nep-cba New Economics Papers
on Central Banking
Issue of 2022‒03‒07
eighteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Capital controls, domestic macroprudential policy and the bank lending channel of monetary policy By Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
  2. Monetary Policy Communication: Perspectives from Former Policy Makers at the ECB By Ehrmann, Michael; Holton, Sarah; Kedan, Danielle; Phelan, Gillian
  3. How Central Bank Mandates Influence Content and Tone of Communication Over Time By Martin T. Bohl; Dimitrios Kanelis; Pierre L. Siklos
  4. Financial Stability Considerations for Monetary Policy: Theoretical Mechanisms By Andrea Ajello; Nina Boyarchenko; François Gourio; Andrea Tambalotti
  5. A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality By Joel Wagner; Tudor Schlanger; Yang Zhang
  6. Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth By Nittai Bergman; David A. Matsa; Michael Weber
  7. Money markets, collateral and monetary policy By Fiorella De Fiore; Marie Hoerova; Harald Uhlig
  8. Transitioning Monetary Policy By Loretta J. Mester
  9. Central bank digital currencies (CBDCs) in Latin America and the Caribbean By Viviana Alfonso C; Steven Kamin; Fabrizio Zampolli
  10. Shadow loans and regulatory arbitrage: evidence from China By Amanda Liu; Jing Liu; Ilhyock Shim
  11. Prudential Regulation and Bank Efficiency : Evidence from WAEMU Zone By Said-Nour Samake
  12. Monetary policy expectation errors By Maik Schmeling; Andreas Schrimpf; Sigurd A. M. Steffensen
  13. Taming the tides of capital: Review of capital controls and macroprudential policy in emerging economies By Norring, Anni
  15. On the Propagation Mechanism of International Real Interest Rate Spillovers: Evidence from More than 200 Years of Data By Juncal Cunado; David Gabauer; Rangan Gupta
  16. Do redemptions increase as money market funds approach regulatory liquidity thresholds? By Dunne, Peter G.; Giuliana, Raffaele
  17. Exorbitant privilege? Quantitative easing and the bond market subsidy of prospective fallen angels By Viral V Acharya; Ryan Niladri; Matteo Crosignani; Tim Eisert; Renée Spigt
  18. Globalisation and financialisation in the Netherlands, 1995 - 2020 By Muysken, Joan; Meijers, Huub

  1. By: Andrea Fabiani; Martha López Piñeros; José-Luis Peydró; Paul E. Soto
    Abstract: We study how capital controls and domestic macroprudential policy tame credit supply booms, respectively targeting foreign and domestic bank debt. For identification, we exploit the simultaneous introduction of capital controls on foreign exchange (FX) debt inflows and an increase of reserve requirements on domestic bank deposits in Colombia during a strong credit boom, as well as credit registry and bank balance sheet data. Our results suggest that first, an increase in the local monetary policy rate, raising the interest rate spread with the United States, allows more FX-indebted banks to carry trade cheap FX funds with more expensive peso lending, especially toward riskier, opaque firms. Capital controls tax FX debt and break the carry trade. Second, the increase in reserve requirements on domestic deposits directly reduces credit supply, and more so for riskier, opaque firms, rather than enhances the transmission of monetary rates on credit supply. Importantly, different banks finance credit in the boom with either domestic or foreign (FX) financing. Hence, capital controls and domestic macroprudential policy complementarily mitigate the boom and the associated risk-taking through two distinct channels.
    Keywords: Capital controls; macroprudential and monetary policy; carry trade; credit supply; risk-taking
    JEL: E52 E58 F34 F38 G21 G28
    Date: 2022–02
  2. By: Ehrmann, Michael (European Central Bank and CEPR); Holton, Sarah (European Central Bank); Kedan, Danielle (European Central Bank); Phelan, Gillian (Central Bank of Ireland)
    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.
    Keywords: monetary policy, central bank communication, survey
    JEL: E52 E58
    Date: 2022–01
  3. By: Martin T. Bohl; Dimitrios Kanelis; Pierre L. Siklos
    Abstract: In this paper, we analyze the relevance of central bank mandates on the content and tone of communication via speeches. Comparing this communication channel for mandate-related objectives between the Federal Reserve and the European Central Bank reveals similarities before the Great Financial Crisis, while notable differences emerge afterward. Furthermore, we propose a study design to examine how hawkish the tone of speeches becomes in light of current versus expected macroeconomic developments. We find that, since the GFC, expectations of unemployment drive the tone of FED speeches while inflation expectations influence the tone of ECB speeches.
    Keywords: ECB, Expectations, FED, Inflation, Central Bank Mandates, Speeches, Structural Topic Model, Unemployment
    JEL: E50 E52 E58
    Date: 2022–02
  4. By: Andrea Ajello; Nina Boyarchenko; François Gourio; Andrea Tambalotti
    Abstract: This paper reviews the theoretical literature at the intersection of macroeconomics and finance to draw lessons on the connection between vulnerabilities in the financial system and the macroeconomy, and on how monetary policy affects that connection. This literature finds that financial vulnerabilities are inherent to financial systems and tend to be procyclical. Moreover, financial vulnerabilities amplify the effects of adverse shocks to the economy, so that even a small shock to fundamentals or a small revision of beliefs can create a self-reinforcing feedback loop that impairs credit provision, lowers asset prices, and depresses economic activity and inflation. Finally, monetary policy may affect the buildup of vulnerabilities, but the sign of the impact along some of its transmission channels is theoretically ambiguous and may vary with the state of the economy.
    Keywords: Monetary policy; Asset prices; Financial stability; Financial crises; Credit; Leverage; Liquidity
    JEL: E44 E52 E58 G20
    Date: 2022–02–15
  5. By: Joel Wagner; Tudor Schlanger; Yang Zhang
    Abstract: We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to provide a quantitative assessment of the macroeconomic impact of flexible inflation targeting and some alternative m2netary policy regimes. These alternative monetary policy regimes are average-inflation targeting, price-level targeting and nominal gross domestic product level targeting. We consider these regimes’ performance with and without an effective lower bound constraint. Our results suggest that the performance of history-dependent frameworks is sensitive to departures from rational expectations. The benefits of adopting history-dependent frameworks over flexible inflation targeting gradually diminish with a greater degree of bounded rationality. This finding is in line with laboratory experiments that show flexible inflation targeting remains a robust framework to stabilize macroeconomic fluctuations.
    Keywords: Central bank research; Economic models; Monetary policy framework; Monetary policy transmission
    JEL: E E27 E3 E4 E58
    Date: 2022–02
  6. By: Nittai Bergman; David A. Matsa; Michael Weber
    Abstract: This paper analyzes the heterogeneous effects of monetary policy on workers with differing levels of labor force attachment. Exploiting variation in labor market tightness across metropolitan areas, we show that the employment of populations with lower labor force attachment—Blacks, high school dropouts, and women—is more responsive to expansionary monetary policy in tighter labor markets. The effect builds up over time and is long lasting. We develop a New Keynesian model with heterogeneous workers that rationalizes these results. The model shows that expansionary monetary shocks lead to larger increases in the employment of less attached workers when the central bank follows an average inflation targeting rule and when the Phillips curve is flatter. These findings suggest that, by tightening labor markets, the Federal Reserve's recent move from a strict to an average inflation targeting framework especially benefits workers with lower labor force attachment.
    JEL: E12 E24 E31 E43 E52 E58 J24
    Date: 2022–01
  7. By: Fiorella De Fiore; Marie Hoerova; Harald Uhlig
    Abstract: Interbank money markets have been subject to substantial impairments in the recent decade, such as a decline in unsecured lending and substantial increases in haircuts on posted collateral. This paper seeks to understand the implications of these developments for the broader economy and monetary policy. To that end, we develop a novel general equilibrium model featuring heterogeneous banks, interbank markets for both secured and unsecured credit, and a central bank. The model features a number of occasionally binding constraints. The interactions between these constraints - in particular leverage and liquidity constraints - are key in determining macroeconomic outcomes. We find that both secured and unsecured money market frictions force banks to either divert resources into unproductive but liquid assets or to de-lever, which leads to less lending and output. If the liquidity constraint is very tight, the leverage constraint may turn slack. In this case, there are large declines in lending and output. We show how central bank policies which increase the size of the central bank balance sheet can attenuate this decline.
    Keywords: money markets, collateral, monetary policy, balance sheet policies.
    JEL: E44 E52 E58
    Date: 2022–02
  8. By: Loretta J. Mester
    Abstract: This year will be one of transition for monetary policy. We will be transitioning away from the extraordinarily accommodative monetary policy that was needed earlier in the pandemic and recalibrating policy to today’s economic challenges. The FOMC is taking steps to begin that process. Our main policy tool is the federal funds rate. Since March 2020, the FOMC has maintained the target range of the fed funds rate at 0 to 1/4 percent to support the economy. At our January meeting, the Committee announced that it will soon be appropriate to raise the target range.
    Keywords: Monetary Policy
    Date: 2022–02–17
  9. By: Viviana Alfonso C; Steven Kamin; Fabrizio Zampolli
    Abstract: The pros and cons of CBDCs have been examined in numerous writings. However, much less research has focused on the benefits, costs and implementation issues of CBDCs in specific economies or regions. This paper attempts to fill that gap for the Latin American and Caribbean (LAC) economies. It first examines the views of central banks in the region toward CBDCs, drawing on their responses to a survey conducted by the BIS in late 2020 and early 2021. Second, it examines whether the engagement of LAC central banks with CBDCs can be explained by the structural characteristics of their economies. Third, it reviews the long list of potential benefits, costs and risks of CBDCs, focusing on their relevance to the LAC economies. Finally, the paper reviews the design choices that central banks face and the actual choices made by a number of central banks in the region.
    Keywords: central bank digital currency, CBDC, payment systems, central banking, digital currency
    JEL: E42 E51 F31 G21 G28 O32 O38
    Date: 2022–01
  10. By: Amanda Liu; Jing Liu; Ilhyock Shim
    Abstract: This paper examines how Chinese banks used on-balance sheet shadow loans for regulatory arbitrage and whether the financial market priced in the banks' use of shadow loans and the resulting vulnerabilities in 2016–2020. It finds that banks chose to window-dress their regulatory capital ratio by using shadow loans. It also shows that banks with a higher shadow loan ratio or a lower break-even non-performing loan ratio obtained from reverse stress testing faced higher wholesale funding costs. Finally, after the announcement of a rare bank failure event, more vulnerable banks witnessed lower cumulative stock and bond returns.
    Keywords: bank capital regulation, Chinese economy, regulatory arbitrage, shadow banking, reverse stress test.
    JEL: G12 G14 G21 G28
    Date: 2022–02
  11. By: Said-Nour Samake (UB - Université de Bordeaux)
    Abstract: This paper aims to analyze the impact of prudential regulation on banking efficiency in the West African Economic and Monetary Union (WAEMU). Using system GMM estimator and panel data from 98 banks in WAEMU zone, we find that prudential regulation related to (i) Loan loss provisions (LLPR) positively affect banking efficiency. While (ii) Capital requirements (CAP); (iii) Liquidity requirements (LIQ); (iv) Loan restrictions (LOANR) and (v) Limits on leverage (LLV) negatively influence banking efficiency in the WAEMU zone. Moreover, we find that small and low-risk banks benefit in terms of efficiency, from stringent prudential regulation, while high-risk banks and large banks are the main losers. Similarly, we also find that, in the face of strict prudential regulation, government and domestic banks are inefficient, while the efficiency of foreign and privately managed banks improves. Overall, our findings support the idea that prudential regulation must be well calibrated and adapted to the specific characteristics of banks so that it does not impede banking efficiency and the proper functioning of the banking system, but also, by the same token, financial stability in the WAEMU zone.
    Keywords: Risk,Financial stability,Banks,Efficiency,Prudential regulation,WAEMU,CBWAS
    Date: 2022–01–23
  12. By: Maik Schmeling; Andreas Schrimpf; Sigurd A. M. Steffensen
    Abstract: How are financial markets pricing the monetary policy outlook? We use survey expectations to decompose excess returns on money market instruments into term premia and expectation errors. We find excess returns to be driven primarily by expectation errors, whereas term premia are negligible. Our findings point to challenges faced by investors in learning about the Federal Reserve's response to large, but infrequent, negative shocks in real-time. Rather than reflecting risk compensation, excess returns stem from investors underestimating by how much the central bank has eased in response to such rare shocks. We document similar results in an international sample.
    Keywords: expectation formation, monetary policy, federal funds futures, overnight index swaps, uncertainty.
    JEL: E43 E44 G12 G15
    Date: 2022–01
  13. By: Norring, Anni
    Abstract: This paper gives an overview on the use of macroprudential policy measures (MPMs) and capital flow management measures (CFMs) by emerging economies, and reviews literature on the effectiveness of these measures in containing the effects of large and volatile capital flows. The main findings of the paper are the following: First, major EMEs tend to use both MPMs and CFMs more than AEs. Second, the empirical evidence on the effectiveness of CFMs remains mixed. Third, there is indicative evidence that MPMs can contain the effects of capital flow volatility. Lastly, there is still little research into the interaction of CFMs and MPMs.
    Keywords: capital flows,emerging economies,CFMs,MPMs
    JEL: F32 F33 F38 F42
    Date: 2022
  14. By: Arnita Rishanty (Bank Indonesia Institute, Bank Indonesia); Sekar Utami Setiastuti (Department of Economics, Universitas Gadjah Mada.); Nur M. Adhi Purwanto (Bank Indonesia)
    Abstract: This study aims to develop an environmental dynamic stochastic general equilibrium (E-DSGE) model with heterogeneous production sectors and evaluate possible central bank and fiscal policies towards green and sustainable production. We estimate the model for the Indonesian economy and assess the effects of macroeconomic uncertainty in terms of productivity, monetary, macroprudential, fiscal policy, and financial shocks in a setup that includes policies supporting green firms. We find that aggregate output, consumption, and investment react negatively to a positive monetary policy and government spending shock. Further, we show that emission tax may dampen the contraction of green output due to contractionary monetary and fiscal policy. The effect of green financing subsidy, however, looks trivial
    Keywords: DSGE model, Bayesian estimation, Monetary policy, Fiscal policy, Environ- mental policy
    JEL: E32 E50 Q58
  15. By: Juncal Cunado (University of Navarra, School of Economics, Pamplona, Spain); David Gabauer (Data Analysis Systems, Software Competence Center Hagenberg, Austria); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)
    Abstract: This paper analyzes the real interest rate transmission mechanism across the United States, Japan, France, Germany, Holland, Italy, Spain and the United Kingdom during a period of more than 200 years. Based on a time-varying parameter vector autoregressive (TVP-VAR) connectedness methodology, the empirical results suggest that the magnitude of these international spillovers ranges between 30% and 75% across the sample period. Furthermore, it is shown that international interest rate spillovers increase during crisis periods, such as the two World Wars, the Great Depression of 1929, the 1980 and 1990 recessions, and the Great Financial Crisis of 2009. More interestingly, our findings illustrate the position of each of these eight countries as net transmitters or receivers of monetary policy shocks over time. Our analysis contributes to the debate on whether the conduct of monetary policy in a country should consider its international spillovers.
    Keywords: TVP-VAR, dynamic connectedness, extended joint connectedness, real interest rate dynamics
    JEL: C32 C52 E52
    Date: 2022–02
  16. By: Dunne, Peter G. (Central Bank of Ireland); Giuliana, Raffaele (Central Bank of Ireland)
    Abstract: TRegulation of Money Market Funds (MMFs) in the EU requires some categories of MMFs to consider applying liquidity management tools if they breach a minimum ‘weekly’ liquidity requirement. Anticipation of the application of such tools is a plausible amplifier of run risks. Using a larger European dataset than previously studied, we assess whether proximity to liquidity thresholds explains differences in redemptions both at the start of the COVID-19 crisis and in the following months. We assess this effect for MMFs subject to and exempt from the liquidity regulation. The evidence shows that outflows can be robustly associated with proximity to minimum liquidity requirements in the peak of the crisis for funds required to consider suspending redemptions if breaches occur. In the post-crisis phase the redemption liquidity relationship does not appear to be specifically related to mandated consideration of the suspension of redemptions. The evidence supports consideration of countercyclical liquidity requirements or buffers that are more usable in times of stress.
    Keywords: Money market funds, Liquidity limits
    JEL: G01 G15 G23 G28 G18 G20 F30
    Date: 2022–01
  17. By: Viral V Acharya; Ryan Niladri; Matteo Crosignani; Tim Eisert; Renée Spigt
    Abstract: We document capital misallocation in the U.S. investment-grade (IG) corporate bond market, driven by quantitative easing (QE). Prospective fallen angels – risky firms just above the IG rating cutoff – enjoyed subsidised bond financing since 2009, especially when the scale of QE purchases peaked and from IG-focused investors that held more securities purchased in QE programs. The benefiting firms used this privilege to fund risky acquisitions and increase market share, exploiting the reluctance of credit rating agencies to downgrade post-M&A and adversely affecting competitors' employment and investment. Eventually, these firms suffered more severe downgrades at the onset of the pandemic.
    Keywords: corporate bond market, investment-grade bonds, large-scale asset purchases (LSAP), credit ratings, credit ratings inflation.
    JEL: E31 E44 G21
    Date: 2022–02
  18. By: Muysken, Joan (UNU-MERIT, SBE Maastricht University, and CofFEE-Europe); Meijers, Huub (UNU-MERIT, SBE Maastricht University)
    Abstract: The Dutch economy is a small open economy. Due to its persistent large current account surplus, the Dutch net foreign assets have been increasing over time. The financial sector is dominated by special purpose vehicles created for tax reasons. The financial assets and liabilities of these vehicles are issued or held abroad, amounting to around 500 per cent of GDP. The remaining part of the financial sector has almost doubled in size relative to GDP over the past 25 years. While the growth of the banking sector stagnated since the financial crisis, the financial sector continued to grow because of the presence of a funded pension system. We analyse these developments using insights from stock flow consistent models for the Dutch economy that we have developed earlier. This analysis also enables us to highlight the role monetary policy played in facilitating and stimulating the growth of financialisation.
    Keywords: globalisation, financialisation, quantitative easing, stock-flow consistent modelling
    JEL: E44 B5 E6 F45 G21 G32
    Date: 2022–02–17

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