nep-cba New Economics Papers
on Central Banking
Issue of 2022‒03‒28
nine papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. QE: Implications for Bank Risk-Taking, Profitability, and Systemic Risk By Supriya Kapoor; Adnan Velic
  2. Long-run scarring effects of meltdowns in a small-scale nonlinear quadratic model By Francesco Simone Lucidi; Willi Semmler
  3. Naive Agents with Non-unitary Discounting Rate in a Monetary Economy By Koichi Futagami; Daiki Maeda
  4. The ECB's neglected secondary mandate: An inter-institutional solution By de Boer, Nik; van 't Klooster, Jens
  5. Robustly optimal monetary policy in a behavioral environment By Lahcen Bounader; Guido Traficante
  6. Shadow banking and the four pillars of traditional financial intermediation By Emmanuel Farhi; Jean Tirole
  7. Monetary and fiscal policy in a nonlinear model of public debt By Gian Italo Bischi; Germana Giombini; Giuseppe Travaglini
  8. Effects of Monetary and Fiscal Policy Interactions on Regional Employment: Evidence from Japan By Tomomi Miyazaki; Haruo Kondoh
  9. Stock Market Response to Covid-19, Containment Measures and Stabilization Policies - The Case of Europe By Jens Klose; Peter Tillmann

  1. By: Supriya Kapoor (Technological University Dublin); Adnan Velic (Technological University Dublin)
    Abstract: In the aftermath of the sub-prime mortgage bubble, the Federal Reserve implemented large scale asset purchase (LSAP) programmes that aimed to increase bank liquidity and lending. The excess liquidity created by quantitative easing (QE) in turn may have stimulated bank risk-taking in search of higher profits. Using comprehensive data on balance sheets, risk measures, and daily market returns in the U.S., we investigate the link between QE, bank risk-taking, profitability, and systemic risk. We find that, particularly during the third round of QE, banks that were more exposed to the unconventional monetary policy increased their risk-taking behavior and profitability. However, these banks also reduced their contribution to systemic risk indicating that the implementation of QE had an overall stabilizing effect on the banking sector. These results highlight the different distributional effects of QE.
    Keywords: large-scale asset purchases, quantitative easing, bank risk-taking, systemic risk, expected shortfall
    JEL: E52 E58 G21
    Date: 2022–02
  2. By: Francesco Simone Lucidi; Willi Semmler
    Abstract: We build a small-scale nonlinear quadratic (NLQ) model in which credit feedback and regime switches in the output gap a ect the adjustment path of the economy towards a steady state. The central bank solves a finite-horizon decision problem where the policy rate also can be zero or negative. We estimate this model by nonlinear seemingly unrelated regression method (NLSUR) and using the parameters to explore policy scenarios. The latter projects long-run dynamics after a large demand contraction leading to scarring effects in the economy. We point out three main results. First, while scars are dominant when the central bank follows a standard Taylor rule, unconventional monetary policy (UMP) mitigates the output decline in both the short and the long run. Second, a zero natural rate of interest alone curtails the central bank's ability to adjust the economy. Third, financial constraints leave the deepest scars even if UMP is active.
    Keywords: credit cycles; credit spread; inflation targeting; nonlinear Phillips curve; unconventional monetary policy
    JEL: E42 E52 E58
    Date: 2022–03
  3. By: Koichi Futagami (Department of Economics, Doshisha University); Daiki Maeda (School of Global Studies, Chukyo University)
    Abstract: We incorporate naive agents with a non-unitary discounting rate into a cash- in-advance (CIA) model. Through this extension, we obtain the following results. First, we show that there exists an equilibrium in which the CIA constraint does not bind when individuals discount their utilities from future consumption lower than their utilities from future leisure time. It is important to note that this non- binding equilibrium exists even if the nominal interest rate takes a positive value. Second, we demonstrate that increases in the money supply growth rate decreases the individuals f saving rate in the equilibrium in which the CIA constraint does not bind. Third, we exhibit that when the equilibrium where the CIA constraint does not bind exists, the welfare level of this equilibrium can be higher than that of the equilibrium in which the CIA constraint binds. Moreover, we deduce that the Friedman rule cannot be optimal in the equilibrium in which the CIA constraint binds and present the result that the optimal level of the optimal nominal interest rate is a?ected by the di?erence of the discount rates.
    Keywords: Non-unitary discounting rate; Naive agents; CIA constraint; Monetary policy; Friedman rule
    JEL: E52 E70
  4. By: de Boer, Nik; van 't Klooster, Jens
    Abstract: The ECB’s secondary mandate requires it to the support broader economic policies by and in the EU. Until recently absent from the ECB strategy, the secondary mandate features prominently in the ECB’s 2021 review of its monetary policy strategy. This report asks: How should the ECB interpret the many objectives that the secondary mandate mentions? And how should it act on them? A more prominent role for its secondary mandate fits well with the new, more political role of the ECB, but it should not act on the secondary mandate alone. Why is that? The requirements that the legal text imposes on the ECB are paradoxical and difficult to reconcile. We explain the paradox in terms of three features. Firstly, the secondary mandate is binding on the ECB so that it must support the EU’s economic policies where this is possible without prejudice to price stability. However and secondly, the secondary mandate is also highly indeterminate because there are many relevant secondary objectives and ways to support them. Acting on the secondary mandate requires prioritising objectives and designing new instruments. Yet, thirdly, the ECB lacks the competence to develop its own policies to pursue the secondary objectives. For the ECB to simply choose its own secondary objectives and act on them raises severe legal and democratic objections. To resolve this paradoxical situation, we propose that the specification of the secondary objectives should take place via high-level coordination with the political institutions of the EU. Unlike direct instructions which are illegal under EU law, coordination would be compatible with central bank independence and strengthen the ECB’s ability to pursue price stability. We propose three main avenues to give shape to such interinstitutional coordination.
    Date: 2021–10–24
  5. By: Lahcen Bounader (International Monetary Fund); Guido Traficante (European University of Rome)
    Abstract: This paper studies robustly optimal monetary policy in a behavioral New Keynesian model, where the private sector has myopia, while the central bank has Knightian uncertainty about the degree of myopia of the private sector and the degree of price stickiness. In such a setup the central bank solves an optimal robust monetary policy problem. We show that under uncertainty in myopia the Brainard’s attenuation principle holds, while under uncertainty on price stickiness, alone or in addition to myopia, monetary policy becomes more aggressive.
    Keywords: Optimal monetary policy, bounded rationality, min- max, parameter uncertainty
    JEL: E
    Date: 2022
  6. By: Emmanuel Farhi (Harvard University [Cambridge], NBER - National Bureau of Economic Research [New York] - NBER - The National Bureau of Economic Research); Jean Tirole (TSE - Toulouse School of Economics - UT1 - Université Toulouse 1 Capitole - Université Fédérale Toulouse Midi-Pyrénées - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IAST - Institute for Advanced Study in Toulouse)
    Abstract: Traditional banking is built on four pillars: SME lending, insured deposit taking, access to lender of last resort, and prudential supervision. This paper unveils the logic of the quadrilogy by showing that it emerges naturally as an equilibrium outcome in a game between banks and the government. A key insight is that regulation and public insurance services (LOLR, deposit insurance) are complementary. The model also shows how prudential regulation must adjust to the emergence of shadow banking, and rationalizes structural remedies to counter bogus liquidity hoarding and financial contagion: ring-fencing between regulated and shadow banking and the sharing of liquidity in centralized platforms.
    Keywords: Narrow banks,CCPs,Ring-fencing,Migration,Supervision,Deposit insurance,Lender of last resort,Retail and shadow banks
    Date: 2021–11
  7. By: Gian Italo Bischi (Department of Economics, Society & Politics, Università di Urbino Carlo Bo); Germana Giombini (Department of Economics, Society & Politics, Università di Urbino Carlo Bo); Giuseppe Travaglini (Department of Economics, Society & Politics, Università di Urbino Carlo Bo)
    Abstract: In this paper we study the dynamic relationship between the pub- lic debt ratio and the real interest rate. Specifically, by means of a macroeconomic model of simultaneous di erence equations - one for the debt ratio and the other for the real interest rate - we focus on the role of monetary policy, fiscal policy and risk premium in affecting the stability of the debt ratio and the existence of steady states, if any. We show that, in a dynamic framework, fiscal rules may not be enough to control the pattern of the debt ratio, and the adoption of a monetary policy, in the form of an interest rate rule, is necessary to control the pattern of the debt ratio for assuring its sustainability over time. Notably, the creation or disappearance of steady states, or periodic (stable) cycles, can generate scenarios of multistability. While we obtain clear evidence that an active monetary policy has a stabilizing effect on both the real interest rate and the debt ratio, we also find that, in some scenarios, fiscal policy is not sucient to avoid explosive patterns of the debt ratio.
    Keywords: Public debt; Interest rate; Instability; Chaos
    Date: 2022
  8. By: Tomomi Miyazaki (Graduate School of Economics, Kobe University); Haruo Kondoh (Department of Economics, Seinan Gakuin University)
    Abstract: This study examines the effects of the interaction between unconventional monetary policy and fiscal stimulus on regional employment in Japan. A mixed vector autoregressions (VARs)/event study approach is used. Our empirical findings first show that whereas employment recovery was salient in western Japan, it was not the case in Tokyo metropolitan areas, the country’s main economic hub. Second, we confirm employment recovery on female employees in all regions. However, we do not observe this on male employees, implying the policy interaction did not necessarily increase the number of regular workers, which might suppress a wage hike in the entire country.
    Date: 2022–03
  9. By: Jens Klose (THM Business School Giessen); Peter Tillmann (Justus-Liebig-University Giessen)
    Abstract: Policymakers imposed constraints on public life in order to contain the Covid-19 pandemic. At the same time, fiscal and monetary policy implemented a large range of of expansionary measures to limit the economic consequences of the pandemic and stimulate the recovery. In this paper, we assess the response of the equity market as a high-frequency indicator of economic activity to containment and stabilization policies for 29 European economies. We construct indicators of containment and stabilization policies and estimate a range of panel VAR models. The main results are threefold: First, we find that stock markets are highly responsive to containment and stabilization policies. We show that domestic fiscal policy as well as monetary policy support the recovery as reflected in the stock market. Second, expansionary fiscal policy conducted at the European level reduces rather raises stock prices. Third, we estimate the model over subsamples and show that the counter-intuitive stock market response to EU policies is driven by the responses in medium- and high-debt countries. These countries' stock markets are also particularly susceptible to monetary policy announcements.
    Keywords: COVID-19, stabilization policies, lockdown-measures, panel VAR
    JEL: E44 E52 E62
    Date: 2022

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