nep-cba New Economics Papers
on Central Banking
Issue of 2022‒05‒09
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Central Bank Communication with the General Public: Promise or False Hope? By Alan S. Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
  3. Measuring Shocks to Central Bank Independence using Legal Rulings By Stefan Griller; Florian Huber; Michael Pfarrhofer
  4. Are all Central Bank Asset Purchases the Same? Different Rationales, Different Effects By Christophe Blot; Caroline Bozou; Jérôme Creel; Paul Hubert
  5. The accountability gap: deliberation on monetary policy in Britain and America during the financial crisis By Schonhardt-Bailey, Cheryl; Dann, Christopher; Chapman, Jacob
  6. Retail Central Bank Digital Currencies (CBDC), Disintermediation and Financial Privacy: The Case of the Bahamian Sand Dollar By Kilian Wenker
  7. The Effects of Conventional and Unconventional Monetary Policy Shocks on US REITs Moments: Evidence from VARs with Functional Shocks By Shixuan Wang; Rangan Gupta; Matteo Bonato; Oguzhan Cepni
  8. The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences By Lena Dräger; Michael J. Lamla; Damjan Pfajfar; Lena Dräger
  9. How Do Banks Respond to Capital Regulation? — The Impact of the Basel III Reforms in the United States By Nicholas Fritsch; Jan-Peter Siedlarek
  10. When the United States and the People’s Republic of China Sneeze: International Real and Financial Spillovers in Asia By Beirne, John; Renzhi, Nuobu; Volz, Ulrich
  11. Macroeconomic Drivers and the Pricing of Uncertainty, Inflation, and Bonds By Brandyn Bok; Thomas M. Mertens; John C. Williams
  12. Nonlinearities in the Exchange Rate Pass-Through: The Role of Inflation Expectations By Christina Anderl; Guglielmo Maria Caporale
  13. Fiscal support and monetary vigilance: Economic policy implications of the Russia-Ukraine war for the European Union By Olivier J Blanchard; Jean Pisani-Ferry
  14. Reinforcement Learning Policy Recommendation for Interbank Network Stability By Alessio Brini; Gabriele Tedeschi; Daniele Tantari
  15. Squaring the circle: How to guarantee fiscal space and debt sustainability with a European Debt Agency By Massimo Amato; Francesco Saraceno
  16. Anchored or Not: How Much Information Does 21st Century Data Contain on Inflation Dynamics? By Michael T. Kiley

  1. By: Alan S. Blinder (Princeton University); Michael Ehrmann (European Central Bank); Jakob de Haan (University of Groningen); David-Jan Jansen (De Nederlandsche Bank)
    Abstract: Central banks are increasingly reaching out to the general public to motivate and explain their monetary policy actions. One major aim of this outreach is to guide inflation expectations; another is to ensure accountability and create trust. This article surveys a rapidly-growing literature on central bank communication with the public. We first discuss why and how such communication is more challenging than communicating with expert audiences. Then we survey the empirical evidence on the extent to which this new outreach does in fact affect inflation expectations and trust. On balance, we see some promise in the potential to inform the public better, but many challenges along the way.
    Keywords: Banks, Monetary Policy
    JEL: D12 D84 E52 E58 G53
    Date: 2022–03
  2. By: Emna Trabelsi (Unité de Recherche d'Analyses Quantitatives Appliquées - Université de Tunis)
    Abstract: In recent literature, there is a focus on the macroeconomic effects of macroprudential policy instruments. The innovation of this paper is to study the effects of transparent macroprudential policies on price stability. Our results provide the first empirical evidence that macroprudential transparency can aid to achieve stable inflation in emerging and developing countries. The effect is necessarily transmitted through the reduction of the occurrence of banking crisis. We also record a particular advantage of macroprudential transparency for non-inflation targeting countries. Overall, our results are robust to the use of two proxies of price stability.
    Keywords: macroprudential transparency,price stability,banking crisis,dynamic panel,mediation,bootstrapping
    Date: 2021–03–31
  3. By: Stefan Griller; Florian Huber; Michael Pfarrhofer
    Abstract: We investigate the consequences of legal rulings on the conduct of monetary policy. Several unconventional monetary policy measures of the European Central Bank have come under scrutiny before national courts and the European Court of Justice. These lawsuits have the potential to severely impact the scope and flexibility of central bank policies, and central bank independence in a wide sense, with important consequences for the real and financial economy. Since the number of relevant legal challenges is small, we develop an econometric approach that searches for minimum variance regimes which we use to isolate and measure the effects of these events. Our results suggest that legal rulings addressing central bank policies have a powerful effect on financial markets. Expansionary shocks ease financial conditions along various dimensions, and inflation swap reactions suggest inflationary pressures with stronger effects in the short term.
    Date: 2022–02
  4. By: Christophe Blot (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Caroline Bozou (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Paul Hubert (Observatoire Français des Conjonctures Economiques - Centre de recherche de la fondation nationale des sciences politiques, Banque de France - Banque de France - Banque de France)
    Abstract: Does policymakers' rationale for a given policy influence the impact of this policy? To answer this question, we exploit the unique setting provided by ECB asset purchase programs. PSPP and PEPP policies consist in purchases of essentially identical assets, but their objectives differ. The PSPP aimed to reduce deflationary risks, while the PEPP was announced in response to the pandemic-driven economic crisis to alleviate sovereign risks. We assess the effects of both policies on both objectives. We find that the PSPP positively affects inflation swaps while the PEPP negatively impacts sovereign spreads but much less evidence of the opposite pattern.
    Keywords: Monetary policy,Asset prices,Central bank communication,Central bank reaction function,Intermediate objectives
    Date: 2021–12
  5. By: Schonhardt-Bailey, Cheryl; Dann, Christopher; Chapman, Jacob
    Abstract: We employ multiple methods to gauge empirically the quality of the deliberative process whereby central bankers are held to account for their policy decisions. We use quantitative text analysis on the monetary policy legislative oversight hearing transcripts in the UK and US during the financial crisis. We find that the UK performs significantly better than the US in holding the central bank head to account on monetary policy, namely by engaging in a reciprocal dialogue between the legislative committee and the central banker. We then manually code selected exchanges from these transcripts, according to four criteria of deliberation: partisanship, accountability, narrative and response quality. We find that British MPs invoke almost no partisan rhetoric and target their questions more to relevant aspects of monetary policy; by comparison, their American counterparts seek to appeal more to their constituents and tend to veer away from discussing the details of monetary policy.
    JEL: N0
    Date: 2022–03–21
  6. By: Kilian Wenker
    Abstract: The fast-growing, market-driven demand for cryptocurrencies worries central banks, as their monetary policy could be completely undermined. Central bank digital currencies (CBDCs) could offer a solution, yet our understanding of their design and consequences is in its infancy. This non-technical paper examines how The Bahamas has designed the Sand Dollar, the first real-world instance of a retail CBDC. It contrasts the Sand Dollar with definition-based specifications. I then develop a scenario analysis to illustrate commercial bank risks. In this process, the central bank becomes a deposit monopolist, leading to high funding risks, disintermediation risks, and solvency risks for the com-mercial banking sector. I argue that restrictions and caps will be the new specifications of a regulatory framework for CBDCs if disintermediation in the banking sector is to be prevented. I identify the anonymity of CBDCs as a comparative disadvantage that will affect their adoption. These findings provide insight into governance problems facing central banks, and coherently lead to the design of the Sand Dollar. I conclude by suggesting that combating cryptocurrencies is a task that cannot be solved by a CBDC.
    Date: 2022–04
  7. By: Shixuan Wang (Department of Economics, University of Reading, Reading, RG6 6EL, UK); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Matteo Bonato (Department of Economics and Econometrics, University of Johannesburg, Auckland Park, South Africa; IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France); Oguzhan Cepni (Copenhagen Business School, Department of Economics, Porcelaenshaven 16A, Frederiksberg DK-2000, Denmark; Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050, Ankara, Turkey)
    Abstract: We use a vector autoregressive model with functional shocks, capturing the shift of the entire term structure of interest rates on monetary policy announcement dates, to empirically evaluate the effects of conventional and unconventional monetary policy decisions on the Real Estate Investment Trusts (REITs) markets of the United States (US). Using 5-minute interval intraday data, we analyze not only the impact on REITs returns, but also its realized variance (RV), realized jumps (RJ), realized skewness (RSK), and realized kurtosis (RKU) over the daily period of September 2008 to June 2021. While the effects of conventional monetary policy shocks on the moments of REITs returns tend to conform with economic theories, the same is not necessarily the case with unconventional monetary policy shocks. In addition, though monetary policy shocks have the most persistent and strongest effects on RJ, the extreme behaviour of the REITs market is also observed through RSK and RKU. Moreover, when we look into 10 REITs sectors, there are indeed heterogeneity in terms of the strength of the effect, but not so much in terms of the sign of responses of the various moments compared to the overall market. Our results have important implications for REITs market participants, given its exponential growth as an asset class.
    Keywords: US REITs, Intraday Data, Higher-Moments, Conventional and Unconventional Monetary Policies, VAR with Functional Shocks
    JEL: C32 E43 E52 R3
    Date: 2022–04
  8. By: Lena Dräger; Michael J. Lamla; Damjan Pfajfar; Lena Dräger
    Abstract: Using a new consumer survey dataset, we show that macroeconomic preferences affect expectations and economic decisions through different channels. While household expectations are on average inversely related to preferences, households with the same inflation or interest rate expectations can differently assess whether the level of the corresponding variable is appropriate or too high/too low. This `hidden heterogeneity' in expectations is correlated with sociodemographic characteristics and affects durable spending and saving decisions. We also show that the variation in inflation preferences can be explained with risk preferences. Overall, this adds a new dimension to the definition of anchored expectations.
    Keywords: macroeconomic expectations, monetary policy perceptions, inflation and interest rate preferences, risk preferences, survey microdata
    JEL: E31 E52 E58 D84
    Date: 2022
  9. By: Nicholas Fritsch; Jan-Peter Siedlarek
    Abstract: Understanding banks’ responses to capital regulation is essential for regulators to use this key tool of modern banking regulation effectively. We study how and when US banks responded to changes to the way capital ratios are measured, changes that were introduced as part of the adoption of Basel III. We find that small banks — those below USD 10bn — responded neither before nor after the release of the new rules to the change in measured capital they experienced under the new rules. In contrast, we show that regional banks — those with total assets between USD 10bn and USD 50bn — adjusted their capital ratios to partially compensate for the changes resulting from the new rules: On average, if a bank’s capital ratio when measured under the new rules was lower than under the old rules, then the bank took steps to increase its capital ratio, compared to a bank whose capital ratio did not change with the new rules. This adjustment took place prior to the publication of the specific language applicable to US banks, suggesting that the changes were largely expected by that time. Both groups of banks responded in the periods following the release of the new US rules in relation to their exposure to mortgage servicing rights, suggesting that the severe treatment of this asset class was not expected. The bank responses we estimate take place well before the Basel III rules started to come into force after 2014, emphasizing the importance of policy announcements in shaping bank behavior.
    Keywords: bank regulation; bank capital; capital requirements
    JEL: G21 G28
    Date: 2022–04–20
  10. By: Beirne, John (Asian Development Bank Institute); Renzhi, Nuobu (Asian Development Bank Institute); Volz, Ulrich (Asian Development Bank Institute)
    Abstract: We examine real and financial spillovers from monetary policy shocks originating in the United States (US) and the People’s Republic of China (PRC) to advanced and emerging economies in Asia over the period 2000 to 2020. Using a structural panel vector autoregression approach, we find that Asian economies overall are more susceptible to spillovers to GDP, inflation, and the current account emanating from monetary policy shocks in the PRC than to those from the US. This is related to high inter-regional trade integration in Asia and is in line with previous research findings. However, while the prevailing literature has highlighted the dominant role of US monetary policy as a transmitter of shocks to global and Asian financial markets, we find more persistence in the response of advanced Asian interest rates to PRC monetary policy shocks. In addition, emerging Asian economies are found to be more susceptible to shocks emanating from the PRC in respect of equity markets and exchange rates. The rising synchronization of Asian financial markets in relation to the PRC as the financial account in the PRC has gradually opened as well as indirect effects via trade and regional value chains help to rationalize our findings.
    Keywords: monetary policy; global financial cycle; international spillovers; US; People’s Republic of China
    JEL: E44 E52 F33 F42
    Date: 2021–11
  11. By: Brandyn Bok; Thomas M. Mertens; John C. Williams
    Abstract: This paper analyzes a new stylized fact: The correlation between uncertainty shocks and changes in inflation expectations has declined and turned negative over the past quarter century. It rationalizes this fact within a standard New Keynesian model with a lower bound on interest rates combined with a decline in the natural rate of interest. With a lower natural rate, the likelihood of the lower bound binding increased and the effects of uncertainty on the economy became more pronounced. In such an environment, increases in uncertainty raise the possibility that the central bank will be unable to eliminate inflation shortfalls following negative demand shocks. As a result, the observed decline in the correlation between uncertainty and inflation expectations emerges. Average-inflation targeting policies can mitigate the longer-run effects of increases in uncertainty on the real economy.
    Keywords: interest; uncertainty; inflation; equilibrium; lower bound; shocks; liquidity
    JEL: E52
    Date: 2022–04–01
  12. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper investigates nonlinearities in the exchange rate pass-through (ERPT) to consumer and import prices by estimating a smooth transition regression model with different inflation expectations regimes for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) respectively over the period January 1993-August 2021. Both market and survey measures of inflation expectations are used as the transition variable, and the nonlinear model is also assessed against a benchmark linear model. The pass-through to both consumer and import prices is found to be stronger in the nonlinear model and in some cases is close to being complete. Also, it is stronger for import prices than for consumer prices. Both seem to be more responsive to exchange rate changes when market expectations of both consumers and producers are considered instead of expectations from consumer surveys only. Finally, inflation expectations appear to affect the ERPT more in inflation targeting countries.
    Keywords: exchange rate pass-through, smooth transition regression, nonlinearities, inflation expectations
    JEL: C22 F31 F41
    Date: 2022
  13. By: Olivier J Blanchard (Peterson Institute for International Economics); Jean Pisani-Ferry (Peterson Institute for International Economics)
    Abstract: The economic shock from the war in Ukraine is forcing Europe to face difficult policy choices, according to Olivier Blanchard and Jean Pisani-Ferry. Governments must decide how best to soften the blow of higher energy and food prices, and how much to rely on debt finance. The European Central Bank must decide how to balance the fight against inflation with the need to sustain aggregate demand, in the face of decreases in real income. The authors analyze the impact of the war on the European economy, discuss the pros and cons of policy options, and call for coherence in balancing sanctions, fiscal measures, and monetary policy. They argue for the use of transfers rather than across-the-board subsidies and point to the room for debt finance. They show the potential role of tripartite wage agreement and also argue that monetary policy can remain on its current trajectory but be ready to adjust.
    Date: 2022–04
  14. By: Alessio Brini; Gabriele Tedeschi; Daniele Tantari
    Abstract: In this paper we analyze the effect of a policy recommendation on the performances of an artificial interbank market. Financial institutions stipulate lending agreements following a public recommendation and their individual information. The former, modeled by a reinforcement learning optimal policy trying to maximize the long term fitness of the system, gathers information on the economic environment and directs economic actors to create credit relationships based on the optimal choice between a low interest rate or high liquidity supply. The latter, based on the agents' balance sheet, allows to determine the liquidity supply and interest rate that the banks optimally offer on the market. Based on the combination between the public and the private signal, financial institutions create or cut their credit connections over time via a preferential attachment evolving procedure able to generate a dynamic network. Our results show that the emergence of a core-periphery interbank network, combined with a certain level of homogeneity on the size of lenders and borrowers, are essential features to ensure the resilience of the system. Moreover, the reinforcement learning optimal policy recommendation plays a crucial role in mitigating systemic risk with respect to alternative policy instruments.
    Date: 2022–04
  15. By: Massimo Amato; Francesco Saraceno (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: This paper contributes to the debate on European macroeconomic governance. What is at stake is creating fiscal space for eurozone countries, while ensuring the sustainability of large public debts. Whether fiscal space is created through the reform of fiscal rules, the creation of a central fiscal capacity, or a mix of the two, the question of public debt management, past and future, is paramount. Here we discuss a proposal that aims at systematic debt management through an ad hoc European Debt Agency. This EDA would progressively absorb the Member States' debt, while keeping them accountable through pricing based on fundamental risk. We further show that (1) a Debt Agency could be designed so as not to imply debt mutualization or moral hazard and that (2) common debt management would allow the ECB to normalize monetary policy without creating instability in sovereign debt markets. An important argument of the paper is that any proposal that does not deal with the entirety of debt risks decreasing sustainability, and thus being counterproductive.
    Date: 2022–03–07
  16. By: Michael T. Kiley
    Abstract: Inflation was low and stable in the United States during the first two decades of the 21st century and broke out of its stable range in 2021. Experience in the early 21st century differed from that of the second half of the 20th century, when inflation showed persistent movements including the "Great Inflation" of the 1970s. This analysis examines the extent to which the experience from 2000-2019 should lead a Bayesian decisionmaker to update their assessment of inflation dynamics. Given a prior for inflation dynamics consistent with 1960-1999 data, a Bayesian decisionmaker would not update their view of inflation persistence in light of 2000-2019 data unless they placed very low weight on their prior information. In other words, 21st century data contains very little information to dissuade a Bayesian decisionmaker of the view that inflation fluctuations are persistent, or "unanchored" . The intuition for, and implications of, this finding are discussed.
    Keywords: Inflation; Phillips Curve; Econometric Modeling
    JEL: E31 C11 E50
    Date: 2022–03–30

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