|
on Central Banking |
| By: | Martin Baumgaertner (THM Business School Giessen) |
| Abstract: | This paper shows that a different communication style of the European Central Bank (ECB) affects stock prices differently. A break in the ECB’s communication from 2016 onwards makes it necessary to adjust the identification of monetary policy surprises in the euro area. By modifying the high-frequency identification of monetary policy shocks in the euro area, I can show that two quantitative easing shocks occur per decision: One during the release and one during the press conference. Although the impact on policy rates is identical, the release window shock seems to have a more pronounced effect on stock prices. |
| Keywords: | Unconventional Monetary Policy, High-Frequency Data, ECB, Communication |
| JEL: | E44 E52 E58 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:mar:magkse:202203&r= |
| By: | Luca Fornaro; Federica Romei |
| Abstract: | We study optimal monetary policy during times of exceptionally high global demand for tradable goods, relative to non-tradable services. The optimal monetary response entails a rise in inflation, which helps rebalance production toward the tradable sector. While the inflation costs are fully beared domestically, however, part of the gains in terms of higher supply of tradable goods spill over to the rest of the world. National central banks may thus fall into a coordination trap, and implement an excessively tight monetary policy during tradable goodsdriven recoveries. |
| Keywords: | Asymmetric shocks, reallocation, monetary policy, international monetary cooperation, inflation, global supply shortages |
| JEL: | E32 E44 E52 F41 F42 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1814&r= |
| By: | Jacopo Bonchi (Department of Economics and Finance and School of European Political Economy, LUISS Guido Carli); Salvatore Nisticò (Department of Social Sciences and Economics, Sapienza University of Rome) |
| Abstract: | Using a tractable New Keynesian model with heterogeneous agents, we analyze the interplay between households' heterogeneity and rational bubbles, and their normative implications for monetary policy. Households are infinitely-lived and heterogeneous because of two sources of idiosyncratic uncertainty, which makes them stochastically cycle in and out of segmented asset markets, and in and out of employment. We show that bubbles can emerge in equilibrium despite the fact that households are infinitely lived, because of the structural heterogeneity that affects their activity in asset and labor markets. The elasticity of an endogenous labor supply, the heterogeneity in asset-market participation and the level of long-run monopolistic distortions are shown to affect the size of equilibrium bubbles and their cyclical implications. We also show that a central bank concerned with social welfare faces an additional tradeoff implied by bubbly fluctuations which makes, in general, strict inflation targeting a suboptimal monetary-policy regime. |
| Keywords: | Inequality, Rational bubbles, Optimal monetary policy, HANK |
| JEL: | E21 E32 E44 E58 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:saq:wpaper:5/22&r= |
| By: | Ricardo Nunes; Ali K. Ozdagli; Jenny Tang |
| Abstract: | Interest rate surprises around FOMC announcements reveal both the surprise in the monetary policy stance (the pure policy shock) and interest rate movements driven by exogenous information about the economy from the central bank (the information shock). In order to disentangle the effects of these two shocks, we use interest rate changes on days of macroeconomic data releases. On these release dates, there are no pure policy shocks, which allows us to identify the impact of information shocks and thereby distill pure policy shocks from interest rate surprises around FOMC announcements. Our results show that there is a prominent central bank information component in the widely used high-frequency policy rate surprise measure that needs to be parsed out. When we remove this central bank information component, the estimated effects of monetary policy shocks are more pronounced relative to those estimated using the entire policy rate surprise. |
| Keywords: | monetary policy; central bank information; high-frequency identification; proxy structural VAR; external instruments |
| JEL: | C36 D83 E52 E58 |
| Date: | 2022–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedbwp:93691&r= |
| By: | V. V. Chari; Luis Pérez |
| Abstract: | Iovino, La’O and Mascarenhas (forthcoming) ask two important questions regarding the optimal conduct of monetary policy: Should the central bank’s policy depend on information the central bank has that is not available to markets? And should the central bank disclose information that it has but market participants do not? Iovino, La’O and Mascarenhas answer these questions using a simple, stylized model with one-period price stickiness. They show that efficient equilibria can be sustained regardless of whether policy depends on the central bank’s information and regardless of its disclosure policy. We explain the logic behind their irrelevance result and show that if restrictions are imposed on equilibria, then monetary policy should in general depend on the central bank’s information. Finally, we offer some speculative answers to their questions and discuss the sense in which policy is converging towards theory. |
| Keywords: | Indeterminacy; Implementation of efficient outcomes; Dependence of policy on information; Central bank communication |
| JEL: | E52 E58 H21 |
| Date: | 2021–11–09 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:93459&r= |
| By: | Donato Masciandaro; Jacopo Magurno; Romano Tarsia |
| Abstract: | This paper reviews the evolution of the literature on Central Bank Independence (CBI) focusing on its metrics as well as on its empirical association with macroeconomic variables. Part One describes the evolution of the CBI indicators, while Part Two analyses the econometric studies devoted to shed light on the relationships between CBI and macroeconomic performances. |
| Keywords: | Monetary Policy, Central Bank Independence, Inflation, Growth, Sacrifice Ratio, Public Finance, Financial Stability |
| JEL: | E50 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp21151&r= |
| By: | Hinterlang, Natascha; Tänzer, Alina |
| Abstract: | This paper introduces a reinforcement learning based approach to compute optimal interest rate reaction functions in terms of fulfilling inflation and output gap targets. The method is generally flexible enough to incorporate restrictions like the zero lower bound, nonlinear economy structures or asymmetric preferences. We use quarterly U.S. data from1987:Q3-2007:Q2 to estimate (nonlinear) model transition equations, train optimal policies and perform counterfactual analyses to evaluate them, assuming that the transition equations remain unchanged. All of our resulting policy rules outperform other common rules as well as the actual federal funds rate. Given a neural network representation of the economy, our optimized nonlinear policy rules reduce the central bank's loss by over43 %. A DSGE model comparison exercise further indicates robustness of the optimized rules. |
| Keywords: | Optimal Monetary Policy,Reinforcement Learning,Artificial Neural Network,Machine Learning,Reaction Function |
| JEL: | C45 C61 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdps:512021&r= |
| By: | Shang-Jin Wei; Yinxi Xie |
| Abstract: | While two strands of the literature suggest that PPI inflation, in addition to or instead of CPI inflation, should be a targeting variable in a monetary policy rule, the distinction between the two is only important when they do not co-move strongly. Our first contribution is to document that their correlation has indeed fallen substantially since the start of this century. Our second contribution is to propose a model to understand this divergence based on expanding global supply chains. Our theory produces additional predictions that are also confirmed in the data. As such changes are structural rather than temporary, the standard monetary policy rule that does not target the PPI inflation may have become increasingly problematic. |
| Keywords: | Inflation and prices; Inflation targets; International topics; Monetary policy |
| JEL: | E31 E52 E58 F11 F12 F41 F62 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:22-5&r= |
| By: | Olivier de Bandt; Bora Durdu; Hibiki Ichiue; Yasin Mimir; Jolan Mohimont; Kalin Nikolov; Sigrid Roehrs; Jean-Guillaume Sahuc; Valerio Scalone; Michael Straughan |
| Abstract: | This paper reviews the different channels of transmission of prudential policy highlighted in the literature and provides a quantitative assessment of the impact of Basel III reforms using “off-the-shelf” DSGE models. It shows that the effects of regulation are positive on GDP whenever the costs and benefits of regulation are both introduced. However, this result may be associated with a temporary economic slowdown in the transition to Basel III, which can be accommodated by monetary policy. The assessment of liquidity requirements is still an area for research, as most models focus on costs, rather than on benefits, in particular in terms of lower contagion risk. |
| Keywords: | Basel III Reforms, DSGE Models, Solvency Requirements, Liquidity Requirements |
| JEL: | E3 E44 G01 G21 G28 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:bfr:banfra:864&r= |
| By: | Federico M. Ferrara; Donato Masciandaro; Manuela Moschella; Davide Romelli |
| Abstract: | Previous scholarship on central bank accountability has generally focused on monetary authorities' deeds and words while largely ignoring the other side of the accountability relationship, namely politicians’ voice on monetary policy. This raises a fundamental question: what are central banks held accountable for by elected officials? To answer this question, we employ structural topic models on a new dataset of the Monetary Dialogues between the Members of the European Parliament (MEPs) and the President of the European Central Bank (ECB) from 1999 to 2019. Our findings are twofold. First, we uncover differences in how MEPs keep the ECB accountable for its primary, price stability objective. We show that European politicians also attempt to keep the central bank accountable for a broader set of issues that are connected with, but distinct from, the central bank's primary goal. Second, we show that unemployment is a key explanatory variable for the political voice articulated by individual MEPs in accountability settings. In particular, higher rates of domestic unemployment lead MEPs to devote less voice on issues related to the ECB’s price stability mission. These findings reveal the existence of a "political" Phillips curve reaction function, which enriches our understanding of the principal-agent accountability relationship between politicians and central bankers. |
| Keywords: | Accountability; European Central Bank; politicians; European Parliament |
| JEL: | E50 E52 E58 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp21159&r= |
| By: | Javier García-Cicco |
| Abstract: | We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy rules: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative merits of each of them is indeed influenced by how agents form inflation-related expectations. |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:cem:doctra:822&r= |
| By: | Gerba, Eddie (Bank of England); Katsoulis, Petros (Bank of England) |
| Abstract: | This paper assesses the impact of banking regulation (Basel III) on financial market dynamics using the repo market as an important case study. To this end, we use unique proprietary data sets from the Bank of England to examine the individual and joint impact of leverage, capital and liquidity coverage ratios on participants’ trading in all collateral segments of the UK repo market. We find non-uniform effects across ratios and participants and non-linear effects across time. For instance, we find that the leverage ratio induces participants to charge lower (higher) interest margins on repo (reverse repo) trades that are non-nettable compared to the nettable ones. Second,we document a change in market microstructure under the new regulatory regime. Specifically, we evidence a substitution effect of banks’ long-term repo borrowing backed by gilts from dealers to investment funds which can be fragile during times of stress. Likewise, we find an increasing prominence of central counterparties. Third, we find evidence that participants who are jointly constrained by multiple ratios and closer to the regulatory thresholds during times of stress reduce their activity to a greater extent than those that are constrained by a single ratio or not constrained, with implications for market liquidity. |
| Keywords: | Banking regulation; repo market; market microstructure; liquidity; monetary policy transmission |
| JEL: | E44 E52 G11 G21 G28 |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0954&r= |
| By: | Allen Head (Queen's University); Timothy Kam (Australian National University); Sam Ng (Australian National University); Isaac Pan (University of Sydney) |
| Abstract: | Using micro-level data for the U.S., we provide new evidence—at national and state levels—of a positive (negative) relationship between the standard deviation (coefficient of variation)and the average in bank lending-rate markups. In a quantitative theory consistent with theseempirical observations, banks’ lending market power is determined in equilibrium and is a novelchannel of monetary policy. At low inflation, banks tend to extract higher markups from existingloan customers rather than competing for additional loans. As a result, banking activity neednot be welfare-improving if inflation is sufficiently low. This result speaks to concerns regardingmarket power in the banking sectors of low-inflation countries. Normatively, under a giveninflation target, welfare gains arise if a central bank can use additional liquidity-provision (ortax-and-transfer) instruments to offset banks’ market-power incentives |
| Keywords: | Banking; Credit; Markup Dispersion; Market Power; Stabilization Policy; Liquidity |
| JEL: | E41 E44 E51 E63 G21 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1481&r= |
| By: | Martin Hodula; Jan Janku; Lukas Pfeifer |
| Abstract: | We investigate the extent to which various structural risks exacerbate the materialization of cyclical risk. We use a large database covering all sorts of cyclical and structural features of the financial sector and the real economy for a panel of 30 countries over the period 2006Q1–2019Q4. We show that elevated levels of structural risks may have an important role in explaining the severity of cyclical and credit risk materialization during financial cycle contractions. Among these risks, private and public sector indebtedness, banking sector resilience and concentration of real estate exposures stand out. Moreover, we show that the elevated levels of some of the structural risks identified may be related to long-standing accommodative economic policy. Our evidence implies a stronger role for macroprudential policy, especially in countries with higher levels of structural risks |
| Keywords: | Cyclical risk, event study, financial cycle, panel regression, structural risks, systemic risk |
| JEL: | E32 G15 G21 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:rpnrpn:2021/03&r= |
| By: | John Beirne; Yannis Dafermos; Alexander Kriwoluzky; Nuobu Renzhi; Ulrich Volz; Jana Wittich |
| Abstract: | This paper investigates the impact of natural disasters on price stability in the euro area. We estimate panel and country-specific structural vector autoregression (VAR) models by combining estimated damages of disaster events with monthly data for the Harmonised Index of Consumer Prices (HICP) for all euro area countries over the period 1996-2021. Besides estimating the effect on overall headline inflation, we examine effects on its 12 main sub-indices and further sub-categories of food price inflation. This allows us to disentangle differences in the direction and strength of price effects across consumption categories. Our results suggest significant positive effects of natural disasters on overall headline inflation, with diverging results at the sub-index level. Positive inflation effects are particularly pronounced for prices of food and beverages, while negative effects prevail for other sub-indices. Our country-specific results suggest heterogenous inflation effects of natural disasters across different countries. A key implication of our findings is that climate change is likely to make it increasingly difficult for the European Central bank to achieve its inflation target. |
| Keywords: | Natural disasters, climate, inflation, monetary policy, European Central Bank |
| JEL: | E31 E52 Q54 |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1981&r= |
| By: | Simona Malovana; Martin Hodula; Josef Bajzik; Zuzana Gric |
| Abstract: | For almost two decades, quantifying the effect of changes in bank capital and capital regulation on lending has been one of the most important research questions. Yet, the empirical literature has remained largely fragmented in terms of the estimated parameters. In this paper, we collect more than 1,600 estimates on the relationship between bank capital and lending and construct 40 variables that reflect the context in which researchers obtain such estimates. After accounting for potential publication bias, the effect of a 1 percentage point (pp) change to the capital (regulatory) ratio on annual credit growth is set at around 0.3 pp, while the effect of changes to capital requirements is about -0.7 pp. Using Bayesian and frequentist model averaging, we expose the additional layers of fragmentation observed in our results. First, we show that the relationship between bank capital and lending changes over time, reflecting the post-crisis period of increasingly demanding bank capital regulation and subdued profitability. Second, we find the reported estimates of elasticities to be significantly affected by the researchers’ choice of empirical approach. |
| Keywords: | Bank capital, bank lending, capital regulation, meta-analysis, publication bias |
| JEL: | C83 E58 G21 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:cnb:wpaper:2021/8&r= |
| By: | Martin Indergand; Eric Jondeau; Andreas Fuster |
| Abstract: | We propose a methodology for measuring the market-implied capital of banks by subtracting from the market value of equity (market capitalization) a credit spread-based correction for the value of shareholders' default option. We show that without such a correction, the estimated impact of a severe market downturn is systematically distorted, underestimating the risk of banks with low market capitalization. We argue that this adjusted measure of capital is the relevant market-implied capital measure for policymakers. We propose an econometric model for the combined simulation of equity prices and CDS spreads, which allows us to introduce this correction in the SRISK framework for measuring systemic risk. |
| Keywords: | Banking, capital, stress test, systemic risk, multifactor model |
| JEL: | C32 G01 G21 G28 G32 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:snb:snbwpa:2022-02&r= |
| By: | Lekha Chakraborty; Harikrishnan S |
| Abstract: | Against the backdrop of the COVID-19 pandemic, this paper analyzes the economic stimulus packages announced by the Indian national government and tries to identify some plausible fiscal and monetary policy coordination. The shrinking fiscal space due to revenue uncertainties has led to a theoretical plausibility of a reemergence of finite monetization of deficits in India. However, the empirical evidence confirms no direct monetization of the deficit. |
| Keywords: | Fiscal-Monetary Policy Coordination; Fiscal Deficits; Monetization; COVID-19 |
| JEL: | E58 E62 E63 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:lev:wrkpap:wp_1002&r= |
| By: | Oliver Pfäuti; Fabian Seyrich |
| Abstract: | We propose a behavioral heterogeneous agent New Keynesian model in which monetary policy is amplified through indirect general equilibrium effects, fiscal multipliers can be larger than one and which delivers empirically-realistic intertemporal marginal propensities to consume. Simultaneously, the model resolves the forward guidance puzzle, remains stable at the effective lower bound and determinate under an interest-rate peg. The model is analytically tractable and nests a wide range of existing models as special cases, none of which can produce all the listed features within one model. We extend our model and derive an equivalence result of models featuring bounded rationality and models featuring incomplete information and learning. This extended model generates hump-shaped responses of aggregate variables and a novel behavioral amplification channel that is absent in existing HANK models. |
| Keywords: | Behavioral Macroeconomics, Heterogeneous Households, Monetary Policy, Forward Guidance, Fiscal Policy, New Keynesian Puzzles, Determinacy, Lower Bound |
| JEL: | E21 E52 E62 E71 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2022_334&r= |
| By: | Óscar Afonso (Faculty of Economics, University of Porto, CEF.UP and OBEGEF); Elena Sochirca (Department of Management and Economics, University of Beira Interior, NECE and NIPE); Pedro Cunha Neves (Faculty of Economics, University of Porto, CEF.UP and OBEGEF) |
| Abstract: | In this paper we develop a dynamic general equilibrium growth model in which robots can replace unskilled labor and: i) the government uses tax revenues to invest in social capital and compensate those who do not work; ii) there is monetary policy with cash-in-advance restrictions that impact, for example, wages; iii) social capital increases skilled-labor productivity and facilitates the technological-knowledge progress. Our results confirm that by reducing the unskilled-to-skilled-labor ratio, the robotization process increases the skill premium (and thus wage inequality between skilled and unskilled workers), stimulates economic growth and improves welfare. We also show that fiscal and monetary policies can have important roles in amplifying or mitigating these effects of the robotization process and that implementing specific policies can generate an important efficiency-equity trade-off. Despite the existence of this trade-off, the long-run economic growth is higher with than without the fiscal and monetary policies, which underlines their crucial role in attenuating the negative aspects of Industry 4.0. |
| Keywords: | Robots; Social Capital; Fiscal Policy; Monetary Policy; Growth |
| JEL: | E62 I31 I38 O30 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:por:cetedp:2201&r= |
| By: | Giancarlo Bertocco; Andrea Kalajzić |
| Abstract: | To hypothesize the existence of a relationship between money and savings means questioning a fundamental pillar of the mainstream economic theory: the concept of neutrality of money. According to the traditional theory economic phenomena such as savings can be defined independently from money. The objective of this work is to show that savings cannot be defined independently from money and that savings must be considered as a monetary phenomenon. The paper consists of two parts. Starting from Adam Smith’s analysis and continuing up to the approaches developed by contemporary economists, in the first part we summarize the most significant aspects and the limitations of the mainstream theory. In the second part we specify the reasons of the non-neutrality of money and of the monetary nature of savings. |
| Keywords: | Savings, money, development, Keynes, Schumpeter |
| JEL: | B12 B13 B52 E12 E44 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2206&r= |
| By: | Karsten Kohler; Engelbert Stockhammer |
| Abstract: | While flexible exchange rates are commonly regarded as shock absorbers, heterodox views suggest that they can play a pro-cyclical role in emerging markets. This article provides theoretical and empirical support for this view. Drawing on post-Keynesian and structuralist theory, we propose a simple model in which flexible exchange rates in conjunction with external shocks become endogenous drivers of boom-bust cycles, once financial effects from foreign-currency debt are accounted for. We present empirical evidence for regular cycles in nominal US-dollar exchange rates in several emerging markets that are closely aligned with cycles in economic activity. An econometric analysis suggests the presence of a cyclical interaction mechanism between exchange rates and output, in line with the theoretical model, in Chile, South Africa, and partly the Philippines. Further evidence indicates that such exchange rate cycles cannot exclusively be attributed to external factors, such as commodity prices, US monetary policy or the global financial cycle. We therefore argue that exchange rate cycles in emerging markets are driven by the interplay of external shocks and endogenous cycle mechanisms. Our argument implies that exchange rate management may be beneficial for macroeconomic stability. |
| Keywords: | Exchange rates, emerging markets, boom-bust cycles, structuralism, global financial cycle, commodity prices |
| JEL: | C32 E12 E32 F31 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:pke:wpaper:pkwp2205&r= |
| By: | Österholm, Pär (Örebro University School of Business); Poon, Aubrey (Örebro University School of Business) |
| Abstract: | In this paper, we estimate trend inflation in Sweden using an unobserved components stochastic volatility model. Using data from 1995Q4 to 2021Q4 and Bayesian estimation methods, we find that trend inflation has been well-anchored during the period – although in general at a level below the inflation target – and it does not appear to have been affected much by the recent high inflation numbers. |
| Keywords: | Unobserved components model; Inflation target; Bayesian estimation |
| JEL: | C11 C32 C52 E32 |
| Date: | 2022–01–18 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:oruesi:2022_002&r= |
| By: | Stefán Thórarinsson |
| Abstract: | This paper seeks to determine what drives inflation variation in Iceland and examine the extent to which local currency pricing is present. To that end we define and estimate a Bayesian structural vector autoregression model. For identification we employ the method developed by Baumeister and Hamilton (2015), defining priors on the impact matrix and on the long run behaviour of the model. We find that supply shocks and exchange rate shocks are the largest contributors in short run dynamics of inflation while foreign shocks dominate the medium and long run horizons. Our results strongly suggest that local currency pricing is largely absent. A test of robustness suggests that our results w.r.t. foreign influences on domestic inflation hold. Whether foreign demand or foreign inflation plays a larger role in determining long horizon variation in inflation seems to vary considerably over the period considered. |
| JEL: | C11 C32 E31 F41 |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp88&r= |