nep-cba New Economics Papers
on Central Banking
Issue of 2022‒05‒23
twelve papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Exploring the Role of Exchange Rate in Inflation Targeting: Evidence from Thailand By Pongsak Luangaram; Nipit Wongpunya
  2. Monetary Policy and the Financial Cycle: International Evidence By Jaromir Baxa; Jan Zacek
  3. More Than Words: Fed Chairs’ Communication During Congressional Testimonies By Michelle Alexopoulos; Xinfen Han; Oleksiy Kryvtsov; Xu Zhang
  4. Systematic Monetary Policy in a SVAR for Australia By Lance A. Fisher; Hyeon-seung Huh
  5. THE EFFECTS OF THE ECB COMMUNICATIONS ON FINANCIAL MARKETS BEFORE AND DURING COVID-19 PANDEMICAbstract:The paper aims to estimate the effects of the European Central Bank communications on the sectoral returns of STOXX Europe 600 from 2013 to 2021. Previous literature has investigated the effects of communications of central banks and checked their effects on macroeconomics and financial data. New opportunities offered by text mining analysis allow us to find new insights into these aspects. However, studies focusing on how text mining indices derived from central banks’ communications can affect different financial sectors are more limited. In this paper, we use different sentiment and topic indices derived from the European Central Bank’s speeches. The paper shows how these different topics and sentiment indices affect the returns on different financial sectors. Our results indicate that the topic of communications is more influential on returns of sectoral indices than the type of communications. Moreover, we find that monetary policy and financial stability topics are the most relevant. We also find that during the COVID-19 time, the number of negative speeches is relevant for almost all the sectoral index returns. By Luca Alfieri; Mustafa Hakan Eratalay; Darya Lapitskaya; Rajesh Sharma
  6. Causal coupling between European and UK markets triggered by announcements of monetary policy decisions By Volta, Vittoria; Aste, Tomaso
  7. Voluntary Equity, Project Risk, and Capital Requirements By Andreas Haufler; Christoph Lülfesmann
  8. The cost of excess reserves and inflation in the United States during the last century By Pavon-Prado, David
  9. Turning in the widening gyre: monetary and fiscal policy in interwar Britain By Ronicle, David
  10. United Kingdom: Financial Sector Assessment Program-Select Issues in Systemic Risk Oversight and Macroprudential Policy By International Monetary Fund
  11. The Impacts of the Dollar-Renminbi Exchange Rate Misalignment on the China-United States Commodity Trade: An Asymmetric Analysis By Sabrine Ferjani; Sami Saafi; Ridha Nouira; Christophe Rault
  12. US Sanctions Reinforce the Dollar’s Dominance By Michael P. Dooley; David Folkerts-Landau; Peter M. Garber

  1. By: Pongsak Luangaram; Nipit Wongpunya
    Abstract: This paper develops a small-scale, structural general equilibrium model for the Thai economy. Using Bayesian estimation, we evaluate the conduct of monetary policy under inflation targeting regime. Specifically, we focus on three main issues. First, we investigate whether exchange rate movements are incorporated in the monetary policy formulation. Second, we conduct welfare evaluation under alternative monetary policy settings. Third, we explore how the varying degree of openness could affect the transmission mechanism. Using data over the past 20 years, we find that the Bank of Thailand adjusted policy interest rate in response to exchange rate movements and this helped to reduce both output and inflation fluctuations from global shocks and improves welfare. While higher degree of openness is found to flatten the slope of the Phillips curve, it does not necessarily reduce monetary policy effectiveness. This is because openness also affects the policy coefficients in the central bank’s endogenous reaction function.
    Keywords: Small open economy models; Monetary policy rules; Exchange rates; Bayesian analysis; Thai economy
    JEL: C32 E52 F41
    Date: 2022–05
  2. By: Jaromir Baxa; Jan Zacek
    Abstract: We evaluate to what extent inflation-targeting central banks appear to have used their interest rate policies to respond to financial imbalances beyond the reaction via the conventional Taylor-rule variables. First, we use the multivariate structural time series model to extract financial cycles for Australia, Canada, Japan, New Zealand, Sweden, the United Kingdom, and the United States. We then estimate time-varying monetary policy reaction functions extended for the financial cycle. We interpret the responses to the financial cycle as attempts to lean against the wind of financial imbalances. The historical decompositions of interest rates reveal that most central banks raised interest rates in response to asset prices and credit booms in the past, including in the years preceding the global financial crisis. The interest rate response to financial cycles is more pronounced with ex-post than with pseudo real-time data. Finally, we document that the financial crisis of 2008 had less of an impact on credit and real housing prices in countries where the interest rate responses to financial cycles were accompanied by macroprudential measures.
    Keywords: Financial cycle, model-based filters, monetary policy, reaction functions
    JEL: C32 E32 E40 E44 E52
    Date: 2022–04
  3. By: Michelle Alexopoulos; Xinfen Han; Oleksiy Kryvtsov; Xu Zhang
    Abstract: We measure soft information contained in the congressional testimonies of U.S. Federal Reserve Chairs and analyze its effect on financial markets. Our measures of Fed Chairs’ emotions expressed in words, voice and facial expressions are created using machine learning. Increases in the Chair’s text-, voice-, or face-emotion indices during these testimonies generally raise the SandP500 index and lower the VIX—indicating that these cues help shape market responses to Fed communications. These effects add up and propagate after the testimony, reaching magnitudes comparable to those after a policy rate cut. Markets respond most to the Chair’s emotions expressed about issues related to monetary policy.
    Keywords: Central bank research; Financial markets; Monetary policy communications
    JEL: E52 E58 E71
    Date: 2022–05
  4. By: Lance A. Fisher (Macquarie University); Hyeon-seung Huh (Yonsei Univ)
    Abstract: A SVAR is estimated over the period of conventional monetary policy in Australia. The monetary policy shock is identified by imposing sign restrictions on the coefficients in the structural equation for the cash rate. There is very high posterior probability on structural models which imply a fall in output and prices, in response to a contractionary monetary policy shock, though the posterior probability of a price puzzle is somewhat higher than for other puzzles. The posterior median estimate of the systematic response of the cash rate to inflation increases noticeably when a price puzzle is ruled out.
    Keywords: monetary policy shocks, structural equations, puzzles, identified set of responses
    JEL: C30 C51 E52
    Date: 2022–05
  5. By: Luca Alfieri; Mustafa Hakan Eratalay; Darya Lapitskaya; Rajesh Sharma
    Keywords: Monetary policy, Central banking, Text mining, COVID-19
    Date: 2022
  6. By: Volta, Vittoria; Aste, Tomaso
    Abstract: We investigate high-frequency reactions in the Eurozone stock market and the UK stock market during the time period surrounding European Central Bank (ECB) and the Bank of England (BoE)’s interest rate decisions, assessing how these two markets react and co-move influencing each other. The effects are quantified by measuring linear and nonlinear transfer entropy combined with a bivariate empirical mode decomposition from a dataset of 1 min prices for the Euro Stoxx 50 and the FTSE 100 stock indices. We uncover that central banks’ interest rate decisions induce an upsurge in intraday volatility that is more pronounced on ECB announcement days and there is a significant information flow between the markets with prevalent direction going from the market where the announcement is made towards the other.
    Keywords: markets; transfer entropy; risk spillover; causality; ES/K002309/1; (EP/P031730/1); H2020-ICT-2018-2 825215
    JEL: F3 G3
    Date: 2022–03–30
  7. By: Andreas Haufler; Christoph Lülfesmann
    Abstract: We introduce a model of the banking sector that formally incorporate a buffer function of capital. Heterogeneous banks choose their portfolio risk, bank size, and capital holdings. Banks voluntarily hold equity when the buffer effect against the risk of default outweighs the cost advantages of debt financing. In the optimum, banks with lower monitoring costs are larger, choose riskier portfolios, and have less equity. Binding capital requirements or levies on bank borrowing are shown to make higher-risk portfolios more attractive. Accounting for banks’ interior capital choices can thus explain why higher capital ratios incentivize banks to undertake riskier projects.
    Keywords: voluntary equity, capital requirements, bank heterogeneity
    JEL: G28 G38 H32
    Date: 2022
  8. By: Pavon-Prado, David
    Abstract: This paper proposes another factor explaining why the American banking sector accumulates reserves (the reserves-cost mechanism) and its consequences mainly on inflation (reserves-cost channel). The mechanism claims that when banks are holding reserves more expensive than those available in the market, they obtain new reserves and accumulate those unused. In addition, the cost of the sources from where banks obtain their reserves determines banks’ decisions about the loans rate. This originates the reserves-cost channel, whereby banks’ decisions about the loans rate modify the impact of Fed’s policies on final targets such as inflation. I test the validity of the mechanism and channel estimating an SVAR for the period 1922-2020. The results confirm both hypothesis and show that when banks set a loans rate lower in relation to the short-term rate of reference, there is higher demand for credit, output and inflation levels.
    Keywords: monetary policy, Federal Reserve, SVARs, excess reserves, reserves cost
    JEL: E4 E5
    Date: 2022–04–28
  9. By: Ronicle, David (Bank of England and International Monetary Fund)
    Abstract: This paper brings together modern empirical techniques, a sign-restricted structural vector autoregression, with contemporary high frequency data to answer an old question – what role did macroeconomic policy play in Britain’s high unemployment and deflation in the years 1919 to 1938. Its specific innovation is to draw on a previously little-used weekly publication of public finance statistics, allowing the roles of taxation, public spending and monetary policy to be assessed side-by-side in a coherent framework. In a period of particularly unsettled policy the paper finds that policy shocks, both monetary and fiscal, made a material contribution to variation in prices and unemployment – and these played a central role in the two great recessions of the period, modern Britain’s most severe. Other policy choices could have delivered better outcomes for prices and unemployment – but these would have required making different choices in the face of conflicting objectives and some sharp trade-offs.
    Keywords: Monetary policy; fiscal Policy; economic history; Great Depression
    JEL: E52 E62 N14
    Date: 2022–04–13
  10. By: International Monetary Fund
    Abstract: The United Kingdom’s macroprudential policy framework has proven its effectiveness. After the Global Financial Crisis (GFC) of 2007–09, the United Kingdom assigned the Bank of England (BOE) a clear financial stability mandate, created a new Financial Policy Committee (FPC) to set macroprudential policy, and shifted to a “twin peaks” model of financial oversight. The 2016 Financial Sector Assessment Program (FSAP) concluded that the new framework appeared appropriate for effectively conducting macroprudential policy. However, the framework was then relatively new. The 2021 FSAP represents an opportunity to review its performance in building systemic resilience through the financial cycle, including the market volatility resulting from the Brexit vote and the COVID-19 pandemic.
    Keywords: FPC mortgage market Recommendations; housing price development; mortgage market; FPC member; policy measure; policy action; affordability stress test; Financial sector stability; Systemic risk; Stress testing; Countercyclical capital buffers; Financial sector risk; Global
    Date: 2022–04–08
  11. By: Sabrine Ferjani; Sami Saafi; Ridha Nouira; Christophe Rault
    Abstract: Contrary to most existing studies of the literature that assumed that the effects of real exchange rate (RE) misalignment on trade flows are symmetric, this paper considers a more general and realistic framework allowing for possible asymmetric effects. We use monthly time-series data over the January 2002-October 2020 period from 66 two-digit industries that trade between China and the U.S. in order to avoid the well-known aggregation bias. Estimates of symmetric error-correction models (ECM) revealed that real dollar-renminbi rate misalignment has short-run effects on 35 U.S. exporting and 53 U.S. importing industries. These short-run effects translated into the long run in 18 and 17 industries, respectively. The numbers increased considerably when estimating asymmetric ECM. Indeed, short-run asymmetric effects were then found in 47 U.S. exporting and 62 U.S. importing industries, which translated into long-run asymmetric effects in 20 U.S. exporting and 21 U.S. importing industries. Our analysis highlights the importance of separating currency overvaluation from currency undervaluation in assessing the effects of the RE misalignment on trade flows between the U.S. and China and confirms that the impacts are industry specific. Our findings (robust to possible structural breaks) are useful for trading industries, and policymakers, and advocate accounting for asymmetries when examining the RE misalignment-trade flows nexus.
    Keywords: asymmetry, nonlinear ARDL, exchange rate misalignment, commodity trade, China, the United States
    JEL: F14 F31 C10
    Date: 2022
  12. By: Michael P. Dooley; David Folkerts-Landau; Peter M. Garber
    Abstract: Recent sanctions on the use of Russia’s international reserve assets seem likely to reduce the appeal of US dollar reserves as a “shock absorber” for international payments. But international reserves are also a means to reassure foreign investors that problematic countries will not confiscate their investments. The “collateral” motive for holding dollar reserves has been enhanced by the demonstration that the United States is willing and able to sanction misbehavior. Geopolitically risky countries now more than ever need to reassure foreign investors that their investments are safe from expropriation. We conclude that recent events will strengthen the role of the dollar as the key international reserve currency.
    JEL: F3 F33 F51
    Date: 2022–04

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