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on Central Banking |
| By: | Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian |
| Abstract: | This paper reports the results of a survey of former members of the Governing Council of the European Central Bank, which sought their views on monetary policy communication practices, the related challenges and the road ahead. Pronounced differences across the respondent groups are rare, suggesting that there is broad consensus on the various issues. Respondents view enhancing credibility and trust as the most important objective of central bank communication. They judge communication with financial markets and experts as extremely important and adequate, but see substantial room for improvement in the communication with the general public. The central bank objective is widely seen as the most important topic for monetary policy communication, and several respondents perceived a need for clarification of the ECB’s inflation aim, citing the ambiguity of the “below, but close to, 2%” formulation that was in place at the time of the survey. JEL Classification: E52, E58 |
| Keywords: | central bank communication, monetary policy, survey |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212627&r= |
| By: | Mr. Maximilien Queyranne; Daniel Baksa; Azhin Abdulkarim; Vassili Bazinas; Mr. Roberto Cardarelli |
| Abstract: | This paper finds that the neutral interest rate has been on a downward trajectory in Morocco since the global financial crisis and may have fallen in the wake of the pandemic. In that context, monetary policy transmission to output and prices appears relatively muted given limited exchange rate flexibility until recently. Also, monetary policy transmission to some market rates has somewhat weakened in the wake of the pandemic. A lower natural rate and low policy rates raise the question of whether further rate reductions would impair the banking system. We find that the sensitivity of cash demand to deposit rates is low, implying limited risks that banks would lose funding with further reductions. A reliance on checking and savings accounts for funding may impair monetary pass-through, however. If monetary policy reaches its effective lower bound, limited and credible recourse to an asset purchase program could usefully complement conventional measures and strengthen monetary policy transmission under an inflation-targeting regime with a flexible exchange rate. |
| Keywords: | Monetary policy, neutral interest rate, unconventional monetary policy. |
| Date: | 2021–10–21 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/249&r= |
| By: | Kai Arvai |
| Abstract: | How can a currency union be sustained when member states have an exit option? This paper derives how fiscal and monetary policies can ensure the survival of a common currency, i countries want to leave the union. A union-wide central bank can prevent a break-up by setting interest rates in favor of the country that wants to exit. I show how a central bank does this by following a monetary rule with state-dependent country weights. The paper then demonstrates in a simulation that a central bank can only sustain the union for a while with this rule, but not permanently and that the best way to sustain the union is through fiscal transfers. |
| Keywords: | Currency union, Monetary policy, Lack of commitment, Exit option, Fiscal Policy |
| JEL: | E42 E52 E61 F33 F45 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:850&r= |
| By: | Alexandre Carvalho; João Valle e Azevedo; Pedro Pires Ribeiro |
| Abstract: | Over the short run contractionary monetary policy shocks tend to be associated with domestic currency appreciations, which goes against standard interest rate parity conditions. How can this be reconciled with the fact that these conditions tend to be restored over the long run? We show the distinction between permanent and temporary monetary policy shocks is helpful to understand the impacts of monetary policy on exchange rates in the short as well as over the long run. Drawing on monthly data for the United States, Germany, France, Great Britain, Japan, Australia, Switzerland and the euro area from 1971 to 2019, and resorting to a simple structural vector error correction (SVEC) model and mild identifying restrictions, we find that a shock leading to a temporary increase in U.S. nominal interest rates leads to a temporary appreciation of the USD against the other currencies, in line with the literature on the exchange rate effects of monetary shocks and that on the forward premium puzzle. In turn, a monetary policy shock leading to a permanent rise in nominal interest rates - e.g. one associated with a normalisation of monetary policy after a long period at the zero lower bound - has the opposite impact, i.e., in line with interest parity conditions, in the short as well as over the long run. The ensuing depreciation may also contribute to higher (not lower) inflation, also in the short run. We thus confirm, in a simpler setting and for more economies, the results of Schmitt-Grohé and Uribe (2021). This highlights the relevance of differentiating between temporary and permanent monetary policy shocks in interpreting short-run exchange rate movements. |
| JEL: | C32 E52 E58 F31 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ptu:wpaper:w202117&r= |
| By: | Jens H. E. Christensen; Mark M. Spiegel |
| Abstract: | Japanese realized and expected inflation has been below the Bank of Japan’s two percent target for many years. We use the exogenous COVID-19 pandemic shock to examine the efficacy of monetary and fiscal policy responses for elevating inflation expectations from an arbitrage-free term structure model of nominal and real yields. We find that monetary and fiscal policy announcements during this period failed to lift inflation expectations, which instead declined notably and are projected to only slowly revert back to levels far below the announced target. Hence, our results illustrate the challenges faced in raising well-anchored low inflation expectations. |
| Keywords: | affine arbitrage-free term structure model; unconventional monetary policy; deflation risk; deflation protection |
| JEL: | C32 E43 E52 G12 G17 |
| Date: | 2021–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:93581&r= |
| By: | Chistoph Grosse-Steffen |
| Abstract: | Inflation target formulations differ across countries and over time. Most widespread are point targets, target ranges, hybrid combinations of the two, or mere definitions of price stability. This paper proposes a novel empirical measure of expectations anchoring based on the cross-sectional distribution of private sector inflation point forecasts. Applying this to a panel of 29 countries, it finds three main results. First, a numerical target definition per se does not improve anchoring compared to a definition of price stability, while the formulation of a numerical reference point increases the degree of anchoring. Second, point targets and hybrid target formulations are associated with better anchoring than target ranges. Third, periods of persistent target deviations lead to an increase in tail risks to the inflation outlook. Conditional on such periods, point targets and hybrid targets attenuate tail risks to the inflation outlook, with a stronger quantitative effect for point targets. The results are consistent with models suggesting that targets ranges are interpreted as zones where monetary policy is less active. |
| Keywords: | Monetary Policy, Inflation Targeting, Expectations Anchoring, Survey Forecasts, Inflation Risk |
| JEL: | E42 E52 D84 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:852&r= |
| By: | Hernán D. Seoane |
| Abstract: | This paper introduces digital assets, crypto assets in general, and Central Bank Dig- ital Currency in particular, into an otherwise standard New-Keynesian closed economy model with Financial Frictions. We use this setting to study the impact of a change in preferences towards the use of digital assets and to address whether the emergence of this type of instruments affect the transmission of monetary policy shocks. In this context we study the introduction of Central Bank Digital Currencies. The model is stylized but it could be a baseline for the design of models for quantitative analysis. |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:ces:econpr:_33&r= |
| By: | Mr. Philippe D Karam; Mr. Jan Vlcek; Mikhail Pranovich |
| Abstract: | We extend a modern practical Quarterly Projection Model to study credit cycle dynamics and risks, focusing on macrofinancial linkages and the role of macroprudential policy in achieving economic and financial stability. We tailor the model to the Philippines and evaluate the model’s properties along several dimensions. The model produces plausible dynamics and sensible forecasts. This along with its simplicity makes it useful for policy analysis. In particular, it should help policymakers understand the quantitative implications of responding to changes in domestic financial conditions, along with other shocks, through the joint use of macroprudential and monetary policies. |
| Keywords: | Philippines, Forecasting and Policy Analysis, Quarterly Projection Model, Monetary Policy, Macroprudential Policy, Credit Cycle, Leverage Ratio; credit cycle dynamics; policy analysis; projection model; model property; Quarterly Projection model; Credit; Macroprudential policy; Central bank policy rate; Credit gaps; Business cycles; Global |
| Date: | 2021–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/256&r= |
| By: | Ferrando, Annalisa; McAdam, Peter; Petroulakis, Filippos; Vives, Xavier |
| Abstract: | Monetary policy aims at affecting corporate borrowing by influencing the marginal costs of firms, but its potency can be conditioned by the degree of market competition. We first identify conditions under which changes in marginal costs may have different effects on credit constraints and output under different competitive environment, in a simple Cournot competition setting. We then exploit changes in monetary policy to examine whether the pass-through of borrowing costs is affected by market structure. First, we use as an experiment the announcement of the ECB Outright Monetary Transactions (OMT) program in a triple-differences specification. We show that small firms (which have low market power and higher credit constraints) in "stressed" countries (which benefited more from the policy) within less concentrated sectors experienced a larger reduction in credit constraints than similar firms in more concentrated sectors. Second, we exploit continuous state-of-the-art measures of monetary policy shocks to study how market structure affects pass-through to real variables, like investment and sales growth. We find evidence that firms with more market power respond less to monetary policy shocks. These results show that the interaction of borrowing capacity and market structure matters, and that concentration may have important effects on monetary policy transmission. JEL Classification: D4, E4, E5, L1 |
| Keywords: | competition, credit constraints, marginal costs, monetary transmission, OMT |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20212632&r= |
| By: | Pauline Avril (Université d'Orléans); Gregory Levieuge (Banque de France, Université d'Orléans); Camelia Turcu (Université d'Orléans) |
| Abstract: | We empirically investigate the impact of natural disasters on the external finance premium (EFP), conditional on the stringency of macroprudential regulation. The intensity of natural disasters is measured through an original set of geophysical indicators for a sample of 88 countries over the period 1996-2016. Using local projections, we show that, following storms, the EFP significantly drops (rises) when macroprudential regulation is stringent (lax). This suggests that regulated financial systems could foster favorable financing conditions to replace destroyed capital with more productive capital. Macroprudential stringency seems less crucial in the case of floods, the predictability of which may prompt self-discipline. |
| Keywords: | Financial stress, External finance premium, Macroprudential policy, Natural disasters, Local projections. |
| JEL: | E |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2021.13&r= |
| By: | Davide Di Zio (Bank of Italy); Marco Fanari (Bank of Italy); Simone Letta (Bank of Italy); Tommaso Perez (Bank of Italy); Giovanni Secondin (Bank of Italy) |
| Abstract: | In recent years, the extensive recourse to unconventional monetary policy measures and the growing importance of the transition process towards a sustainable economy have given rise to new challenges for the Eurosystem’s central banks in managing financial risks. In this context, central banks’ investment strategies, whose goal is to reinforce capital strength, have been combined with the adoption of criteria aimed at fostering a sustainable growth model. This work describes the strategic allocation process for investment developed by the Bank of Italy and the methodology adopted for applying sustainability criteria to some of the portfolio’s asset classes. |
| Keywords: | central banks, investment allocation, sustainability, Bayesian VAR |
| JEL: | E58 G11 G17 Q56 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wpmisp:mip_014_21&r= |
| By: | Pål Boug; Håvard Hungnes (Statistics Norway); Takamitsu Kurita |
| Abstract: | The recent boom in house prices in many countries during the Covid-19 pandemic and the possibility of household financial distress are of concern among some central banks. We revisit the empirical modelling of house prices and household debt with a policy-oriented perspective using Norwegian data over the last four decades within the cointegrated VAR model. Our findings suggest, in line with previous work, a long-run mutually reinforcing relationship between these financial magnitudes, and thus the potential for the build-up of financial instabilities and spillover effects to the real economy. Applying a control analysis, we find that both house prices and debt are controllable magnitudes to some pre-specified target levels through the mortgage interest rate, which enables the central bank to reduce large fluctuations and bubble tendencies in the housing market. The present control analysis thus provides some useful policy implications from empirically relevant representations of two important financial factors entering the decision process of the policy maker. |
| Keywords: | House prices; household debt; econometric modelling; cointegrated VAR; policy control analysis; simulation |
| JEL: | C32 C53 E52 R21 |
| Date: | 2021–11 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:967&r= |
| By: | Doojav, Gan-Ochir |
| Abstract: | This paper develops three macroeconomic models such as large structural VAR, DSGE-based structural VAR and GAP models for Mongolia, a developing and commodity-exporting economy. All models are estimated using Bayesian methods on the quarterly data. Results suggest that (i) external shocks (i.e., China’s economic activity, commodity prices and FDI) are important sources of macroeconomic volatility in Mongolia, (ii) combining macroprudential and monetary policy measures is important in welfare loss by ensuring both macroeconomic and financial stability, and (iii) equilibrium values for inflation, growth, unemployment rate and real interest rate are estimated as 6 percent, 5 percent, 8 percent, and 3.5 percent for Mongolia, respectively. The paper also provides recommendations for macroeconomic stabilization policy. |
| Keywords: | External shocks, Open economy macroeconomics, Optimal stabilization policy, Bayesian analysis |
| JEL: | C11 C32 C51 E58 E63 F4 |
| Date: | 2021–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111206&r= |
| By: | Cristina Badarau (Université de Bordeaux); Corentin Roussel (Université de Bordeaux) |
| Abstract: | In the aftermath of the Global Financial Crisis, financial regulation uses micro- and macro-prudential rules, most of the time motivated by empirical studies. This article suggests a theoretical explanation for countercyclical and progressive capital requirements that incorporate micro- and macro-prudential stabilization objectives. The Capital Adequacy Ratio (CAR) imposed to individual banks by a Prudential Authority (PA) would thus represent an optimal regulation whose aim is to avoid individual and systemic risk accumulation by imposing minimal constraints to financial institutions. This corresponds to the implementation of optimal time-varying prudential capital requirements to banks, with non-linear structure, that allows PA to take progressive countercyclical actions in order to insure financial stability. We also test the mechanism in a DSGE model and show that it would be more suitable for the financial and real stability compared to the existing fixed prudential ratios. |
| Keywords: | prudential regulation model, optimal CAR, time-varying capital requirements, DSGE model |
| JEL: | E |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:inf:wpaper:2021.11&r= |
| By: | Rafael Cezar; Eric Monnet |
| Abstract: | Long considered suboptimal, capital controls and FX interventions are now recognized as prudential measures. Yet, whether they should be used in combination remains an open question. Thanks to a rich dataset from 1950, we investigate how the response of FX reserves to an exogenous US monetary shock depends on capital controls. The response is insignificant with a very close capital account. By contrast, for a significant number of countries, FX interventions and capital controls are combined to tame the effects of an international financial shock. Yet, as countries open up financially, FX interventions replace capital controls. There is no one-sizes-fits-all recipe. |
| Keywords: | Capital Controls ; Foreign Exchange Interventions ; Foreign Exchange Reserves ; GlobalvFinancial Cycle |
| JEL: | F31 F32 F38 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:849&r= |
| By: | Thomas Philippon; Olivier Wang |
| Abstract: | We study time-consistent bank resolution mechanisms. When interventions are ex post efficient, a government cannot commit not to inject capital into the banking system. Contrary to common wisdom, we show that the government may still avoid moral hazard and implement the first best allocation by using the distribution of bailouts across banks to provide ex ante incentives. In particular, we analyze properties of credible tournament mechanisms that provide support to the best performing banks and resolve the worst performing ones, including through mergers. Our mechanism continues to perform well if banks are partially substitutable, and if they are heterogeneous in their size, interconnections, and thus systemic risk, as long as bailout funds can be targeted to particular banks. |
| JEL: | G01 G2 G33 G34 G38 H12 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:29560&r= |
| By: | Andersson, Fredrik N. G. (Department of Economics, Lund University); Kilman, Josefin (Department of Economics, Lund University) |
| Abstract: | Romer and Romer (2004) propose a simple method to estimate monetary policy shocks using forecasts and real-time data. However, such data is not always (publicly) available, especially in a historical context. We explore the consequences of using revised data instead of the original forecast and real-time data when estimating policy shocks using the Romer and Romer framework. To this end, we estimate policy shocks for the same period as Romer and Romer. We find that using revised data has little impact on actual shock estimates, and the estimated effects of monetary policy shocks are similar. |
| Keywords: | Monetary policy shocks; prices; GDP |
| JEL: | E20 E30 E40 E50 E60 |
| Date: | 2021–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:lunewp:2021_019&r= |
| By: | Pauline AVRIL; Grégory LEVIEUGE; Camélia TURCU |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:leo:wpaper:2913&r= |
| By: | Li, Boyao |
| Abstract: | Both equity and regulation play key roles in determining the ability of credit creation of banks. The equity endogenously varies while the regulations are exogenously imposed. I propose a banking model to investigate how the changes in bank equity due to interest receipt and expenditure affect credit and money creation under the Basel III regulations. Three Basel III regulations are discussed: the capital adequacy ratio, liquidity coverage ratio, and net stable funding ratio. The effects on credit creation are demonstrated by the changes in the credit supply in response to the interest payments changing the equity. My results indicate that the changes in equity cause multiplier effects on the credit supply. The multipliers depend on the regulatory constraints. Similarly, I present the impacts on money creation, given by the multiplier effects on the money supply. This study sheds considerable light on how bank equity and Basel III regulations affect credit and money creation. |
| Keywords: | Credit creation; Basel III; Bank equity; Interest payments; Multiplier effect; Balance sheet |
| JEL: | E51 G21 G28 G32 |
| Date: | 2021–12–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111269&r= |
| By: | Mr. Junghwan Mok; Andrea Deghi; Tomohiro Tsuruga |
| Abstract: | The COVID-19 pandemic crisis has severely shocked the commercial real estate (CRE) sector, which could have important implications for macro-financial stability going forward because of the large size of the sector and its strong interconnectedness with the real economy. Using a novel methodology, this paper quantifies vulnerabilities in the CRE sector and analyzes policy tools available to mitigate related risks. The analysis shows that CRE prices were overvalued in several major advanced economies in 2020:Q1. It also shows that such price misalignments increase the likelihood of future price corrections and exacerbate downside risks to future GDP growth. While the path of recovery in the sector will depend inherently on the pace of overall economic recovery and the structural shifts induced by the pandemic, easy financial conditions may contribute to an increase in financial vulnerabilities and persistent price misalignment. Macroprudential policy can, however, be effective in curbing the financial stability risks posed by the CRE sector. |
| Keywords: | Commercial Real Estate; Asset Prices; Growth-at-Risk; Panel Quantile Regression; Macroprudential Policy |
| Date: | 2021–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:2021/264&r= |
| By: | Tsung-Hsien Li; Jan Sun |
| Abstract: | Many credit cardholders in the U.S. turn to expensive payday loans, even though they have not yet exhausted their credit lines. This results in significant monetary costs and has been coined the “Payday Loan Puzzle.” We propose the novel explanation that households use payday loans to protect their credit scores since payday lenders do not report to credit bureaus. To quantitatively examine this hypothesis, we build a two-asset Huggett-type model with two default options as well as hidden information and actions. Using our calibrated model, we can account for 40% of the empirically identified payday loan borrowers with liquidity left on their credit cards. We can also match the magnitude of monetary costs due to this seeming pecuniary mistake. To inform the policy debate over payday lending, we assess the welfare implications of several policy counterfactuals. We find that either banning payday loans or increasing their default costs results in aggregate welfare losses. |
| Keywords: | Consumer Credit, Bankruptcy, Default, Payday Loan, Financial Regulation, Type Score, Asymmetric Information, Hidden Action, Cross-Subsidization |
| JEL: | D82 E21 E49 G18 G51 K35 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2021_324&r= |
| By: | Camelia Minoiu; Rebecca Zarutskie; Andrei Zlate |
| Abstract: | We study the effects of the Main Street Lending Program (MSLP)—an emergency lending program aimed at supporting the flow of credit to small and mid-sized firms during the COVID-19 crisis on bank lending to businesses. Using instrumental variables for identification and multiple loan-level and survey data sources, we document that the MSLP increased banks' willingness to lend more generally outside the program to both large and small firms. Following the introduction of the program, participating banks were more likely to renew maturing loans and to originate new loans, as well as less likely to tighten standards on business loans than nonparticipating banks. Additional evidence suggests that the MSLP, despite low take-up, supported the flow of bank credit during the pandemic by serving as a backstop to the bank loan market and by increasing banks' levels of risk tolerance in the face of uncertainty. |
| Keywords: | Main Street Lending Program; Federal Reserve; Bank lending; COVID-19 pandemic; Emergency lending facilities |
| JEL: | E52 E58 E63 G21 |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2021-78&r= |
| By: | Camille Cornand (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - CNRS - Centre National de la Recherche Scientifique - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UL2 - Université Lumière - Lyon 2 - ENS Lyon - École normale supérieure - Lyon); Paul Hubert |
| Abstract: | We compare disagreement in expectations and the frequency of forecast revisions among five categories of agents: households, firms, professional forecasters, policymakers and participants to laboratory experiments. We provide evidence of disagreement among all categories of agents. There is however a strong heterogeneity across categories: while policymakers and professional forecasters exhibit low disagreement, firms and households show strong disagreement. This translates into a heterogeneous frequency of forecast revision across categories of agents, with policymakers revising more frequently their forecasts than firms and professional forecasters. Households last revise less frequently. We are also able to explore the external validity of experimental expectations. |
| Keywords: | inflation expectations,information frictions,disagreement,forecast revisions,experimental forecasts,survey forecasts,central bank forecasts |
| Date: | 2021–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-03468918&r= |
| By: | Uwe Böwer |
| Abstract: | Lebanon is not defying gravity anymore. After a long period of surprising economic resilience, the Lebanese economy fell into a severe crisis in 2019, triggered by a sudden stop in life-sustaining capital inflows. The undercurrents of unsustainable public debt and twin deficits amid a weak institutional environment, however, had long been in the making. Drastic devaluation in parallel markets, high inflation and strong real GDP contractions reflect Lebanon’s deep crisis, which has only been aggravated by the COVID-19 pandemic and the devastating Beirut port explosions. The government is facing a momentous task to address the devaluation-inflation nexus, improve public governance, rebuild the electricity sector, restore sound public finances, repair the financial system and reinvigorate the private sector. This paper discusses the potential contributions of a currency board arrangement as a possible external anchor that could help stabilise Lebanon’s economy. Indeed, a currency board could end devaluation and rein in inflation, enhance discipline and governance, and, if accompanied by a broader reform agenda, help incentivise a return of capital inflows and improve private sector conditions. However, a currency board severely restricts certain macroeconomic adjustment mechanisms, requires a careful transition management and involves sizeable fiscal adjustments. While the stabilisation benefits of a currency board could be significant at Lebanon’s current juncture, getting the accompanying reforms in place, cushioning the social impact of the adjustment and ensuring solid implementation all present major challenges to make a currency board sustainable. Lebanon’s international partners stand ready to help. However, meeting these challenges first and foremost requires strong ownership by Lebanon itself. |
| Keywords: | Lebanon, currency board, exchange rate regime, monetary policy, inflation, Böwer. |
| JEL: | E52 E58 O53 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:euf:ecobri:068&r= |