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on Central Banking |
| By: | Melchisedek Joslem Ngambou Djatche (Université Côte d'Azur; GREDEG CNRS) |
| Abstract: | In this paper, we analyse the link between monetary surprises and banks' activity and risk-taking. Some theoretical and empirical studies show that monetary easing increases banks' appetite for risk, affect credit allocation and bank's profitability. Our study adds to analyses of the monetary risk-taking channel considering monetary surprise, i.e. the impact of unexpected changes in monetary policy on bank's risk and activity. Using a dataset of US banks, we find that negative monetary surprises (higher increase or lower decrease of interest rates than expected) lead banks to take more risk, to grant more corporate loans than consumption loans, and to be more profitable. We complement the literature on the risk-taking channel and provide arguments that Central Banks can manage financial stability. |
| Keywords: | monetary surprise, financial stability, bank risk-taking, VAR model, dynamic panel regression |
| JEL: | E44 E58 G21 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:gre:wpaper:2021-45&r= |
| By: | Marco Bassetto; Gherardo Gennaro Caracciolo |
| Abstract: | It is well known that monetary and fiscal policy are connected by a common budget constraint. In this paper, we study how this manifests itself in the context of the Eurozone, where that connection links the European Central Bank, the 19 national central banks, the Treasuries of 19 countries, and the European Union. Our goal is twofold. First, we wish to clarify how seigniorage flows from the monetary authority to the budget of each country. Second, we seek to answer the question of how the taxpayers of each country are affected by a default of one of the participants to the union. In answering this question, we analyze the mechanisms that ensure (or do not ensure) that net liabilities across countries stay bounded, and we establish how the answer depends on the liquidity premium that each category of assets commands (cash, excess reserves within the Eurosystem, and government bonds). We find that the official risk-sharing provisions of the policy of quantitative easing (QE), whereby national central banks retain 90% of the risk intrinsic in bonds of their own country, only holds under restrictive assumptions; under plausible scenarios, a significantly larger fraction of the risk is mutualized. |
| Keywords: | Monetary/fiscal interaction; Fiscal theory of the price level; Eurozone; TARGET2; Monetary union |
| JEL: | E63 E51 E58 E31 H63 |
| Date: | 2021–12–02 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:93470&r= |
| By: | Lenney, Jamie (Bank of England) |
| Abstract: | I analyse the role of capital income in the transmission of demand shocks, such as monetary policy shocks, in a medium scale DSGE model that produces an empirically consistent counter-cyclical response of the labour share to monetary policy shocks. This is achieved by augmenting the one sector New Keynesian model with an alternate form of labour that seeks to expand the measure of goods available to consumers. I compare and contrast the transmissions of monetary policy shocks in the one sector ‘textbook’ model relative to the augmented model in both a representative agent (RANK) and heterogeneous agent (HANK) setting that includes a fully endogenous wealth distribution. The comparison highlights the role of capital income in the transmission of monetary policy shocks in these models. When the labour share moves counter-cyclically partial equilibrium decomposition’s of monetary policy transmission show a significant contractionary role for capital income. |
| Keywords: | DSGE; DCT; expansionary labour; HANK; inequality; intangible; New Keynesian; perturbation |
| JEL: | D31 E12 E21 E52 L29 |
| Date: | 2022–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0960&r= |
| By: | Barnett, William A.; Bella, Giovanni; Ghosh, Taniya; Mattana, Paolo; Venturi, Beatrice |
| Abstract: | In a New Keynesian model, it is believed that combining active monetary policy using a Taylor rule with a passive fiscal rule can achieve local equilibrium determinacy. However, even with such policies, indeterminacy can occur from the emergence of a Shilnikov chaotic attractor in the region of the feasible parameter space. That result, shown by Barnett et al. (2021), implies that the presence of the Shilnikov chaotic attractor can cause the economy to drift towards and finally become stuck in the vicinity of lower-than-targeted inflation and nominal interest rates. The result can become the source of a liquidity trap phenomenon. We propose policy options for eliminating or controlling Shilnikov chaotic dynamics to help the economy escape from the liquidity trap or avoid drifting into it in the first place. We consider ways to eliminate or control the chaos by replacing the usual Taylor rule by an alternative policy design without interest rate feedback, such as a Taylor rule with monetary quantity feedback, an active fiscal policy rule with passive monetary rule, or an open loop policy without feedback. We also consider approaches that retain the Taylor rule with interest rate feedback and the associated Shilnikov chaos, while controlling the chaos through a well-known engineering algorithm using a second policy instrument. We find that a second instrument is needed to incorporate a long-run terminal condition missing from the usual myopic Taylor rule. |
| Keywords: | Shilnikov chaos criterion, global indeterminacy, long-term un-predictability, liquidity trap, long run anchor. |
| JEL: | C61 C62 E12 E52 E63 |
| Date: | 2022–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111568&r= |
| By: | Direye, Eli; Khemraj, Tarron |
| Abstract: | The Bank of Papua New Guinea has maintained an active policy of foreign exchange market intervention. This monetary tool is associated with a depreciating currency and a worsening shortage of foreign currencies in the domestic market – suggesting that at most the policy instrument leans against existing FX market pressure. However, the one-sided sales of central bank securities (or bills) engender an appreciation of the rate and an easing of the shortage in the domestic FX market. Supported by empirical evidence, we demonstrate that the one-sided sales of central bank bills perform like an instrument of monetary policy for foreign exchange market stability in the presence of persistent non-remunerated excess bank reserves. |
| Keywords: | Papua New Guinea, central bank bills, one-sided sterilization, foreign exchange intervention |
| JEL: | E50 E52 E58 F4 F41 H63 O10 |
| Date: | 2021–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111533&r= |
| By: | Jean-Guillaume Sahuc; Mattia Girotti; Benoît Nguyen |
| Abstract: | Negative interest rate policy makes excess liquidity costly to hold for banks and this may weaken the bank-based transmission of monetary policy. We design a rule-based tiering system for excess reserve remuneration that reduces the burden of negative rates on banks while ensuring that the central bank keeps control of interbank interest rates. Using euro-area data, we show that under the proposed tiering system, the aggregate cost of holding excess liquidity when the COVID-19 monetary stimulus fully unfolds would be more than 36% lower than that under the ECB’s current system. |
| Keywords: | Negative interest rates, excess liquidity, tiering system, bank profitability, interbank market |
| JEL: | E43 E52 G21 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:drm:wpaper:2022-4&r= |
| By: | Alessandro Ferrari (Bank of Italy); Valerio Nispi Landi (Bank of Italy) |
| Abstract: | In a DSGE model, we study the effectiveness of a Green QE, i.e. a program of green-asset purchases by the central bank, along the transition to a carbon-free economy. The model is characterized by green firms that produce using a clean technology and brown firms that pollute but they can pay a cost to abate emissions. The transition is driven by an emission tax. We analyze the evolution of macroeconomic variables along the transition and we compare different versions of Green QE. We show two main findings, in our baseline calibration, where the green and the brown goods are imperfect substitutes. First, Green QE helps to further reduce emissions along the transition, but its quantitative impact on the stock of pollution is small. Second, we find the largest effects when the central bank invests in green assets in the early stage of the transition. Moreover, we highlight that the elasticity of substitution between the green and the brown good is a crucial parameter: if the goods are imperfect complements (an elasticity lower than one), Green QE raise emissions. |
| Keywords: | central bank, monetary policy, quantitative easing, climate change |
| JEL: | E52 E58 Q54 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1358_22&r= |
| By: | Michel Alexandre (Central Bank of Brazil and Institute of Mathematics and Computer Science, University of Sao Paulo, Sao Carlos, Brazil); Gilberto Tadeu Lima (Department of Economics, University of Sao Paulo, Brazil); Luca Riccetti (Department of Economics and Law, University of Macerata, Italy); Alberto Russo (Department of Management, Università Politecnica delle Marche, Ancona, Italy and Department of Economics, Universitat Jaume I, Castellón, Spain) |
| Abstract: | The purpose of this paper is to contribute to a further understanding of the impact of monetary policy shocks on a financial network, which we dub the “financial network channel of monetary policy transmisión”. To this aim, we develop an agent-based model (ABM) in which banks extend loans to firms. The bank-firm credit network is endogenously time-varying as determined by plausible behavioral assumptions, with both firms and banks being always willing to close a credit deal with the network partner perceived to be less risky. We then assess through simulations how exogenous shocks to the policy interest rate affect some key topological measures of the bank-firm credit network (density, assortativity, size of largest component, and degree distribution). Our simulations show that such topological features of the bank-firm credit network are significantly affected by shocks to the policy interest rate, and this impact varies quantitatively and qualitatively with the sign, magnitude, and duration of the shocks. |
| Keywords: | Financial network, monetary policy shocks, agent-based modeling |
| JEL: | C63 E51 E52 G21 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:jau:wpaper:2022/01&r= |
| By: | Allen Head; Timothy Kam; Sam Ng; Isaac Pan |
| 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 these empirical observations, banks’ lending market power is determined in equilibrium and is a novel channel of monetary policy. At low inflation, banks tend to extract higher markups from existing loan customers rather than competing for additional loans. As a result, banking activity need not be welfare-improving if inflation is sufficiently low. This result speaks to concerns regarding market power in the banking sectors of low-inflation countries. Normatively, under a given inflation target, welfare gains arise if a central bank can use additional liquidity-provision (or tax-and-transfer) instruments to offset banks’ market-power incentives. |
| Keywords: | Banking and Credit; Markups Dispersion; Market Power; Stabilization Policy; Liquidity |
| JEL: | E41 E44 E51 E63 G21 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:acb:cbeeco:2022-684&r= |
| By: | Edoardo Rainone (Bank of Italy) |
| Abstract: | Following the implementation of negative policy rates, interest rates on bank deposits reached their historic lows, with values close or equal to zero. This paper investigates the implications of such a new environment for the demand of currency. We find evidence of a structural break in the demand of currency when rates on deposits fall below 0.1 per cent. Exploiting time, bank and banknote denomination variation, as well as exogenous reforms that affected currency payments and holdings, our analysis finds that the increase of currency in circulation seems to be mostly driven by transactions instead of store-of-value demand. |
| Keywords: | financial stability, monetary policy, negative interest rates, deposits, zero lower bound, money demand |
| JEL: | E41 E42 E52 E58 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_1359_22&r= |
| By: | Berg, Tobias; Haselmann, Rainer; Kick, Thomas; Schreiber, Sebastian |
| Abstract: | Using granular supervisory data from Germany, we investigate the impact of unconventional monetary policies via central banks' purchase of corporate bonds. While this policy results in a loosening of credit market conditions as intended by policy makers, we document two unintended side effects. First, banks that are more exposed to borrowers benefiting from the bond purchases now lend more to high-risk firms with no access to bond markets. Since more loan write-offs arise from these firms and banks are not compensated for this risk by higher interest rates, we document a drop in bank profitability. Second, the policy impacts the allocation of loans among industries. Affected banks reallocate loans from investment grade firms active on bond markets to mainly real estate firms without investment grade rating. Overall, our findings suggest that central banks' quantitative easing via the corporate bond markets has the potential to contribute to both banking sector instability and real estate bubbles. |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:lawfin:27&r= |
| By: | Anusha Chari; Karlye Dilts Stedman; Kristin J. Forbes |
| Abstract: | Evidence suggests that macroprudential policy has small and insignificant effects on the volume of portfolio flows. We show, however, that these minor effects mask very different relationships across the global financial cycle. A tighter ex-ante macroprudential stance amplifies the impact of global risk shocks on bond and equity flows—increasing outflows by significantly more during risk-off episodes and increasing inflows significantly more during risk on episodes. These amplification effects are more prominent at the “extremes,” especially for extreme risk-off periods, and are larger for regulations that target specific risks (such as currency or housing exposures) than those which strengthen generalized cyclical buffers (such as the CCyB). This paper estimates these relationships using a policy-shocks approach that corrects for reverse causality by combining high-frequency risk measures with weekly data on portfolio investment and a new measure of macroprudential regulations that captures the intensity of policy stances. Overall, the results support a growing body of evidence that macroprudential regulation can reduce the volume and volatility of bank flows but shift risks in ways that aggravate vulnerabilities in other parts of the financial system. |
| Keywords: | Macroprudential regulation |
| JEL: | F32 F34 F38 G15 G23 G28 |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93599&r= |
| By: | Asongu, Simplice; Ojong, Nathanael; Soumtang, Valentine |
| Abstract: | This study explores the responses to the COVID-19 pandemic by the Bank of Central African States (BEAC), which is the central bank for countries in the Central African Economic and Monetary Community (CEMAC), that is, Cameroon, Chad, Gabon, Equatorial Guinea, Central African Republic, and the Republic of Congo. While hitherto, BEAC had fundamentally focused on fighting inflation and promoting monetary integration and financial stability in its member states, the COVID-19 pandemic, among other factors, has motivated it to also shift its policies towards targeted credit programmes and more economic growth. This study sheds light on four core aspects: (i) the socio-economic context of the CEMAC region prior to the COVID-19 pandemic, (ii) BEAC as a lender of last resort, (iii) historical, contemporary, and future insights surrounding targeted credit programmes, and (iv), suggestions for the path forward in terms of reforms, with emphasis on inclusive growth and monitoring economic development at the regional level. |
| Keywords: | Covid-19 pandemic; monetary policy; central bank responses; CEMAC, BEAC |
| JEL: | G2 O1 O55 |
| Date: | 2021–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111558&r= |
| By: | Neyer, Ulrike; Stempel, Daniel |
| Abstract: | Empirical evidence suggests that considerable differentials in inflation rates exist across households. This paper investigates how central banks should react to household inflation heterogeneity in a tractable New Keynesian model. We include two households that differ in their consumer price inflation rates after adverse shocks. The central bank reacts to either an average of the households' consumer price inflation rates or their individual rates, respectively. After a negative demand shock, the consumer price inflation rates of both households diverge less from their steady states when the central bank only considers the individual inflation rate of the household experiencing the higher inflation rate. Furthermore, output fluctuates less under that regime. After a negative supply shock, a central bank only considering the household experiencing the higher inflation rate mitigates the immediate effects of the shock on both consumer price inflation rates more effectively. Our results imply that central banks, which react discretionarily to differing inflation experiences in an economy, lead to a more efficient attainment of an economy-wide inflation target and to lower fluctuations of all inflation rates. |
| Keywords: | Business cycles,inflation,inequality,household heterogeneity,New Keynesian models |
| JEL: | E31 E32 E52 |
| Date: | 2022 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:dicedp:378&r= |
| By: | Ariel Dvoskin Author-Email: ariel.dvoskin@bcra.gov.ar Author-Workplace-Name: Central Bank of Argentina; Sebastián Katz (Central Bank of Argentina) |
| Abstract: | What are the most appropriate policy regimes and mix of instruments in small open economies to deal with capital flows volatility and the influence of the global financial cycle? In this article, we review the recent experience of various emerging economies and the arguments in favor of the use of various conventional and unconventional policy tools and approaches. In particular, we analyze the different reasons that prevent full exchange rate flexibility as a shock absorber, which demands, in many circumstances, the use of alternative tools, sometimes as substitutes but in many other cases as complements of FX flexibility: FX markets interventions, macroprudential regulations and capital flow management measures. Our main contribution is to present the FX transmission channels to the macro/financial performance and the tools currently used by many Central Banks to deal with FX shocks identified by an extensive literature in a systematic and orderly manner. We conclude that the most appropriate policy responses critically depend, not only on the nature and intensity of the shock, but also on the structural conditions and particular circumstances that each economy exhibits at the "starting point". |
| Keywords: | capital flows, capital flow management measures, exchange rate policy, FX markets interventions, macroprudential regulations, small open economies. |
| JEL: | E58 F31 F38 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:202197&r= |
| By: | David M. Arseneau; Grace Brang; Matt Darst; Jacob M. M. Faber; David E. Rappoport; Alexandros Vardoulakis |
| Abstract: | This paper uses data from the Financial Accounts of the United States to map out the regulatory boundaries of assets held by U.S. financial institutions from a macroprudential perspective. We provide a quantitative measure of the regulatory perimeter—the boundary between the part of the financial sector that is subject to some form of prudential regulatory oversight and that which is not—and show how it has evolved over the past forty years. Additionally, we measure the boundaries between different regulatory agencies and financial institutions that operate within the regulatory perimeter and illustrate how these boundaries potentially become blurred in the face of regulatory overlap. Quantifying the regulatory perimeter and the boundaries for macroprudential regulators within the perimeter is informative for assessing financial stability risks over the credit cycle. |
| Keywords: | Regulation; Regulatory reach; Boundary problem; Financial institutions |
| JEL: | E58 G18 G28 |
| Date: | 2022–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-02&r= |
| By: | Barnett, William A.; Eryilmaz, Unal |
| Abstract: | We analyze determinacy in the baseline open-economy New Keynesian model developed by Gali and Monacelli (2005). We find that the open economy structure causes multifaceted behaviors in the system creating extra challenges for policy making. The degree of openness significantly affects determinacy properties of equilibrium under various forms and timing of monetary policy rules. Conditions for the uniqueness and local stability of equilibria are established. Determinacy diagrams are constructed to display the regions of unique and multiple equilibria. Numerical analyses are performed to confirm the theoretical results. Limit cycles and periodic behaviors are possible, but in some cases only for unrealistic parameter settings. Complex structures of open economies require rigorous policy design to achieve optimality. |
| Keywords: | bifurcation; determinacy; dynamic systems; New Keynesian; stability; open economy; Taylor Principle |
| JEL: | C14 C22 C52 C61 C62 E32 E37 E61 L16 |
| Date: | 2022–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:111567&r= |
| By: | Pedro Elosegui Author-Email: pelosegui@bcra.gov.ar Author-Workplace-Name: Central Bank of Argentina; Federico Forte (BBVA Research, BBVA Argentina); Gabriel Montes-Rojas (IIEP-BAIRES-UBA, CONICET) |
| Abstract: | This paper studies the network structure and fragmentation of the Argentine interbank market. Both the unsecured (CALL) and the secured (REPO) markets are examined. The aim of this study is to understand their actual fragmentation, as well as its potential implications for monetary policy and financial stability. Applying network analysis, different underlying segments within the market are identified. We approximate the theoretical distribution that better fits the empirical degree distribution of the interbank loan networks. Based on standard topological metrics, it is found that, although the secured market has less participants, its nodes are more densely connected than in the unsecured market. In addition, the interrelationships in the unsecured market are less stable, as it was witnessed during the 2018 currency crisis, making its structure more volatile and vulnerable to negative shocks. The analysis identifies two "hidden" underlying sub-networks within the REPO market: one based on the transactions collateralized by Treasury bonds (REPO-T) and other based on the operations collateralized by Central Bank (CB) securities (REPO-CB). The connectivity indicators were significantly more stable in the REPO-T market than in the REPO-CB segment. The changes in monetary policy stance and monetary conditions seem to have a substantially smaller impact in former than in the latter "sub-market". Hence, the connectivity levels within the REPO-T market remain relatively unaffected by the (in some period pronounced) swings in the other segment of the market. These results have implications in terms of the interpretation of the interest rates that arise from these markets. |
| Keywords: | network analysis, interbank market, fragmentation, central bank, monetary policy, Argentina |
| JEL: | C2 C12 G21 G28 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:bcr:wpaper:202196&r= |
| By: | Daisuke Ikeda; Shangshang Li; Sophocles Mavroeidis; Francesco Zanetti |
| Abstract: | Unconventional monetary policy (UMP) may make the effective lower bound (ELB) on the short-term interest rate irrelevant. We develop an empirical test of this 'irrel evance hypothesis' based on a simple idea that under the hypothesis, the short rate can be excluded in any empirical model that accounts for alternative measures of mon etary policy. We develop a theoretical model that underpins this hypothesis, and test it empirically for Japan and the United States using a structural vector autoregressive model with the ELB. For each country, we firmly reject the hypothesis but find that UMP has had strong delayed effects. |
| Date: | 2021–05–04 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:961&r= |
| By: | Santiago Camara |
| Abstract: | This paper studies the role of households' heterogeneity in access to financial markets and the consumption of commodity goods in the transmission of foreign shocks. First, I use survey data from Uruguay to show that low income households have poor to no access to savings technology while spending a significant share of their income on commodity-based goods. Second, I construct a Two-Agent New Keynesian (TANK) small open economy model with two main features: (i) limited access to financial markets, and (ii) non-homothetic preferences over commodity goods. I show how these features shape aggregate dynamics and amplify foreign shocks. Additionally, I argue that these features introduce a redistribution channel for monetary policy and a rationale for "fear-of-floating" exchange rate regimes. Lastly, I study the design of optimal policy regimes and find that households have opposing preferences a over monetary and fiscal rules. |
| Date: | 2022–01 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2201.02916&r= |
| By: | Neamtu, Ioana (Bank of England); Vo, Quynh-Anh (Bank of England) |
| Abstract: | This paper examines how the level (ie group or business unit level) at which regulatory requirements are applied affects banks’ asset risk. We develop a theoretical model and calibrate it to UK banks. Our main finding is that the impact differs depending on which regulatory constraint is binding at the group consolidated level. If that is the leverage ratio requirement, then the allocation of regulatory constraints to business units either maintains or decreases the riskiness of banks’ investment portfolios. However, if the risk-weighted requirement is the binding constraint at the group level, applying regulatory requirements at the business unit level can lead to banks selecting riskier asset portfolios as optimal. We also find that the impact on banks’ asset risk differs across bank business models. |
| Keywords: | Leverage ratio requirement; risk-weighted capital requirements; capital allocation |
| JEL: | G21 G28 |
| Date: | 2021–12–17 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0956&r= |
| By: | W. Blake Marsh |
| Abstract: | I study investor responses to the 2020 bank stress tests that included restrictions on shareholder payouts. I find that banks subject to the stress tests and payout restrictions experienced both immediate and persistently lower excess stock price returns. In the cross-section, I find that excess stock returns declined with bank size but cannot otherwise be explained by pre-pandemic bank or payout characteristics, suggesting that investors penalized banks likely to experience greater regulatory scrutiny. However, the excess stock return penalties are smaller than those previously estimated in the literature examining voluntary payout reductions that signal bank distress. The results show that using supervisory discretion to take preventative actions during a crisis is less costly than waiting to take actions when banks are distressed. |
| Keywords: | Bank payout policy; Stress testing; Bank supervision |
| JEL: | G21 G28 G35 |
| Date: | 2022–01–28 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedkrw:93664&r= |
| By: | Jose Santiago Mosquera (Departmento de Economía, Universidad de San Andrés) |
| Abstract: | By December 2017, the Argentine economy had been experiencing good figures in variables such as GDP, employment, poverty, and inflationary dynamics. However, other variables warned about the process’ sustainability (rising current account deficit and high, relatively stable fiscal deficit). According to a part of the literature, this raises the possibility of the economy being in a situation of multiple equilibria, in which expectations play a key role in determining the actual equilibrium. Since, activity stagnated, and country risk began to increase, as did the exchange rate. Was there an event that broke the trend? In this paper, I implement a robust synthetic control strategy to argue that the change of the inflation targets (on December 28th) eroded the credibility of the central bank, signaling that the government was not willing to pursue the fiscal balance as believed. Consequently, this day acted as a coordinator of expectations towards a worse equilibrium than the one in which the economy was. |
| Keywords: | Central Bank independence, credibility, synthetic control, multiple equilibria |
| JEL: | E43 E58 E61 E63 E65 |
| Date: | 2021–12 |
| URL: | http://d.repec.org/n?u=RePEc:sad:wpaper:161&r= |
| By: | Javier Bianchi; Saki Bigio; Charles Engel |
| Abstract: | We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for dollar liquid assets. Financial flows are unpredictable and may leave banks “scrambling for dollars.” Because of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield on the dollar. We show that an increase in the dollar funding risk leads to a rise in the convenience yield and an appreciation of the dollar, as banks scramble for dollars. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity, which is consistent with the theory. |
| Keywords: | Exchange rates; Liquidity premia; Monetary policy |
| JEL: | E44 F31 F41 G20 |
| Date: | 2021–11–05 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmwp:93468&r= |
| By: | Massimo Casa (Bank of Italy); Laura Graziani Palmieri (Bank of Italy); Laura Mellone (Bank of Italy); Francesca Monacelli (Bank of Italy) |
| Abstract: | The paper illustrates the phases of the process that the Bank of Italy follows to produce the statistics derived from credit and financial reporting: the identification of the information requirements; the definition of the data model; the design of the new data collection method to be used by reporting agents; cooperation between the Bank of Italy and reporting agents; data quality procedures; and dissemination of this information to internal and external users. This process takes an ‘integrated approach’ and was adopted by the Bank of Italy in the late 1980s. For the last decade, it has been a reference point for the European System of Central Banks both as regards the development of the statistical framework and for the efficiency improvements in data management and data governance on the part of the authorities. The Bank of Italy takes part in these initiatives providing a valuable contribution in terms of ideas and experience. |
| Keywords: | regulatory reporting, banking reporting, data model, data quality, information management, statistical production, information system |
| JEL: | C81 G21 M15 |
| Date: | 2022–02 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:opques:qef_667_22&r= |
| By: | Mäki-Fränti, Petri; Silvo, Aino; Gulan, Adam; Kilponen, Juha |
| Abstract: | We use Finnish household-level registry and survey data to study the effects of ECB’s monetary policy on the distribution of income and wealth. We find that monetary easing has a large positive effect on aggregate economic activity in Finland, but its overall net impact on income and wealth inequality is negligible. Monetary easing increases households’ gross income by reducing unemployment and leading to a general rise in wages, while at the same time it boosts asset prices. These different channels have counteracting effects on income and wealth inequality, as measured by the Gini coefficient and the ratios of income and wealth of the 90th percentile to the 50th percentile. The reduction in aggregate unemployment benefits especially households in lower income quintiles, where the initial rate of unemployment is high. Households in the upper income quintiles, where the rate of employment is higher, benefit relatively more from an increase in wages. An increase in house prices benefits all homeowners. In terms of net wealth, households with large mortgages, in the lower wealth quintiles, benefit the most from an increase in house prices due to a leverage effect. An increase in stock prices, in turn, benefits mainly households in the top wealth quintile. |
| JEL: | D31 E32 E52 |
| Date: | 2022–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:bof:bofrdp:2022_003&r= |
| By: | Richard H. Clarida |
| Abstract: | This paper discusses the Federal Reserve's new framework and highlights some important policy implications that flow from the revised consensus statement and the new strategy. In particular, it first discusses the factors that motivated the Federal Reserve in November 2018 to announce it would undertake in 2019 the first-ever public review of its monetary policy strategy, tools, and communication practices. It then considers the major findings of the review as codified in our new Statement on Longer-Run Goals and Monetary Policy Strategy and highlights some important policy implications that flow from them. |
| Keywords: | FOMC; Monetary policy |
| Date: | 2022–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgfe:2022-01&r= |
| By: | Donato Masciandaro; Romano Vincenzo Tarsia |
| Abstract: | This paper proposes an index for evaluating central bank activism in addressing climate-change issues. Consistent with a principal-agent approach, this metric assumes that the central bank’s sensibility on climate change depends on both economic and political drivers. The index has been created to include not only actual policies but also participation in green networks and initiatives that signal central bank activism on climate change. |
| Keywords: | Climate change, central banking, principal-agent, political pressure, monetary policy, financial stability |
| Date: | 2021 |
| URL: | http://d.repec.org/n?u=RePEc:baf:cbafwp:cbafwp21167&r= |
| By: | Valentin Jouvanceau (Bank of Lithuania); Julien Albertini (GATE, University of Lyon); Stéphane Moyen (Deutsche Bundesbank) |
| Abstract: | This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation. |
| Keywords: | New Keynesian model, Search and matching, ZLB, Forward guidance. |
| JEL: | E30 J60 |
| Date: | 2022–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:lie:wpaper:100&r= |