nep-cba New Economics Papers
on Central Banking
Issue of 2022‒04‒18
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary policy, macroprudential policy and financial stability By Laeven, Luc; Maddaloni, Angela; Mendicino, Caterina
  2. A reassessment of monetary policy surprises and high-frequency identification By Bauer, Michael D.; Swanson, Eric T.
  3. CBDC as Competitor for Bank Deposits and Cryptocurrencies By Max Fuchs
  4. The cost of disinflation in a small open economy vis-à-vis a closed economy By Faryna, Oleksandr; Jonsson, Magnus; Shapovalenko, Nadiia
  5. Inflation Targeting or Fiscal Activism? By Billi, Roberto M.
  6. Money markets and bank lending: evidence from the adoption of tiering By Altavilla, Carlo; Boucinha, Miguel; Burlon, Lorenzo; Giannetti, Mariassunta; Schumacher, Julian
  7. Climate Actions, Market Beliefs and Monetary Policy By Barbara Annicchiarico; Fabio Di Dio; Francesca Diluiso
  8. Emerging Markets: Prospects and Challenges By Mr. Vladimir Klyuev; Leandro Medina; Dmitry Plotnikov; Tryggvi Gudmundsson; Mr. Boaz Nandwa; Francisco Schiffrer; Di Yang
  9. Domestic and External Monetary Policy Shocks and Economic Inequality in the Republic of Korea By Hahm, Joon-Ho; Lee, Dong Jin; Park, Cyn-Young
  10. Exchange Rate Pass-through Under the Unconventional Monetary Policy Regime By YOSHIDA Yushi; Weiyang ZHAI; SASAKI Yuri; Siyu ZHANG
  11. Forward guidance shocks By Mirela Miescu
  12. Revisiting the Properties of Money By Hull, Isaiah; Sattath, Or
  13. The Impacts of Financial Crises on the Trilemma Configurations By Joshua AIZENMAN; Menzie CHINN; ITO Hiroyuki
  14. Seemingly Irresponsible but Welfare Improving Fiscal Policy at the Lower Bound By Billi , Roberto M.; Walsh, Carl E.
  15. Banks' strategic interaction, adverse price dynamics and systemic liquidity risk By Krüger, Ulrich; Roling, Christoph; Silbermann, Leonid; Wong, Lui Hsian
  16. Fix vs. Float: Evaluating the Transition to a Sustainable Equilibrium in Bolivia By Mr. Etibar Jafarov; Andres Gonzalez; Chris Walker; Diego Rodriguez Guzman

  1. By: Laeven, Luc; Maddaloni, Angela; Mendicino, Caterina
    Abstract: Recent research developed under the ECB research task force on Monetary Policy, Macroprudential Policy and Financial Stability highlights the existence of trade-offs and spillovers that monetary policy and macroprudential authorities face when deciding on their policy interventions. Monetary policy measures are key to support the supply of credit to the economy, but they could also have unintended consequences on financial stability risks. Macroprudential policies are instead effective in limiting financial stability risks, but they could also reduce the length of economic expansions by preventing credit from flowing to productive economic activities. In addition, since monetary and macroprudential policies transmit to the broad economy via the financial system, they unavoidably affect each other’s effectiveness. Taking these factors into account is key for the design and implementation of both policies. JEL Classification: E3, E44, G01, G21
    Keywords: financial frictions, policy trade-offs, risk taking, systemic risk
    Date: 2022–02
  2. By: Bauer, Michael D.; Swanson, Eric T.
    Abstract: High-frequency changes in interest rates around FOMC announcements are an important tool for identifying the effects of monetary policy on asset prices and the macroeconomy. However, some recent studies have questioned both the exogeneity and the relevance of these monetary policy surprises as instruments, especially for estimating the macroeconomic effects of monetary policy shocks. For example, monetary policy surprises are correlated with macroeconomic and financial data that is publicly available prior to the FOMC announcement. We address these concerns in two ways: First, we expand the set of monetary policy announcements to include speeches by the Fed Chair, which essentially doubles the number and importance of announcements in our dataset. Second, we explain the predictability of the monetary policy surprises in terms of the "Fed response to news" channel of Bauer and Swanson (2021) and account for it by orthogonalizing the surprises with respect to macroeconomic and financial data. Our subsequent reassessment of the effects of monetary policy yields two key results: First, estimates of the high-frequency effects on financial markets are largely unchanged. Second, estimates of the macroeconomic effects of monetary policy are substantially larger and more significant than what most previous empirical studies have found.
    Keywords: FOMC,policy rule,monetary transmission,SVAR,external instruments
    JEL: E43 E52 E58
    Date: 2022
  3. By: Max Fuchs (University of Kassel)
    Abstract: Private cryptocurrencies allow for payments without the need for a financial institution. These institutions, the central bank and retail banks, may thus observe a decline in the demand for their payments systems, i.e. cash and deposits. Using the monetary search model of Lagos and Wright (2005), we show that the central bank is able to tilt the playing field until it wins. By introducing an interest-bearing central bank digital currency (CBDC), the central bank is able to provide a payment system which is superior to cryptocurrencies. Miners cannot match the CBDC rate and go bankrupt. Retail banks, on the other hand, face lower profits but survive in the equilibrium. In addition, it can be welfare-improving to kick out cryptocurrencies by an interest-bearing CBDC.
    Keywords: CBDC, cryptocurrencies, welfare analysis
    JEL: E41 E42 E51 E52 E58
    Date: 2022
  4. By: Faryna, Oleksandr (National Bank of Ukraine and National University of Kyiv-Mohyla Academy); Jonsson, Magnus (Monetary Policy Department, Central Bank of Sweden); Shapovalenko, Nadiia (National Bank of Ukraine)
    Abstract: We use a standard new Keynesian model to evaluate the cost of disinflation – measured by the sacrifice ratio, the central bank’s loss function, and the welfare cost – in a small open economy vis-à-vis a closed economy. Disinflation is either more costly or less beneficial in the small open economy, but the results vary quantitatively depending on the measure and the economic environment. Optimised simple monetary policy rules imply that the relative weight on inflation stabilisation should be lower in the small open economy if the central bank minimises the loss function, but higher if it maximises welfare.
    Keywords: Disinflation; sacrifice ratio; central bank’s loss function; welfare cost; small open economy; new Keynesian model; optimised rules; imperfect credibility
    JEL: E31 E50 F41
    Date: 2021–11–01
  5. By: Billi, Roberto M. (Research Department, Central Bank of Sweden)
    Abstract: I study the welfare performance of a policy regime of fiscal activism in which fiscal policy acts as an automatic stabilizer and controls inflation, while monetary policy pegs the nominal interest rate. When evaluated through the lens of a standard New Keynesian model, accounting for price and wage rigidities and for a zero lower bound (ZLB) on the nominal interest rate, fiscal activism can substantially outperform inflation targeting in the face of both demand shocks and technology shocks. Fiscal activism can also eliminate the occurrence of ZLB episodes.
    Keywords: automatic stabilizers; Öscal and monetary interactions; government debt
    JEL: E24 E31 E52 E63
    Date: 2022–03–01
  6. By: Altavilla, Carlo; Boucinha, Miguel; Burlon, Lorenzo; Giannetti, Mariassunta; Schumacher, Julian
    Abstract: Exploiting the introduction of the ECB’s tiering system for remunerating excess reserve holdings, we document the importance of access to the money market for bank lending. We show that the two-tier system produced positive wealth effects for banks with excess reserves and encouraged a reallocation of liquidity toward banks with unused exemptions. This ultimately decreased the fragmentation in the money market and enhanced the monetary policy transmission mechanism. The increased access to money market by banks with unused allowances incentivizes them to extend more credit than other banks, including banks with excess liquidity whose valuations increase the most. JEL Classification: G2, E5
    Keywords: bank lending, Money market, negative interest rate policy
    Date: 2022–02
  7. By: Barbara Annicchiarico (DEF and CEIS, Università di Roma "Tor Vergata"); Fabio Di Dio (Institute for Globally Distributed Open Research and Education (IGDORE)); Francesca Diluiso (Mercator Research Institute on Global Commons and Climate Change)
    Abstract: This paper studies the role of expectations and monetary policy on the economy’s response to climate actions. We show that in a stochastic environment and without the standard assumption of perfect rationality of agents, there is more uncertainty regarding the path and the economic impact of a climate policy, with a potential threat to the ability of central banks to maintain price stability. Market beliefs and behavioral agents increase the trade-offs inherent to the chosen mitigation tool, with a carbon tax entailing more emissions uncertainty than in a rational expectations model and a cap-and-trade scheme implying a more pronounced pressure on allowances prices and inflation. The impact on price stability is worsened by delays in the implementation of stringent climate policies, by the lack of confidence in the ability of central banks to keep inflation under control, and by the adoption of monetary rules tied to expectations rather than current macroeconomic conditions. Central banks can implement successful stabilization policies that reduce the uncertainty surrounding the impact of climate actions and support the greening process while staying within their mandate.
    Keywords: Climate policy; monetary policy; expectations; inflation; market sentiments; business cycle.
    JEL: D83 Q50 E32 E71
    Date: 2022–03–25
  8. By: Mr. Vladimir Klyuev; Leandro Medina; Dmitry Plotnikov; Tryggvi Gudmundsson; Mr. Boaz Nandwa; Francisco Schiffrer; Di Yang
    Abstract: This article documents recent developments in emerging markets in the context of the COVID-19 pandemic, assesses their prospects and challenges, and discusses appropriate policy settings for the medium term. It argues that EM policymakers’ ability to grapple with an incomplete and uneven recovery will be constrained by high public debt and uncertain inflation prospects as well as external risks surrounding capital flows and exchange rate developments. The paper also discusses potential impact of a tightening in global financial conditions and appreciation of the US dollar that could be triggered by a general increase in risk aversion or a reassessment of the likely path of US monetary policy.
    Keywords: Emerging markets, COVID-19, Monetary Policy
    Date: 2022–02–18
  9. By: Hahm, Joon-Ho (Yonsei University); Lee, Dong Jin (Sangmyung University); Park, Cyn-Young (Asian Development Bank)
    Abstract: This paper investigates the effects of monetary policy shocks on income and wealth inequalities in the Republic of Korea. Using the detailed Household Income and Expenditure Survey and Korean Labor and Income Panel Study data, we construct measures of income and wealth inequality for the Korean economy. Empirical results show that both domestic and external monetary policy shocks exert significant countercyclical effects on income inequality. For wealth inequality, however, the effects are very different. Whereas domestic monetary policy shocks are insignificant, external policy shocks proxied by fluctuations in net capital flows seem to have significant effects on net wealth inequality.
    Keywords: monetary policy; income inequality; wealth inequality; external monetary policy shock; emerging market economies
    JEL: D31 E44 E52 F42 G51
    Date: 2022–04–01
  10. By: YOSHIDA Yushi; Weiyang ZHAI; SASAKI Yuri; Siyu ZHANG
    Abstract: We apply the structural VAR model to Japan under the unconventional monetary policy regime, 2000Q1 and 2019Q4. In addition to the traditional sign restrictions, we impose narrative sign restrictions based on five phenomenal economic episodes. Estimated exchange rate pass-through induced by monetary policy shock or exogenous exchange rate shock is consistent with the conventional view, i.e., a Japanese yen depreciation induces inflation at the consumer level. On the other hand, we found evidence of perverse exchange rate pass-through induced by demand shock. A ten percent exchange rate depreciation driven by weak domestic demand is associated with a one percent deflation at the consumer level. The magnitude of the latter effect is greater than the former. This demand-shock-induced exchange rate pass-through effect may have undermined the continuous efforts of the Bank of Japan to achieve the target of a two percent inflation rate.
    Date: 2022–03
  11. By: Mirela Miescu
    Abstract: I estimate the effects of a forward guidance (FG) shock and compare it with a traditional monetary policy (MP) shock. I find that FG shocks have smaller effects on macroeconomic aggregates than MP shocks. Structural identification is reached by a novel heteroscedascticity-based approach that exploits (i) the introduction of the forward guidance in the form of a published policy-rate path in the US in January 2012; and (ii) the zero lower bound (ZLB) constraints. My findings are consistent with the predictions of the latest theories about the FG puzzle.
    Keywords: forward guidance, Monetary policy, event study, heteroscedasticity, structural VAR
    JEL: E52 E32 C32
    Date: 2022
  12. By: Hull, Isaiah (Research Department, Central Bank of Sweden); Sattath, Or (Department of Computer Science)
    Abstract: The properties of money commonly referenced in the economics literature were originally identified by Jevons (1876) and Menger (1892) in the late 1800s and were intended to describe physical currencies, such as commodity money, metallic coins, and paper bills. In the digital era, many non-physical currencies have either entered circulation or are under development, including demand deposits, cryptocurrencies, stablecoins, central bank digital currencies (CBDCs), in-game currencies, and quantum money. These forms of money have novel properties that have not been studied extensively within the economics literature, but may be important determinants of the monetary equilibrium that emerges in forthcoming era of heightened currency competition. This paper makes the first exhaustive attempt to identify and define the properties of all physical and digital forms of money. It reviews both the economics and computer science literatures and categorizes properties within an expanded version of the original functions-and-properties framework of money that includes societal and regulatory objectives.
    Keywords: Money; CBDC; Digital Currencies; Quantum Money; Currency Competition
    JEL: E40 E42 E50 E51
    Date: 2021–11–01
  13. By: Joshua AIZENMAN; Menzie CHINN; ITO Hiroyuki
    Abstract: Over the years, policymakers have explored various combinations of varying degrees of monetary policy independence, exchange rate stability, and financial openness, while recognizing that not all three policies can be achieved to the fullest extent – this is known as the "monetary trilemma" hypothesis. In recent years, holding international reserves (IR) has become an important policy instrument as a buffer or insurance against liquidity shortages. Significant and fundamental economic events such as currency crises have often changed the policy mix. In this paper, we find that countries' policy mixes have been diverse and have varied over time from the perspective of both the monetary trilemma and IR holdings. We then illustrate how the combination of the three trilemma policies and IR holding drastically changed before and after the Asian Financial Crisis (AFC). However, the Global Financial Crisis (GFC) did not lead to a drastic change in the policy arrangements. We find that countries that faced large terms of trade shocks or negative economic growth during the crisis increase IR holding in the post-AFC. Countries that had negative growth during the crisis also tend to pursue more exchange rate flexibility and more open financial markets. This characteristic is true for commodity exporters, but not for manufacturing exporters. Countries with large current account deficits (i.e., "large capital borrowers") tended to be more sensitive to economic growth at the time of the AFC. Countries that are under IMF stabilization programs or those with sovereign wealth funds tend to hold more IR. These characteristics were not found in the aftermath of the GFC. In general, countries increased their IR holdings after the GFC, but did not respond to the during-crisis economic and institutional conditions.
    Date: 2022–03
  14. By: Billi , Roberto M. (Research Department, Central Bank of Sweden); Walsh, Carl E. (University of California, Santa Cruz)
    Abstract: In this paper, we evaluate the consequences of super-active Öscal policy rulesó that is, rules that call for tax cuts and/or spending increases as the governmentís debt level risesó in a standard New Keynesian model subject to an occasionally-binding zero lower bound on the monetary policy interest rate. We show that such seemingly irresponsible, debt-Önanced Öscal stimulus at the ZLB, unbacked by any promise of future tax increases or spending cuts, not only improves economic stability by acting as an automatic stabilizer, but also, somewhat paradoxically, reduces government debt accumulation. When evaluated using a model-consistent measure of welfare, Öscal rules calibrated to the U.S. response during both the Great Recession and COVID recession, combined with a weak monetary policy response to ináation, outperform a monetary policy that responds strongly to ináation and reduce the frequency of episodes at the ZLB.
    Keywords: automatic stabilizers; Öscal and monetary interactions; government debt
    JEL: E31 E52 E63
    Date: 2022–02–01
  15. By: Krüger, Ulrich; Roling, Christoph; Silbermann, Leonid; Wong, Lui Hsian
    Abstract: In this paper we introduce two measures, the Systemic Liquidity Buffer (SLB) and the Systemic Liquidity Shortfall (SLS) to assess liquidity in the banking system. The SLB takes an aggregated perspective on liquidity risks in the banking system. In contrast, the SLS focusses on the problematic banks which suffer a liquidity shortfall. These measures provide an add-on to regulatory liquidity measures such as the LCR because they better incorporate a systemic perspective: (1) They model the impact of a funding shock by valuing assets at depressed market prices, (2) Doing so, they explicitly incorporate banks' strategic responses to a market undergoing sharp price declines. We test our approach using several applications capturing both a short (5 days) and a medium-term (30 days) stress scenario, a sudden rise in interest rates, the impact of banks' US dollar business and the recent COVID-19 crisis.
    Keywords: Systemic liquidity risk,market liquidity,funding liquidity,contagion,fire sales
    JEL: C63 G01 G17 G21 G28
    Date: 2022
  16. By: Mr. Etibar Jafarov; Andres Gonzalez; Chris Walker; Diego Rodriguez Guzman
    Abstract: Bolivia has achieved noteworthy success over the past 15 years in raising incomes, reducing poverty, and maintaining macroeconomic stability by deploying commodity revenues to finance transfers, public investment, and state-led development, using an exchange rate peg as a policy anchor. However, with the end of the commodity boom in 2014, fiscal deficits have grown and reserves have fallen. One route to restoring long-run sustainability would be to combine fiscal consolidation with a switch to a floating exchange rate. However, a preference for maintaining the peg could be accommodated with adjustments elsewhere in the policy framework. Employing a detailed dynamic stochastic general equilibrium model of the Bolivian economy, this study assesses the long-run sustainability and relative benefits of alternative policy combinations, and calculates optimal adjustment paths for the transition from the present situation to the steady state. It concludes that continued adherence to a fixed-rate regime, while not optimal, is feasible, if supported by a larger fiscal effort.
    Keywords: Bolivia, inflation target, fixed exchange rate, speculative attack, transition path, linear time iteration, time consistency.
    Date: 2022–02–25

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