nep-cba New Economics Papers
on Central Banking
Issue of 2022‒04‒04
nineteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Macroprudential Policy in Central Banks: Integrated or Separate? Survey Among Academics and Central Bankers By Simona Malovana; Martin Hodula; Zuzana Gric; Josef Bajzik
  2. Rate forward guidance in an environment of large central bank balance sheets: a Eurosystem stock-taking assessment By Monetary Policy Committee, Taskforce on Rate Forward Guidance and Reinvestment
  3. Cross-border regulatory spillovers and macroprudential policy coordination By Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva
  4. The Term Structure of Monetary Policy Uncertainty By Brent Bundick; Trenton Herriford; Andrew Lee Smith
  5. Liquidity Risk and Interdependence in Payment Systems: The Case of Peru By Jushua Baldoceda; Anthony Meza
  6. Lower for longer under endogenous technology growth By Elfsbacka Schmöller, Michaela; Spitzer, Martin
  7. Spillovers of the Bank of Japan’s Exchange Traded Fund and Corporate Bond Purchases By Linh, Nguyen Thuy
  8. Real Exchange Rate Decompositions By Bruno Feunou; Jean-Sébastien Fontaine; Ingomar Krohn
  9. Financial conditions and zombie companies: International evidence By Joel Bowman
  10. Money Market Fund Vulnerabilities: A Global Perspective By Antoine Bouveret; Antoine Martin; Patrick E. McCabe
  11. Demographic Trends and the Transmission of Monetary Policy By Giacomo Mangiante
  12. Tracing Banks' Credit Allocation to their Funding Costs By Anne Duquerroy; Adrien Matray; Farzad Saidi
  13. Households' Perceived Inflation and CPI Inflation: the Case of Japan By Yusuke Takahashi; Yoichiro Tamanyu
  14. Modeling Bank Panics: Challenges By Lawrence Christiano; Husnu Dalgic; Xiaoming Li
  15. After the Allocation: What Role for the Special Drawing Rights System? By Tobias Pforr; Fabian Pape; Steffen Murau
  16. Cooling the Mortgage Loan Market: The Effect of Recommended Borrower-Based Limits on New Mortgage Lending By Martin Hodula; Milan Szabo; Lukas Pfeifer; Martin Melecky
  17. The Coming Battle of Digital Currencies By Cong, Lin William; Mayer, Simon
  18. Forecasting US Inflation Using Bayesian Nonparametric Models By Todd E. Clark; Florian Huber; Gary Koop; Massimiliano Marcellino
  19. "What's Causing Accelerating Inflation: Pandemic or Policy Response?" By Yeva Nersisyan; L. Randall Wray

  1. By: Simona Malovana; Martin Hodula; Zuzana Gric; Josef Bajzik
    Abstract: We surveyed experts from academia, central banks and other regulatory institutions on the preferred institutional setup of macroprudential policy and the underlying interactions stemming from the conduct of monetary and macroprudential policy. We find substantial support for the integration setup, under which macroprudential policy is entrusted to the central bank and not to a separate institution. The most significant factors driving the respondents' views are the large degree of interdependence of the two policies, the potential information gains from keeping them "under one roof", and a greater capability to resolve strategic conflicts. We identify non-negligible heterogeneity in the responses, especially in terms of respondents' age, managerial position and research orientation.
    Keywords: Central banking, expert survey, institutional arrangement, macroprudential policy, monetary policy
    JEL: C83 E52 E58 G21 G28
    Date: 2021–12
  2. By: Monetary Policy Committee, Taskforce on Rate Forward Guidance and Reinvestment
    Abstract: In the aftermath of the global financial crisis, central banks started being confronted with severe challenges that led to an unprecedented policy response in terms of the size and variety of monetary policy measures. One such measure centred on central banks communicating to the public more explicitly their future policy actions in order to influence expectations. In the case of interest rates, as the standard policy rate approached the effective lower bound, major central banks began providing forward guidance (FG) on interest rates with the intention of lowering expectations of future short-term rates. While FG had been used in certain jurisdictions before the crisis, its prominence in the monetary policy toolkit grew substantially in the aftermath of the crisis. This occasional paper summarises the work carried-out by the Eurosystem Taskforce on the macroeconomic impact of rate forward guidance (FG) in an environment of large central bank balance sheets. The analysis presented covers the period up to February 2020 so the implications of the pandemic as well as the ECB’s strategy review are beyond the scope of the Taskforce’s mandate. The paper describes the analytical challenges associated with assessing rate FG on account of the relative novelty of these policies, the lack of well-established empirical results and the sensitivity of model predictions to the expectations formation process. To overcome and address these challenges, the Taskforce took stock of all the available infrastructure and analysis within in the Eurosystem, and where needed, developed structural and empirical models and approaches to assess the macroeconomic impact of rate FG in an environment of large central bank balance sheets. JEL Classification: E37, E43, E52, E58
    Keywords: ECB policy, effective lower bound, forward guidance, monetary policy
    Date: 2022–03
  3. By: Pierre-Richard Agénor; Timothy Jackson; Luiz Awazu Pereira da Silva
    Abstract: A core-periphery model with financial frictions, imperfect financial integration, and cross-border banking is used to assess the magnitude of regulatory spillovers and the gains from international macroprudential policy coordination. A core global bank lends to its affiliates in the periphery and banks in both regions are subject to risk-sensitive capital regulation. Following an expansionary monetary policy in the core, a countercyclical response in capital requirements induces the global bank to engage in regulatory arbitrage. The magnitude of the resulting cross-border capital flows depends on the degree of economies of scope in lending. Welfare gains associated with countercyclical capital buffers are calculated for three policy regimes: independent policies (Nash), coordination, and reciprocity---a regime in which capital ratios set in the core are imposed on branches operating in the periphery. If regulators set policies on the basis of a narrow financial stability mandate, and these policies are evaluated in terms of household welfare, reciprocity may perform better than Nash, and as well as coordination for all parties, when regulatory leakages are strong.
    Keywords: global banking, financial spillovers, regulatory leakages, macroprudential policy coordination.
    JEL: E58 F42 F62
    Date: 2022–03
  4. By: Brent Bundick; Trenton Herriford; Andrew Lee Smith
    Abstract: This paper studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. Movements in the term structure of interest rate uncertainty around FOMC announcements cannot be summarized by a single measure but instead are two dimensional. We characterize these two dimensions as the level and slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors significantly help to explain changes in Treasury yields and forward real interest rates around FOMC announcements, even after accounting for changes in the expected path of policy rates. Moreover, we demonstrate that focusing on just a single dimension of monetary policy uncertainty provides an inaccurate description of how policy uncertainty shapes the transmission of FOMC announcements. Finally, our policy uncertainty factors provide stronger first-stage instruments in a proxy SVAR setting which implies more expansionary macroeconomic effects of forward guidance than those estimated only using the expected path of policy rates.
    Keywords: Monetary Policy Uncertainty; Forward Guidance; Proxy VAR
    JEL: E32 E52
    Date: 2022–02–25
  5. By: Jushua Baldoceda (Central Reserve Bank of Peru); Anthony Meza (Central Reserve Bank of Peru)
    Abstract: The failure of a financial institution (banks and microfinance institutions) to meet its payment obligations can have implications, not only for its continuity, but also for the stability of payment systems, markets, and the financial system in general. Central banks, as monetary authorities, regulators, and overseers of a country's payment infrastructures must monitor the liquidity risk of participants in those systems in order to prevent in time any event of this nature. To do this, the liquidity needs of the entities must be identified and anticipated to mitigate the possible effects of their inability to pay and the possible consequences on the payment systems. This paper reviews the literature on liquidity risks and their systemic consequences. It also presents different indicators of liquidity and interdependence built with the transactional data of the RTGS System, administered by the Central Reserve Bank of Peru. These indicators are contrasted with the participant's intraday facilities operations in the RTGS (from Jan-2010 to Nov-2021), in order to assess the liquidity problem and its consequences from a systemic point of view.
    Keywords: RTGS; liquidity risk; systemic risk; indicators
    JEL: E42 E50 E58
    Date: 2022–03–07
  6. By: Elfsbacka Schmöller, Michaela; Spitzer, Martin
    Abstract: This paper studies monetary policy strategies under endogenous technology dynamics and low r∗. Endogenous growth strengthens the gains from make-up strategies relative to inflation targeting, especially if policy space is reduced. This result is due to the long-run non-neutrality of money and the hysteresis effects in TFP through which ELB episodes generate permanent scars on long-run aggregate supply. Make-up strategies not only foster the alignment of inflation with target but also support productivity-improving investment in R&D and technology adoption and hence the long-run trend path, provided that the inherent make-up element is sufficiently pronounced. Inflation is less responsive to monetary policy due to the interaction with productivity dynamics. As a result, additional stimulus is required at the ELB and the degree of subsequent overshooting is alleviated. Endogenous growth also generates novel monetary policy trade-offs, most notably credibility challenges, which can be mitigated by confining make-up elements to ELB episodes.
    JEL: E24 E31 E32 E52 O30
    Date: 2022–03–31
  7. By: Linh, Nguyen Thuy
    Abstract: This study examines the spillovers of the Bank of Japan’s (BOJ’s) exchange-traded fund (ETF) and corporate bond (CB) purchases on bank operations and the supply of bank loans for public and private firms not subject to BOJ purchases. The results show that, first, following the introduction of the BOJ’s purchases in 2010, the total lending of highly exposed banks decreased; instead, such banks invested more in securities compared to less exposed banks. Second, evidence suggests a small but negative effect of the purchase program on bank investment and performance ratios. The decline in targeted firms’ bank loans may have intensified banking competition and encourage highly affected banks to engage more in risk-taking activities, which might adversely affect banks. Third, consistent with the increase in exposed banks’ risk-taking incentives, the impact on bank loans of public ineligible firms is shown to be insignificant, while SMEs with higher exposure to the BOJ’s program had more favorable loan terms such as larger loan amounts and lower interest rates after the policy implementation. However, this positive impact on SMEs is not strong enough to improve firms’ performance.
    Keywords: Unconventional monetary policy, Risk asset purchases, Risk-taking channel, Firm financing, Bank-firm relationship
    JEL: E52 G21 G32
    Date: 2021–06
  8. By: Bruno Feunou; Jean-Sébastien Fontaine; Ingomar Krohn
    Abstract: We provide a novel daily decomposition of the real exchange rate that exploits a direct link between bond and foreign exchange (FX) markets. Real exchange rate dynamics can be attributed to changes in the expected future level of the exchange rate; cross-country differentials of expected inflation, yields and bond term premia; and an FX risk premium. Through a variance decomposition exercise, we fi nd that the FX risk premium is the dominant component. Monetary policies and macroeconomic news announcements largely move the real exchange through changes in the FX risk premium.
    Keywords: Asset pricing; Exchange rates; International financial markets; Monetary policy transmission
    JEL: E43 F31 G12
    Date: 2022–03
  9. By: Joel Bowman
    Abstract: Financial conditions eased after the global financial crisis and during the COVID-19 pandemic as policymakers across most countries adopted large scale monetary policy easing. This has increased concern amongst some that a prolonged period of accommodative financial conditions has fostered the growth of zombie companies − businesses that are consistently unable to meet their interest expenses from current profits. This paper finds that an easing in self-constructed measures of financial conditions is correlated with an increase in the share of resources sunk into zombie companies using a sample of listed companies across 20 OECD countries and 11 industries over the period 2003 to 2019. However, the size of this relationship is higher for countries with banking systems that are in poorer financial health. As a result, fears that accommodative financial conditions foster more capital being sunk into inefficient zombie companies is likely to be less of a concern for countries with healthy banking systems.
    Keywords: Financial Conditions, Zombie Companies, Bank Health
    JEL: E44 E52 G21
    Date: 2022–03
  10. By: Antoine Bouveret; Antoine Martin; Patrick E. McCabe
    Abstract: Money market funds (MMFs) are popular around the world, with over $9 trillion in assets under management globally. From their origins in the 1970s, MMFs have operated in a niche between the capital markets and the banking system, as investment funds that offer private money-like assets with features similar to those of bank deposits. Hence, they are vulnerable to runs that arise from liquidity transformation and from sudden changes in investor perceptions of the funds’ ability to serve as money-like assets. Since 2000, MMF runs have occurred in many countries and under many regulatory regimes. The global pattern of runs and crises shows that MMF vulnerabilities are not unique to a particular set of governing arrangements, and that mitigating these vulnerabilities requires fundamental reforms that either place MMFs more clearly within the investment-fund sector or establish protections for MMFs similar to those for deposits.
    Keywords: money market funds; liquidity transformation; runs; nonbank financial institutions; short-term funding markets; information-insensitive assets; financial stability
    JEL: G20 G23 G28
    Date: 2022–03–01
  11. By: Giacomo Mangiante
    Abstract: This paper studies the impact of demographic trends on the transmission of monetary policy. In particular, I propose and quantify a novel channel to explain how population aging might affect the effectiveness of monetary policy and the flattening of the Phillips curve: older individuals purchase more from product categories with higher levels of price rigidity - categories which adjust their prices less often - so the aggregate frequency of price adjustment decreases as the population ages. Using micro data on consumer expenditure, I document the negative relationship between age and the frequency of price adjustment and find that it is mainly due to the higher share of services consumed by old households. At the macro level, if prices are more rigid output should respond more to monetary shocks. To test this hypothesis, I exploit the cross-sectional variation in demographic structures across the U.S. and I show that the economic activity in states with a higher old-age dependency ratio reacts more to monetary shocks. Finally, I rationalise these findings using a two-sector OLG New Keynesian model where demographic trends shift aggregate demand towards services, i.e., the stickier expenditure category. Combining the model with population projections for the U.S., I find that the changes in the age distribution between 1980 and 2010 increased the contemporaneous response of output to monetary shocks by 6% and will have increased it by 10% in 2050. Moreover, demographic trends explain around 10% of the decrease in the slope of the Phillips curve.
    Keywords: Monetary policy, age structure, consumption heterogeneity, Phillips curve
    JEL: E52 J11
    Date: 2022–03
  12. By: Anne Duquerroy (Banque de France); Adrien Matray (Princeton & CEPR); Farzad Saidi (University of Bonn & CEPR)
    Abstract: We quantify how banks’ funding costs affect their lending behavior directly, and in-directly by feeding back to their net worth. For identification, we exploit banks’ het-erogeneous liability structure and the existence of regulated deposits in France whose rates are set by the government. Using administrative credit-registry and regulatory bank data, we find that a one-percentage-point increase in funding costs reduces credit by 17%. To insulate their profits, banks reach for yield and rebalance their lending towards smaller and riskier firms. These changes are not compensated for by less af-fected banks at the aggregate city level, with repercussions for firms’ investment.
    Keywords: bank funding costs, monetary-policy transmission, deposits, credit supply, SMEs, savings
    JEL: E23 E32 E44 G20 G21 L14
    Date: 2022–02
  13. By: Yusuke Takahashi (Bank of Japan); Yoichiro Tamanyu (Bank of Japan)
    Abstract: This study analyzes the mechanism of how households' inflation perceptions are formed in Japan and investigates the backdrop of why perceived inflation is higher than CPI inflation. Our cross-sectional analysis using micro-data shows that a variety of factors affect households' inflation perceptions, including their sociodemographic characteristics, which are likely to affect their consumption patterns, their sentiment, and their awareness of the Bank of Japan's "price stability target." We further show that such inflation perceptions, as well as sentiment and awareness of the "price stability target," influence households' tolerance towards price rises. We then analyze how changes in the price of individual goods and services influence perceived inflation using aggregate data and find that a large share of the fluctuations in perceived inflation can be explained by changes in food product and petroleum product prices. In addition, we show that house prices, which are not included in the CPI in Japan, also explain these fluctuations. These results imply that households have in mind a different basket of goods and services from the CPI when they form their inflation perceptions.
    Keywords: Inflation; Inflation perception; Consumer price index; Tolerance towards price rises
    JEL: D12 E31 E58
    Date: 2022–03–02
  14. By: Lawrence Christiano; Husnu Dalgic; Xiaoming Li
    Abstract: Our primary finding is that surprisingly small changes in assumptions which determine the amount of net worth available in a bank panic have an important impact on the nature of the equilibria: there may not be a bank panic at all, or there may be several di erent panics of di erent severity. The economic reasons for this sensitivity are clarified by transforming the market economy into a game and studying banker best response functions. To establish robustness to model details, we report similar quantitative results across three di erent model specifications and calibrations. A second, additional result, is displayed in a three-period version of the panic model of Gertler and Kiyotaki (2015). That model naturally suggests the idea that welfare can be improved by imposing a restriction on bank leverage. We compute the Ramsey-optimal leverage restriction, but find that there is an implementation problem: the restriction can be associated with more than one equilibrium, not just the desired one. We discuss one way to address the implementation problem.
    Keywords: Bank runs, financial crises, macroprudential policy
    JEL: E44 G01 G21
    Date: 2022–03
  15. By: Tobias Pforr (European University Institute); Fabian Pape (University of Warwick); Steffen Murau (Boston University)
    Abstract: In August 2021, the IMF made a new SDR allocation to help ease pandemic-induced financial strains in the Global South. This paper assesses the potential of the SDR system to address debt-related problems in global finance. We analyze the SDR system as a web of interlocking balance sheets whose members can use SDR holdings—the system's tradable assets—for conversion into usable currency as a perpetual low-interest loan or to make payments to each other. Using original IMF data, we study how the system has been practically used since 1990. Though widely perceived as a solution in search of a problem in the post-Bretton Woods era, we find that the SDR system provides three mechanisms through which IMF members borrow and lend usable currency to each other, with different strings attached: first, transactions by agreement; second, the IMF's core lending facilities for which the SDR system offers additional resources; and third, IMF-sponsored Trusts which seek to harness the SDR system for development purposes and are the basis for the current idea of 'voluntary channeling'. Overall, given the SDR system's idiosyncratic accounting rules, the new allocation can improve the liquidity position of a country and offer some limited avenues for sovereign debt restructuring but comes with new interest and exchange rate risks. Voluntary channeling cannot happen without a wealth transfer, neither the SDR allocation nor the use of Trusts can overcome this problem. Still, Trusts can be a useful instrument to help with debt forgiveness and to ensure that borrowed funds are used for their intended purpose.
    Keywords: International Monetary Fund, balance sheets, critical macro-finance, Money View, central banks, development finance, Global South.
    JEL: E42 E58 F02 F33 F34 F53 F55 N10 N20
    Date: 2022–03–09
  16. By: Martin Hodula; Milan Szabo; Lukas Pfeifer; Martin Melecky
    Abstract: This paper studies the effects of regulatory recommendations concerning maximum (i) loan-to-value (LTV), (ii) debt-to-income (DTI) and (iii) debt service-to-income ratios (DSTI) on new loans secured by residential property. It uses loan-level regulatory survey data on about 82,000 newly granted residential mortgage loans in the Czech Republic from 2016 to 2019 to estimate the average effects of the Czech National Bank's regulatory recommendations and their heterogeneous effects depending on borrower, loan, bank and regional characteristics. The studied response variables include the mortgage loan size and lending rate and the value of the property with which loans are secured. The machine learning method of causal forests is employed to estimate the effects of interest and to identify any heterogeneity and its likely drivers. We highlight two important facts: (i) value-based (LTV) and income-based (DTI and DSTI) limits have different impacts on the mortgage market and (ii) borrower, loan, bank and regional characteristics play an important role in the transmission of the recommended limits.
    Keywords: Borrower-based measures, causal forests, Czech Republic, macroprudential recommendations, residential mortgage loans
    JEL: E44 G21 G28 G51 R31
    Date: 2022–03
  17. By: Cong, Lin William; Mayer, Simon
    Abstract: We model the dynamic global competition among national fat currencies, cryptocurrencies, and Central Bank Digital Currencies (CBDCs) in which the strength of a country and of its currency are mutually reinforcing. The rise of cryptocurrencies hurts stronger fat currencies, but can beneft weaker fat currencies by reducing competition from stronger ones. Countries strategically implement CBDCs in response to competition from emerging cryptocurrencies and other currencies. Our model suggests the following pecking order: Countries with strong but non-dominant currencies (e.g., China) are most incentivized to launch CBDC due to both technological frst-mover advantage and potential reduction in dollarization; the strongest currencies (e.g., USD) beneft from developing CBDC early on to nip cryptocurrency growth in the bud and to counteract competitors’ CBDCs; nations with the weakest currencies forgo implementing CBDCs and adopt cryptocurrencies instead. Strong fat competition and the emergence of cryptocurrencies spur fnancial innovation and digital currency development. Our fndings help rationalize recent developments in currency and payment digitization, while providing insights into the global battle of currencies and the future of money.
    Keywords: Financial Economics
    Date: 2022–03–28
  18. By: Todd E. Clark; Florian Huber; Gary Koop; Massimiliano Marcellino
    Abstract: The relationship between inflation and predictors such as unemployment is potentially nonlinear with a strength that varies over time, and prediction errors error may be subject to large, asymmetric shocks. Inspired by these concerns, we develop a model for inflation forecasting that is nonparametric both in the conditional mean and in the error using Gaussian and Dirichlet processes, respectively. We discuss how both these features may be important in producing accurate forecasts of inflation. In a forecasting exercise involving CPI inflation, we find that our approach has substantial benefits, both overall and in the left tail, with nonparametric modeling of the conditional mean being of particular importance.
    Keywords: nonparametric regression; Gaussian process; Dirichlet process mixture; inflation forecasting
    JEL: C11 C32 C53
    Date: 2022–03–02
  19. By: Yeva Nersisyan; L. Randall Wray
    Abstract: This paper examines the recent increase of the measured inflation rate to assess the degree to which the acceleration is due to problems created (largely on the supply side) by the pandemic versus pressures created on the demand side by pandemic relief. Some have attributed the inflation to excess demand, most notably Larry Summers, who had warned that the pandemic relief spending was too great. As evidence, one could point to the quick recovery of GDP and to reportedly tight labor markets. Others have variously blamed supply chain disruptions, shortages of certain inputs, OPEC's oil price increases, labor market disruptions because of COVID, and rising profit margins obtained through exercise of pricing power. We conclude that there is little evidence that excess demand is the problem, although we agree that in the absence of the relief checks, recovery would have been sufficiently slow to minimize inflation pressure. We closely examine the main contributors to rising overall prices and conclude that tighter monetary policy would not be an effective way to reduce price pressures. We also cast doubt on the expectations theory of inflation control. We present evidence that suggests there is currently little danger that higher inflation will become entrenched. If anything, rate hikes now will make it harder for the economy to adjust to current realities. The potential for lots of pain with little gain is great. The best course of action is to tackle problems on the supply side.
    Keywords: COVID-19; Inflation; Pandemic Relief; Pricing Power; Supply Chains
    JEL: E31 E32 E52 E52
    Date: 2022–03

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