nep-cba New Economics Papers
on Central Banking
Issue of 2022‒03‒21
twelve papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Measuring monetary policy transparency in Uruguay By Cecilia Dassatti; Gerardo Licandro
  2. Ideology and monetary policy: the role of political parties’ stances in the ECB’s parliamentary hearings By Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
  3. Exchange Rate Pass-Through Conditional on Shocks and Monetary Policy Credibility. The Case of Uruguay By Fernanda Cuitiño; Juan Pablo Medina; Laura Zacheo
  4. Post-COVID fiscal rules: a central bank perspective By Hauptmeier, Sebastian; Leiner-Killinger, Nadine; Muggenthaler, Philip; Haroutunian, Stephan
  5. Inflation Expectations and Their Formation: Working Paper 2022-03 By Jeffrey Schafer
  6. Monetary Architecture and the Green Transition By Murau, Steffen; Haas, Armin; Guter-Sandu, Andrei
  7. Fluctuating bail-in expectations and effects on market discipline, risk-taking and cost of capital By Giuliana, Raffaele
  8. Reading Between the Lines : Objective Function Estimation using RBA Communications By Gao, Robert
  9. The Federal Funds Market, Pre- and Post-2008 By Eric T. Swanson
  10. Who Can Tell Which Banks Will Fail? By Kristian Blickle; Markus K. Brunnermeier; Stephan Luck
  11. Quantification of systemic risk from overlapping portfolios in the financial system By Poledna, Sebastian; Martínez-Jaramillo, Serafín; Caccioli, Fabio; Thurner, Stefan
  12. Application of Quantum Computers in Foreign Exchange Reserves Management By Martin Vesely

  1. By: Cecilia Dassatti (Banco Central del Uruguay); Gerardo Licandro (Banco Central del Uruguay)
    Abstract: The adoption of inflation targeting regimes has led central banks to devote considerable efforts to improve their transparency. Following this trend, several authors have developed tools to measure and compare the levels of transparency of central banks. This paper seeks to carry out this task for the Central Bank of Uruguay applying two different transparency indices. The first one was designed in the mid 2000s and has been applied in a sample with a significant number of countries. The second index is based on a new approach that seeks to reflect the best practices of the most advanced inflation-forecast targeting regimes.
    Keywords: monetary policy, central bank, transparency
    JEL: E0 E4
    Date: 2021
  2. By: Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
    Abstract: We investigate whether ideology drives the sentiments of parliamentarians when they speak to the central bank they hold accountable. To this end, we collect textual data on the quarterly hearings of the ECB President before the European Parliament from 1999 to 2019. We apply sentiment analysis to more than 1,900 speeches of individual Members of the European Parliament (MEPs) from 128 parties. We find robust evidence that MEPs’ sentiments toward the ECB are correlated with the ideological stance predominantly on a pro-/anti-European dimension rather than on a left-right dimension. JEL Classification: E02, E52, E58
    Keywords: Central Bank Accountability, Central Bank Independence, Party Ideology, Sentiment Analysis
    Date: 2022–03
  3. By: Fernanda Cuitiño (Banco Central del Uruguay); Juan Pablo Medina (Business School, Universidad Adolfo Ibáñez, Chile); Laura Zacheo (Banco Central del Uruguay)
    Abstract: The estimation of exchange rate pass-through (ERPT) is critical for understanding and forecasting the inflation dynamics in open economies. In this work, we estimate a medium scale New-Keynesian model for the Uruguayan economy to analyze the ERPT. We compute the ERPT with the estimated model conditional on specific external shocks and on whether the monetary policy has perfect or imperfect credibility. The results show that the empirical fit is better under imperfect credibility. The estimated degree of imperfect credibility is quite significant and it shows substantial variation across shocks and over time. We find that the ERPT tends to be lower for a shock that has a higher offsetting effect in aggregate demand and when monetary policy is more credible in keeping the inflation target constant. Finally, adding the exchange rate stabilization in the monetary policy rule in the case of Uruguay has a stronger empirical role once we allow for imperfect credibility.
    Keywords: exchange rate pass-through, emerging economy, imperfect credibility, bayesian estimation
    JEL: E12 E58 F31 F41
    Date: 2021
  4. By: Hauptmeier, Sebastian; Leiner-Killinger, Nadine; Muggenthaler, Philip; Haroutunian, Stephan
    Abstract: Regarding a prospective reform of the European Stability and Growth Pact (SGP) it seems rather consensual that a simplified framework should take account of the prevailing macroeconomic context and enhance the balancing of sustainability and stabilisation considerations. This paper provides simulation analysis for the euro area and individual countries with a view to assessing the short- and longer-term budgetary and macroeconomic implications of a move to a two-tier system with an expenditure growth rule as single operational indicator linked to a debt anchor. Compared to the status quo, our analysis suggests that expenditure growth targets which take account of the ECB’s symmetric 2% inflation target can improve the cyclical properties of the framework. Fiscal policy would be tighter when inflation is above the target but looser when inflation is below target, resulting in a better synchronisation of fiscal and monetary policies. Providing additional fiscal accommodation in a low inflation environment would enable monetary policy to operate more effectively especially in the vicinity of the effective lower bound. The link to a longer-term debt anchor at the same time ensures a transition towards the Treaty’s debt reference level. JEL Classification: E63, H50, H60
    Keywords: debt sustainability, European fiscal rules, monetary and fiscal policy interactions
    Date: 2022–03
  5. By: Jeffrey Schafer
    Abstract: This paper reviews theory and evidence on how consumers and firms form their expectations about inflation and how monetary policymakers might influence that process; both of those factors have implications for the Congressional Budget Office's baseline projections and policy analyses. Inflation expectations are important because they affect decisions that determine actual inflation. Surveys of consumers and business managers provide especially useful data for studying the process of forming expectations. Empirical evidence suggests that
    JEL: D83 D84 E17 E31 E37
    Date: 2022–03–15
  6. By: Murau, Steffen; Haas, Armin; Guter-Sandu, Andrei
    Abstract: How to finance the Green Transition towards net-zero carbon emissions remains an open question. The literature either operates within a market-failure paradigm that calls for a Pigou tax to help markets correct themselves, or via war finance analogies that offer a ‘triad’ of state intervention possibilities: taxation, treasury borrowing, and central bank money creation. These frameworks often lack a thorough conceptualisation of endogenous credit money creation, for instance when resorting to loanable funds theory, and disregard the systemic and procedural dimensions of financing the Green Transition. We propose that ‘monetary architecture’, which perceives the monetary and financial system as a constantly evolving and historically specific hierarchical web of interlocking balance sheets, offers a more comprehensive framework to conceptualize the systemic and procedural financing challenges. Using the US as an example, we draw implications of a systemic financing view while considering a division of labor between ‘firefighting’ institutions such as the Federal Reserve and the Treasury, and ‘workhorse’ institutions such as off-balance-sheet fiscal agencies, commercial banks, and shadow banks. We argue further that financing the Green Transition must undergo three ideal-typical phases—initial balance sheet expansion, long-term funding, and possibly final contraction—that require diligent macro-financial management to avoid financial instability.
    Date: 2022–02–16
  7. By: Giuliana, Raffaele
    Abstract: Through the compulsory participation of junior investors in bearing losses of their failing bank, the bail-in attempts to limit bail-outs’ side-effects in terms of market discipline, too-big-to-fail, bank-sovereign nexus and risk-taking. This paper assesses the consequences of bail-in expectations along these dimensions ensuring – through a bond pricing study – that bail-in expectations are not confounded by other factors. Using hand-collected details of EU bail-in events, I study both positive and negative exogenous shocks to bail-in expectations, offering three sets of findings. First, bail-in events can reinforce (or weaken) bail-in expectations, as shown by Khwaja-Mian tests (validated by placebo analyses). Second, bail-in expectations promote market discipline, and mitigate too-big-to-fail and bank-sovereign nexus. Third, bail-in effects on bank resilience appear mixed. While it incentivises banks to reduce risk-taking (e.g., increasing risk-weighted equity by a third of Basel III requirement), it also remarkably exacerbates total funding costs through an increase in equity cost (partially off-set by a debt cost reduction). JEL Classification: G21, G28, H81, C23
    Keywords: Bail-in, Cost of Capital, Expectations, Financial Stability, Fixed-income Claims, Market Discipline, Rating, Risk-taking
    Date: 2022–03
  8. By: Gao, Robert (Monash University)
    Abstract: We use a dictionary based natural language processing approach to quantify the sentiment of RBA communications. This measure of sentiment is then used as a proxy for loss in the estimation of the RBA’s objective function. We find that RBA communications imply a target for average inflation between 2.4% to 2.7% for short run horizons of up to one year ahead, consistent with the RBA’s medium term inflation target band of 2-3%. This result is robust to different forms of communication, forecast horizons, and allowing for asymmetric preferences. We also find that the RBA’s loss improves with rising output growth, commodity prices and stock market returns, as well as an appreciating exchange rate and falling unemployment.
    Keywords: central bank ; natural language processing ; objective function ; Reserve Bank of Australia ; text analysis JEL Classification: E58 ; E5
    Date: 2021
  9. By: Eric T. Swanson
    Abstract: This chapter provides an overview of the federal funds market and how the equilibrium federal fund rate is determined. I devote particular attention to comparing and contrasting the federal funds market before and after 2008, since there were several dramatic changes around that time that completely changed the market and the way in which the equilibrium federal funds rate is determined. The size of this structural break is arguably as large and important as the period of reserves targeting under Fed Chairman Paul Volcker from 1979–82. Finally, I discuss the relationship between the federal funds rate and other short-term interest rates in the U.S. and the outlook for the federal funds market going forward.
    JEL: E43 E52 E58
    Date: 2022–02
  10. By: Kristian Blickle; Markus K. Brunnermeier; Stephan Luck
    Abstract: We use the German Crisis of 1931, a key event of the Great Depression, to study how depositors behave during a bank run in the absence of deposit insurance. We find that deposits decline by around 20% during the run and that there is an equal outflow of retail and non-financial wholesale deposits from both ex-post failing and surviving banks. This implies that regular depositors are unable to identify failing banks. In contrast, the interbank market precisely identifies which banks will fail: the interbank market collapses for failing banks entirely but continues to function for surviving banks, which can borrow from other banks in response to deposit outflows. Since regular depositors appear uninformed, we argue that it is unlikely that deposit insurance would exacerbate moral hazard. Instead, interbank depositors are best positioned for providing “discipline” via short-term funding.
    JEL: G20 G21
    Date: 2022–02
  11. By: Poledna, Sebastian; Martínez-Jaramillo, Serafín; Caccioli, Fabio; Thurner, Stefan
    Abstract: Financial markets create endogenous systemic risk, the risk that a substantial fraction of the system ceases to function and collapses. Systemic risk can propagate through different mechanisms and channels of contagion. One important form of financial contagion arises from indirect interconnections between financial institutions mediated by financial markets. This indirect interconnection occurs when financial institutions invest in common assets and is referred to as overlapping portfolios. In this work we quantify systemic risk from indirect interconnections between financial institutions. Complete information of security holdings of major Mexican financial intermediaries and the ability to uniquely identify securities in their portfolios, allows us to represent the Mexican financial system as a bipartite network of securities and financial institutions. This makes it possible to quantify systemic risk arising from overlapping portfolios. We show that focusing only on direct interbank exposures underestimates total systemic risk levels by up to 50% under the assumptions of the model. By representing the financial system as a multi-layer network of direct interbank exposures (default contagion) and indirect external exposures (overlapping portfolios) we estimate the mutual influence of different channels of contagion. The method presented here is the first quantification of systemic risk on national scales that includes overlapping portfolios.
    Keywords: financial networks; financial regulation; multi-layer networks; overlapping portfolios; systemic risk
    JEL: D85 G18 G21
    Date: 2021–02
  12. By: Martin Vesely
    Abstract: The main purpose of this article is to evaluate possible applications of quantum computers in foreign exchange reserves management. The capabilities of quantum computers are demonstrated by means of risk measurement using the quantum Monte Carlo method and portfolio optimization using a linear equations system solver (the Harrow-Hassidim-Lloyd algorithm) and quadratic unconstrained binary optimization (the quantum approximate optimization algorithm). All demonstrations are carried out on the cloud-based IBM QuantumTM platform. Despite the fact that real-world applications are impossible under the current state of development of quantum computers, it is proven that in principle it will be possible to apply such computers in FX reserves management in the future. In addition, the article serves as an introduction to quantum computing for the staff of central banks and financial market supervisory authorities.
    Keywords: Foreign exchange reserves, HHL algorithm, portfolio optimization, QAOA algorithm, quantum computing, risk measurement
    JEL: C61 C63 G11
    Date: 2022–03

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