and how banks' technology adoption affects the bank lending channel of monetary policy transmission. We construct a new measurement of bank-level technology adoption, which can tell whether the technology is related to the bank's lending business and which specific technology is adopted. We find that lending-related technology adoption significantly strengthens the transmission of the bank lending channel, meanwhile, adopting technologies that are not related to lending activities significantly mitigates that. By technology categories, the adoption of cloud computing technology displays the largest impact on strengthening the bank lending channel. Moreover, higher exposure to BigTech competition is significantly associated with a weaker reaction to monetary policy shocks.
    Keywords: bank lending channel,monetary policy transmission,technology adoption
    JEL: G21 G23
    Date: 2021
  12. By: Minjie Deng (Simon Fraser University); Min Fang (University of Lausanne & University of Geneva)
    Abstract: We study how debt maturity heterogeneity determines firm-level investment responses to monetary policy shocks. We first document that debt maturity significantly affects the responses of firm-level investment to conventional monetary policy shocks: firms who hold more long-term debt are less responsive to monetary shocks. The magnitude of responses due to debt maturity heterogeneity is comparable to the well-documented responses due to debt level heterogeneity. Evidence from credit ratings and borrowing responses indicates that the higher future default risk embedded in long-term debt plays an essential role. We then develop a heterogeneous firm model with investment, long-term and short-term debt, and default risk to quantitatively interpret these facts. Conditional on the level of debt, firms with more long-term debt are more likely to default on their external debt and consequently face a higher marginal cost of external finance. As a result, these firms are less responsive in terms of investment to expansionary monetary shocks. The effect of monetary policy on aggregate investment, therefore, depends on the distribution of debt maturity.
    Date: 2021–12
  13. By: Margarita Rubio
    Abstract: Brexit will bring many economic and institutional consequences. Among other, Brexit will have implications on financial stability and the implementation of macroprudential policies. One immediate effect of Brexit is the fact that the United Kingdom (UK) will no longer be subject to the jurisdiction of the European Supervisory Authorities (ESAs) nor the European Systemic Risk Board (ESRB). This paper studies the welfare implications of this change of regime, both for the UK and the European Union (EU). By means of a Dynamic Stochastic General Equilibrium model (DSGE), I compare the pre-Brexit scenario with the new one, in which the UK sets macroprudential policy independently. I find that, after Brexit, the UK is better off by setting its own macroprudential policy without taking into account Europe's welfare as a whole. Given the small relative size of the UK, this implies just slight welfare loss in the EU.
    Keywords: Brexit, macroprudential policy, DSGE, welfare
    Date: 2021
  14. By: Liebich, Lena; Nöh, Lukas; Rutkowski, Felix Joachim; Schwarz, Milena
    Abstract: In light of its recently completed strategy review, the ECB has presented a climate action plan, which schedules the consideration of climate criteria within the corporate sector purchase program (CSPP). We study the potential role of the ECB in supporting the transition to a low-carbon economy by decarbonizing the CSPP. We demonstrate that the carbon intensity of CSPP purchases is basically determined by three factors: First, by the CSPP-eligibility criteria as these tend to exclude bonds from low-emission sectors. Second, by the underlying structure of the bond market as this tends to be skewed towards carbon-intensive sectors. Third, among the eligible bonds, the ECB tends to select those from relatively emission-intensive sectors. Consequently, to decarbonize the CSPP, the ECB can theoretically act along these three lines. That is: Adjust the CSPP-eligibility criteria to expand the range of eligible low-carbon assets. Revise the principle of market neutrality to tilt the CSPP portfolio towards low-carbon companies. Or purchase so far neglected low-carbon bonds within the current eligibility and market neutrality framework. We analyze chances and discuss risks with regard to all three options. As we find that all approaches to decarbonize the CSPP have either very limited effects on the carbon intensity of the CSPP portfolio or are associated with significant theoretical and practical concerns, we conclude that the contributions to the success of an active green monetary policy that goes beyond the principle of market neutrality are not guaranteed, while at the same time risks arise for a monetary policy oriented towards price level stability. In contrast, by linking the CSPP to climate-related disclosures, the ECB can contribute to increased transparency and improved risk management and has an important and potentially climate-effective lever in hand that is independent of revising the principle of market neutrality.
    Date: 2021
  15. By: Monique Reid (Department of Economics, Stellenbosch University, South Africa); Pierre Siklos (Wilfrid Laurier University, Balsillie School of International Affairs, Waterloo, Canada, and Research Fellow, University of Stellenbosch, South Africa)
    Abstract: Inflation expectations are today keenly monitored by both the private sector and policy makers. Expectations matter, but whose expectations matter and how should this unobservable be measured? Answering these questions involves a number of choices that should be transparent and explicit. In this research note, we focus on these choices with respect to the South African inflation expectations data collected by the Bureau for Economic Research. Being willing to detail the strengths and weaknesses of a particular approach is valuable as it will enable us to choose the appropriate proxy for each application and to interpret the results with insight.
    Keywords: Inflation expectations survey, Bureau for Economic Research, inflation targeting, monetary policy, survey methodology
    JEL: C83 E43 E52 E58 E71
    Date: 2021
  16. By: Immaculate Machasio (World Bank); Peter Tillmann (University of Giessen)
    Abstract: Remittance inflows are driven by macroeconomic conditions in the home and the host economies, respectively. In this paper, we study the effect of U.S. monetary policy on remittance flows into economies in Latin American and the Caribbean. The role of Fed policy for remittances has not yet been studied. We estimate a series of panel local projections for remittance inflows into eight countries. A surprise change in U.S. monetary conditions has a strong and highly significant negative effect on inflows. Our finding remains robust if we change the sample period or include additional variables. Hence, our paper establishes a remittance-channel through which the Fed affects the business cycle abroad.
    Keywords: remittances, migration, business cycle, monetary policy, spillovers
    JEL: F24 F41 E52 O11
    Date: 2021
  17. By: Jinzhao Chen (CleRMa - Clermont Recherche Management - ESC Clermont-Ferrand - École Supérieure de Commerce (ESC) - Clermont-Ferrand - UCA - Université Clermont Auvergne); Zhitao Lin (College of Economics and Institute of Finance, Jinan University, Guangzhou); Xingwang Qian (Economics and Finance Department, SUNY Buffalo State, Buffalo, NY)
    Abstract: This paper examines how capital controls affect the volatility of the renminbi (RMB) covered interest deviation (CID). We find that capital controls amplify the volatility of RMB CID and the amplification effect becomes more prominent in more flexible RMB exchange regimes. Capital controls influence the volatility of interest rate differential (IRD) and forward premium (FP), two components of CID, differently, particularly during the U.S. Fed's QE era. In addition, using an error correction model, we show that, while capital controls magnify both the short-and longrun volatility of the CID and the IRD, they do not affect FP volatility.
    Keywords: Capital controls,RMB CID volatility,amplification effect,interest rate differential,forward premium
    Date: 2021
  18. By: Sushant Acharya; Keshav Dogra; Sanjay R. Singh (Department of Economics, University of California Davis)
    Abstract: We formalize the idea that the financial sector can be a source of non-fundamental risk. Households’ desire to hedge against price volatility can generate price volatility in equilibrium, even absent fundamental risk. Fearing that asset prices may fall, risk-averse households demand safe assets from leveraged intermediaries, whose issuance of safe assets exposes the economy to self-fulfilling fire sales. Policy can eliminate non-fundamental risk by (i) increasing the supply of publicly backed safe assets, through issuing government debt or bailing out intermediaries, or (ii) reducing the demand for safe assets, through social insurance or by acting as a market maker of last resort.
    Keywords: safe assets, self-fulfilling asset market crashes, liquidity, fire sales
    JEL: D52 D84 E62 G10 G12
    Date: 2021–12–19
  19. By: Farmer, J. Doyne; Kleinnijenhuis, Alissa; Wetzer, Thom; Wiersema, Garbrand
    Abstract: Currently financial stress test simulations that take into account multiple interacting contagion mechanisms are conditional on a specific, subjectively imposed stress-scenario. Eigenvalue-based approaches, in contrast, provide a scenario-independent measure of systemic stability, but only handle a single contagion mechanism. We develop an eigenvalue-based approach that gives the best of both worlds, allowing analysis of multiple, interacting contagion channels without the need to impose a subjective stress scenario. This allows us to demonstrate that the instability due to interacting channels can far exceed that of the sum of the individual channels acting alone. We derive an analytic formula in the limit of a large number of institutions that gives the instability threshold as a function of the relative size and intensity of contagion channels, providing valuable insights into financial stability whilst requiring very little data to be calibrated to real financial systems.
    Keywords: Financial Stability, Systemic Risk, Interacting Contagion Channels, Financial Contagion, Multiplex Networks, Stress Test, Liquidity-Solvency Nexus
    JEL: G01 G17 G18 G21 G23 G28
    Date: 2020–01
  20. By: Jonathan J Adams (Department of Economics, University of Florida)
    Abstract: Can waves of optimism and pessimism produce large macroeconomic bubbles, and if so, is there anything that policymakers can do about them? Yes and yes. I study a business cycle model where agents with rational expectations receive noisy signals about future productivity. The model features dispersed information, which allows aggregate noise shocks to produce frequent large bubbles in the capital stock. Because of the information friction, a policymaker with an informational advantage can improve outcomes. I consider policies that affect investment incentives by distorting the intertemporal wedge. I calculate the optimal policy rule, and find that policymakers should discourage investment booms after aggregate news shocks.
    JEL: D84 E21 E32
    Date: 2020–09
  21. By: Xiao Shuguang; Lai Xinglin
    Abstract: While the traditional monetary transmission mechanism usually uses the equity and capital markets as monetary reservoirs, due to China's unique fiscal and financial system, the real estate sector has become China's 'invisible' non-traditional monetary reservoir for many years. Firstly, based on the perspective of the real estate sector as a monetary reservoir, this paper constructs a dynamic general equilibrium model that includes fiscal investment and financing and uses Chinese housing market data as well as central bank data on refinancing rates to financial institutions and GDP data for parameter estimation to reveal the laws of the monetary transmission mechanism of the monetary reservoir-fiscal financing investment: firstly, an asset can be financed as long as it satisfies the three criteria of a leveraged trading system:First,there is a commitment to pay and the existence of government utility; second, local governments have an incentive to carry out credit expansion and investment and also financing operations through money pool assets, and there is a financing effect when the tax return on fiscal investment is higher than fiscal financing; third, the bubble effect is greater than the financing effect and it will push the monetisation of fiscal deficits when the financing effect is greater than the bubble effect and then the economic growth masks the credit expansion of local governments.To address the problem of monetary transmission mechanism under the perspective of real estate monetary reservoir, this paper carries out the design of a de-bubble financing mechanism for monetary reservoir assets.
    Date: 2021–11
  22. By: Marina Lovchikova; Johannes Matschke
    Abstract: Capital flows into emerging markets are volatile and associated with risks. A common prescription is to impose counter-cyclical capital controls that tighten during economic booms to mitigate future sudden-stop dynamics, but it has been challenging to document such patterns in the data. Instead, we show that emerging markets tighten their capital controls in response to volatility in international financial markets and elevated risk aversion. We develop a model in which this behavior arises from a desire to manipulate the risk premium. When investors are more risk-averse or markets are volatile, investors require a high marginal compensation to hold risky emerging market debt. Regulators are able to exploit this tight link and raise capital inflow controls, thereby lowering the risk premium and reducing the overall cost of debt. We emphasize that risk premium manipulations via capital controls are only optimal from the perspective of the individual emerging market, but not from a global perspective. This suggests that the use of capital controls may impose costs in an international context.
    Keywords: Capital Controls; Risk Aversion; Risk Premium; Volatility
    JEL: F36 F38 F41
    Date: 2021–09–08

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