nep-cba New Economics Papers
on Central Banking
Issue of 2022‒06‒20
29 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Is the Bank of Canada concerned about inflation or the state of the economy? By Ke Pang, Christos Shiamptanis
  2. Credibility and Explicit Inflation Targeting By Robert G. King; Yang K. Lu
  3. A tale of two global monetary policies By Agrippino, Silvia Miranda; Nenova, Tsvetelina
  4. Exchange Rate and Inflation under Weak Monetary Policy: Turkey Verifies Theory By Refet S. Gürkaynak; Burcin Kisacikoglu; Sang Seok Lee
  5. The Geographic Effects of Monetary Policy By Juan Herreno; Mathieu Pedemonte
  6. Monetary Policy and Household Loan Supply: Volume and Composition Effects By Győző Gyöngyösi; Steven Ongena; Ibolya Schindele
  7. Central bank swap lines: micro-level evidence By Ferrara, Gerardo; Mueller, Philippe; Viswanath-Natraj, Ganesh; Wang, Junxuan
  8. Lost in Negative Territory? Search for Yield! By Mattia Girotti; Guillaume Horny; Jean-Guillaume Sahuc
  9. A simple framework for analyzing the macroeconomic effects of inside money By Balázs Világi; Balázs Vonnák
  10. Labor Supply Shocks, Labor Force Entry, and Monetary Policy By Takushi Kurozumi; Willem Van Zandweghe
  11. Financial crises and shadow banks: A quantitative analysis By Rottner, Matthias
  12. Did Doubling Reserve Requirements Cause the 1937-38 Recession? New Evidence on the Impact of Reserve Requirements on Bank Reserve Demand and Lending By Charles W. Calomiris; Joseph R. Mason; David C. Wheelock
  13. How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers By Katya Kartashova; Xiaoqing Zhou
  14. International Monetary Spillovers to Frontier Financial Markets: Evidence from Bangladesh By Sardar, Rashedur; Schaffer, Matthew
  15. Capital requirements, market structure, and heterogeneous banks By Müller, Carola
  16. Identification with external instruments in structural VARs By Agrippino, Silvia Miranda; Ricco, Giovanni
  17. Evolution of the Exchange Rate Pass-Throught into Prices in Peru: An Empirical Application Using TVP-VAR-SV Models By Calero Roberto; Gabriel Rodríguez; Salcedo Cisnero Roberto
  18. Commodity price shocks and macroeconomic dynamics By Ruthira Naraidoo; Juan Paez-Farrell
  19. Unstable Coins: The Early History of Central Bank Analog Currencies By William Roberds
  20. Market Operations under the Three-Tier System- Explanation Using the Reserve Demand Curve Model - By Takuto Arao
  21. A basic macroeconomic agent-based model for analyzing monetary regime shifts By Florian Peters; Doris Neuberger; Oliver Reinhardt; Adelinde Uhrmacher
  22. Global Stagflation By Jongrim Ha; M. Ayhan Kose; Franziska Ohnsorge
  23. Heterogeneous effects and spillovers of macroprudential policy in an agent-based model of the UK housing market By Carro, Adrian; Hinterschweiger, Marc; Uluc, Arzu; Farmer, J. Doyne
  24. Monetary Policy and Portfolio Flows in an Emerging Market Economy By Martha López-Piñeros; Norberto Rodríguez-Niño; Miguel Sarmiento
  25. The Yield and Market Function Effects of the Reserve Bank of Australia's Bond Purchases By Richard Finlay; Dmitry Titkov; Michelle Xiang
  26. Policy Choice in Time Series by Empirical Welfare Maximization By Toru Kitagawa; Weining Wang; Mengshan Xu
  27. A baseline stock-flow model for the analysis of macroprudential regulation for Latin America and the Caribbean By Esteban Ramon Perez Caldentey; Lorenzo Nalin; Leonardo Rojas
  28. Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve By Gara Afonso; Domenico Giannone; Gabriele La Spada; John C. Williams
  29. The U.S. rise in inflation levels and the loss of purchasing powers. By De Koning, Kees

  1. By: Ke Pang, Christos Shiamptanis (Wilfrid Laurier University)
    Abstract: This paper examines the historical behaviour of the Bank of Canada (BoC) from 1991, when the BoC adopted inflation targeting, until 2015. We use a newly released dataset that contains quarterly vintages of real-time historical data and BoC staff forecasts, and we present three novel empirical findings. First, over the full sample period we find that the BoC responds both to inflation and the real economy. The long-run coefficient on inflation exceeds unity, satisfying the Taylor principle. Second, we fi nd that there is considerable variation in the monetary policy coefficients. During the early period of our sample, we fi nd a strong response to inflation and no response to the real economy. But over time we fi nd that the response to inflation weakens, the Taylor principle disappears, and the response to the real economy rises substantially. At the later part of our sample, the BoC appears to respond to the real economy, but not to inflation. Third, we investigate if the BoC is responding to an alternative inflation measure that captures persistent inflation deviations, that is inflation that remains away from its target for an extended period. We augment our monetary policy rule with this new inflation measure and find that the BoC responds asymmetrically to positive and negative persistent inflation deviations, suggesting that persistent inflation overshooting and undershooting elicit different responses.
    Keywords: monetary policy, forward looking Taylor rule, real-time data and forecasts, inflation deviations
    JEL: E42 E43 E52 E58
    Date: 2022–05
  2. By: Robert G. King; Yang K. Lu
    Abstract: In his 2004 inflation targeting manifesto, Marvin Goodfriend described US monetary policy as implicit inflation targeting and advocated explicit targeting. Summarizing the 1965-2000 US inflation experience, he highlighted the importance of evolving Fed credibility, which accords with our recent work using a quantitative New Keynesian model. We define credibility as policy consistency with a publicly announced framework and develop two lessons theoretically. First, under explicit targeting, no conflict arises between flexible inflation targeting and maintaining/accumulating credibility. Second, implicit targeting reduces the effectiveness of expectations management and stabilization policy, as well as opening the door to costly inflation scare episodes
    JEL: E52 E58
    Date: 2022–05
  3. By: Agrippino, Silvia Miranda (Bank of England); Nenova, Tsvetelina (London Business School)
    Abstract: We compare the macroeconomic and financial spillovers of the unconventional monetary policies of the Fed and the ECB. Monetary policy tightenings in the two areas are followed by a contraction in global activity and trade, a retrenchment in global capital flows, a fall in global stock markets, and a rise in risk aversion. Bilateral spillovers are also powerful. Fed and ECB monetary policies propagate internationally through the same channels – trade and risk-taking – but the magnitude of ECB spillovers is smaller. We postulate that the relative importance of the euro and the US dollar in the international financial system can help to explain such asymmetries, and produce tentative evidence that links the strength of the ECB spillovers to € exposure in trade invoicing and the pricing of financial transactions.
    Keywords: Unconventional monetary policy; high-frequency identification; international spillovers; Fed; ECB
    JEL: E52 F42 G15
    Date: 2022–04–14
  4. By: Refet S. Gürkaynak; Burcin Kisacikoglu; Sang Seok Lee
    Abstract: For the academic audience, this paper presents the outcome of a well-identified, large change in the monetary policy rule from the lens of a standard New Keynesian model and asks whether the model properly captures the effects. For policymakers, it presents a cautionary tale of the dismal effects of ignoring basic macroeconomics. The Turkish monetary policy experiment of the past decade, stemming from a belief of the government that higher interest rates cause higher inflation, provides an unfortunately clean exogenous variance in the policy rule. The mandate to keep rates low, and the frequent policymaker turnover orchestrated by the government to enforce this, led to the Taylor principle not being satisfied and eventually a negative coefficient on inflation in the policy rule. In such an environment, was the exchange rate still a random walk? Was inflation anchored? Does the “standard model” suffice to explain the broad contours of macroeconomic outcomes in an emerging economy with large identifying variance in the policy rule? There are no surprises for students of open-economy macroeconomics; the answers are no, no, and yes.
    JEL: E02 E31 E52 E58 F31 F41
    Date: 2022
  5. By: Juan Herreno; Mathieu Pedemonte
    Abstract: We study the differential regional effects of monetary policy exploiting geographical heterogeneity in income across cities in the United States. We find that prices and employment in poorer cities react more to monetary policy shocks. The results for prices hold for a wide range of narrow consumer expenditure categories. The results are consistent with New Keynesian models that allow for a differential share of hand-to-mouth consumers across regions, but not with models in which regions have different slopes of the Phillips curve. We show that an increase in heterogeneity across cities amplifies the effect of monetary policy on prices and employment.
    Keywords: Heterogeneous Effects of Monetary Policy; Monetary Union; TANK
    JEL: E31 E24 E52 E58 F45
    Date: 2022–05–12
  6. By: Győző Gyöngyösi (Leibniz Institute for Financial Research SAFE and Magyar Nemzeti Bank (Central Bank of Hungary)); Steven Ongena (University of Zurich, Swiss Finance Institute, KU Leuven, NTNU, and CEPR); Ibolya Schindele (Central European University and Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: We study how monetary conditions change the supply by banks of mortgage credit to households. We exploit the widespread presence of foreign currency mortgages in Hungary and study this country's comprehensive credit registry. Changes in monetary conditions not only affect the supply of credit in volume, but also in its currency and risk composition. Hence, we establish a "bank-lending-to-households2 channel of monetary policy that is heterogeneous. While the availability of foreign currency mortgages weakens the domestic bank-lending channel overall, weakly capitalized domestic banks relying on swap transactions for their foreign currency lending are more sensitive to changes in monetary conditions.
    Keywords: Bank balance-sheet channel, household lending, monetary policy, foreign currency lending.
    JEL: E51 F3 G21
    Date: 2022
  7. By: Ferrara, Gerardo (Bank of England); Mueller, Philippe (Warwick Business School); Viswanath-Natraj, Ganesh (Warwick Business School); Wang, Junxuan (Warwick Business School)
    Abstract: In this paper we investigate the price, volatility and micro-level effects of central bank swap lines during the 2020 pandemic. These policies lowered the ceiling on covered interest rate parity violations and reduced volatility following settlement of swap line auctions. We then combine dealer-level dollar repo auctions by the Bank of England with a trade repository that includes the universe of FX forward and swap contracts traded in the UK. We find evidence of a substitution channel: dealers that draw on swap lines reduce their demand for dollars at the forward leg in the FX market. We also find evidence that dealers that draw on swap lines increased their net supply of dollars to non-financial institutions, supporting the rationale for swap lines in providing cross-border liquidity to the real economy.
    Keywords: Swap lines; monetary policy; foreign exchange swaps; covered interest rate parity; central banking
    JEL: E44 F30 F31 F32 F41 G11 G12 G15 G18 G20
    Date: 2022–05–06
  8. By: Mattia Girotti; Guillaume Horny; Jean-Guillaume Sahuc
    Abstract: We study how negative interest rate policy (NIRP) affects banks’ loan pricing. Using contract-level data from France, we show that NIRP affects bank lending rates to firms through a portfolio rebalancing channel: banks holding a one standard deviation more of cash and central bank reserves offer a 8.6 basis points lower loan rate after NIRP is introduced. The impact concentrates on medium-term loans (with maturity comprised between three and six years) but not on loans to risky firms, indicating that banks conduct a search for yield focused on term spreads. These findings suggest that NIRP complements quantitative easing policies.
    Keywords: Negative interest rates, portfolio rebalancing, search for yield, term spreads, banks
    JEL: E43 E58 G21
    Date: 2022
  9. By: Balázs Világi (Magyar Nemzeti Bank (Central Bank of Hungary)); Balázs Vonnák (Magyar Nemzeti Bank (Central Bank of Hungary))
    Abstract: The majority of the New Keynesian DSGE literature assumes that the macroeconomic effects of monetary policy can be satisfactorily described by an interest rate rule without addressing the details of the money supply. We investigate whether this approach remains valid in the presence of inside money created by the banking system. To analyze this issue we present a framework based on the generalization of the IS and LM curves to dynamic general equilibrium models. We find that it is possible to implement a policy based on an interest rate rule even in the presence of inside money, although it requires a more complex toolkit of monetary policy implementation than it is assumed in models with only outside money. We also show that despite some current views, the existence of inside money does not invalidate the common macroeconomic wisdom that investments are linked to savings: both savings and financing matter in determining investments.
    Keywords: monetary policy, interest rate rule, inside money, liquidity, money multiplier.
    JEL: E51 E52 G21
    Date: 2022
  10. By: Takushi Kurozumi; Willem Van Zandweghe
    Abstract: Should monetary policy offset the effects of labor supply shocks on inflation and the output gap? Canonical New Keynesian models answer yes. Motivated by weak labor force participation during the pandemic, we reexamine the question by introducing labor force entry and exit in an otherwise canonical model with sticky prices and wages. The entry decision generates an employment channel of monetary policy, and a labor supply shock to the value of nonparticipation in the labor market induces a policy trade-off between stabilization of the employment gap and wage growth. For an adverse labor supply shock, optimal policy dampens the decline in employment to rein in wage growth, which entails a period of higher inflation and a positive output gap. A welfare analysis of policy rules shows that monetary policy should not lean against the employment gap.
    Keywords: Labor supply shock; Labor force entry; Employment channel of monetary policy
    JEL: E24 E31 E52 J21
    Date: 2022–05–24
  11. By: Rottner, Matthias
    Abstract: Motivated by the build-up of shadow bank leverage prior to the financial crisis of 2007-2008, I develop a nonlinear macroeconomic model featuring excessive leverage accumulation and endogenous financial crises to capture the observed dynamics and to quantify the build-up of financial fragility. I use the model to illustrate that extensive leverage makes the shadow banking system runnable, thereby raising the vulnerability of the economy to future financial crises. The model is taken to U.S. data with the objective of estimating and analyzing the probability of a run in the years preceding the financial crisis of 2007-2008. According to the model, the estimated risk of a run was already considerable in 2005 and kept increasing due to the upsurge in leverage. Using counterfactual scenarios, I assess the impact of alternative monetary and macroprudential policy strategies on the estimated build-up of financial fragility.
    Keywords: Financial crises,leverage,credit boom,nonlinear estimation
    JEL: E32 E44 G23
    Date: 2022
  12. By: Charles W. Calomiris; Joseph R. Mason; David C. Wheelock
    Abstract: In 1936-37, the Federal Reserve doubled member banks' reserve requirements. Friedman and Schwartz (1963) famously argued that the doubling increased reserve demand and forced the money supply to contract, which they argued caused the recession of 1937-38. Using a new database on individual banks, we show that higher reserve requirements did not generally increase banks' reserve demand or contract lending because reserve requirements were not binding for most banks. Aggregate effects on credit supply from reserve requirement increases were therefore economically small and statistically zero.
    Keywords: reserve requirements; reserve demand; excess reserves; money multiplier
    JEL: E51 E58 G21 G28 N12 N22
    Date: 2022–05–04
  13. By: Katya Kartashova; Xiaoqing Zhou
    Abstract: One of the most important channels through which monetary policy affects the real economy is changes in mortgage rates. This paper studies the effects of mortgage rate changes resulting from monetary policy shifts on homeowners’ spending, debt repayment and defaults. The Canadian institutional setting facilitates the design of identification strategies for causal inference, since the vast majority of mortgages in the country experience predetermined, periodic and automatic contract renewals with the mortgage rate reset based on the prevailing market rate. This allows us to exploit quasi-random variation in the timing of the rate reset and present causal evidence for both rate declines and increases, with the help of detailed, representative consumer credit panel data. We find asymmetric effects of rate changes on spending, debt repayment and defaults. Our results can be rationalized by the conventional cash-flow effect in conjunction with changes in consumer expectations about future interest rates upon the reset. Given the pervasiveness of Canadian-type mortgages in many other OECD countries, our findings have broader implications for the transmission of monetary policy to the household sector.
    Keywords: Mortgage rate; monetary policy; consumption; consumer expectations; household finance
    JEL: D12 D14 E43 E52 G21 R31
    Date: 2022–05–06
  14. By: Sardar, Rashedur (University of North Carolina at Greensboro, Department of Economics); Schaffer, Matthew (University of North Carolina at Greensboro, Department of Economics)
    Abstract: This paper investigates international monetary spillovers to stock prices in Bangladesh, a frontier market that has been excluded from prior studies in the literature. Using daily stock price data for over 300 publicly traded firms in a high-frequency framework, we find that contractionary monetary shocks originating from the US, euro area, and China lower stock prices, with Chinese monetary shocks having the largest impact. Contractionary shocks originating from India, on the other hand, lead to a statistically significant increase in stock returns. The positive response is driven by a small number of policy decisions. When these outlier decisions are removed from the sample, contractionary Indian monetary shocks lead to a decline in stock prices in line with spillovers from the other countries.
    Keywords: Monetary Policy; International Spillovers; Frontier Markets;
    JEL: E58 G15 O53
    Date: 2022–06–16
  15. By: Müller, Carola
    Abstract: Bank regulators interfere with the efficient allocation of resources for the sake of financial stability. Based on this trade-off, I compare how different capital requirements affect default probabilities and the allocation of market shares across heterogeneous banks. In the model, banks' productivity determines their optimal strategy in oligopolistic markets. Higher productivity gives banks higher profit margins that lower their default risk. Hence, capital requirements indirectly aiming at highproductivity banks are less effective. They also bear a distortionary cost: Because incumbents increase interest rates, new entrants with low productivity are attracted and thus average productivity in the banking market decreases.
    Keywords: bank competition,bank regulation,Basel III,capital requirements,heterogeneous banks,leverage ratio
    JEL: G11 G21 G28
    Date: 2022
  16. By: Agrippino, Silvia Miranda (Bank of England); Ricco, Giovanni (University of Warwick)
    Abstract: IV methods have become the leading approach to identify the effects of macroeconomic shocks. Conditions for identification generally involve all the shocks in the VAR even when only a subset of them is of interest. This paper provides more general conditions that only involve the shocks of interest and the properties of the instrument of choice. We introduce a heuristic and a formal test to guide the specification of the empirical models, and provide formulas for the bias when the conditions are violated. We apply our results to the study of the transmission of conventional and unconventional monetary policy shocks.
    Keywords: Identification with external instruments; structural VAR; invertibility; monetary policy shocks
    JEL: C32 C36 E30 E52
    Date: 2022–04–14
  17. By: Calero Roberto (Departamnento de Economía, Pontificia Universidad Católica del Perú.); Gabriel Rodríguez (Pontificia Universidad Católica del Perú.); Salcedo Cisnero Roberto (Pontificia Universidad Católica del Perú.)
    Abstract: We use a set of VAR models with time-varying parameters and stochastic volatility (TVP-VARSV) to estimate the evolution of the exchange rate pass-through (ERPT) into prices for Peru over 1995Q2-2019Q4. According to two Bayesian selection criteria, the best-fitting models allow most parameters and the variances of shocks to evolve over time. The results are divided into two parts: (i) the ERPTs into import and producer prices decline significantly since the end of the 1990s until 2008. However, since 2014 both ERPTs resurge considerably due to exchange rate depreciation associated with the end of Quantitative Easing (QE), falling commodity prices, and global political events. These findings are in line with recent literature using TVP-VARSV and emphasizing ERTP resurgence after the Global Financial Crisis (GFC); (ii) the ERPT into consumer prices declined steadily throughout the sample. This is in line with the existing literature and is explained by a low-inflation context under an Inflation Targeting (IT) regime and by strong Central Bank credibility. Finally, the results are robust to a set of sensitivity exercises, including changes in the variables associated with the external shock and domestic economic activity, as well as in the values of the priors; and an estimation of the ERPT for Colombia. JEL Classification-JE: C11, C32, E31, F31.
    Keywords: Exchange Rate Pass-Through into Prices, Vector Autoregressive Model with TimeVarying Parameters, Stochastic Volatility, Bayesian Estimation and Comparison of Models, Deviance Information Criterion, Marginal Likelihood, Peruvian Economy.
    Date: 2022
  18. By: Ruthira Naraidoo (University of Pretoria); Juan Paez-Farrell (Department of Economics, University of Sheffield, UK)
    Abstract: We analyse the transmission mechanism of commodity price shocks in emerging economies. Using a panel vector autoregression, we find that the shock leads to a real exchange rate appreciation, increases in output, inflation the nominal interest rate and the trade balance, and a fall in the unemployment rate. The transmission mechanism can be understood using a dynamic stochastic general equilibrium model of a small commodity-exporting open economy with nominal as well as search and matching frictions. We find that the conduct of monetary policy is key to both the variables’ dynamics as well as to the magnitude of Dutch disease effects.
    Keywords: Commodity prices, emerging markets, inflation, monetary policy, search and matching, unemployment, Dutch disease, DSGE modelling
    JEL: E31 E32 E44 E52 E61 F42 O11
    Date: 2022–05
  19. By: William Roberds
    Abstract: Recently, there has been much discussion as to whether central bank digital currencies (CBDCs) should be introduced, and if so, how they should be designed. This article offers a historical perspective on this discussion, with a survey of early public bank (proto-central bank) "analog currencies"—circulating banknotes. Public banknotes were an experimental product when they were first issued in sixteenth-century Naples, but by the late nineteenth century, such notes could be found in most European countries. In between came all sorts of implementation difficulties: egregious insider fraud, a real estate finance bubble, hyperinflation, rampant counterfeiting, and complete institutional collapse. Despite these many misfires, central bank–issued notes eventually became the default form of payment in virtually every country worldwide.
    Keywords: central bank digital currency; banknotes
    JEL: E58 N13
    Date: 2022–03–03
  20. By: Takuto Arao (Bank of Japan)
    Abstract: In Japan's money markets, negative interest rate transactions prevail under the three-tier system applied to the financial institutions' current accounts held at the Bank of Japan. This paper explains the mechanism of short-term interest rate formation under the three-tier system and the concept of market operations using a simple reserve demand curve model. Under the three-tier system, in which current deposits are divided into three tiers and different interest rates are applied to each tier, financial institutions have an incentive to conduct money market transactions for arbitrage purposes depending on to which tier their outstanding current account balances fill up prior to money market transactions. The Bank realizes negative interest rates consistent with yield curve control by taking steps so that the "hypothetical policy-rate balance (the policy-rate balance that remains assuming that arbitrage transactions have taken place in full), " is maintained at a certain level. The shape of the reserve demand curve is considered to be downward sloping around the boundaries of each tier due to the uncertainties over future course of current account balances. The shape and position of the reserve demand curve will change depending on the degree of the uncertainties and other factors such as the use of Special Operations in Response to COVID-19 and various loan support programs. Short-term interest rates also change when arbitrage transactions are not conducted in full due to market friction. It can be interpreted that the Bank influences on short-term interest rates by changing the reserve demand curve and the reserve supply curve through setting the Benchmark Ratio and carrying out market operations based on the information about these factors.
    Keywords: Negative interest rate; Tiered remuneration; Interbank market; Monetary policy implementation
    Date: 2022–05–27
  21. By: Florian Peters; Doris Neuberger; Oliver Reinhardt; Adelinde Uhrmacher
    Abstract: In macroeconomics, an emerging discussion of alternative monetary systems addresses the dimensions of systemic risk in advanced financial systems. Monetary regime changes with the aim of achieving a more sustainable financial system have already been discussed in several European parliaments and were the subject of a referendum in Switzerland. However, their effectiveness and efficacy concerning macro-financial stability are not well-known. This paper introduces a macroeconomic agent-based model (MABM) in a novel simulation environment to simulate the current monetary system, which may serve as a basis to implement and analyze monetary regime shifts. In this context, the monetary system affects the lending potential of banks and might impact the dynamics of financial crises. MABMs are predestined to replicate emergent financial crisis dynamics, analyze institutional changes within a financial system, and thus measure macro-financial stability. The used simulation environment makes the model more accessible and facilitates exploring the impact of different hypotheses and mechanisms in a less complex way. The model replicates a wide range of stylized economic facts, including simplifying assumptions to reduce model complexity.
    Date: 2022–05
  22. By: Jongrim Ha (World Bank); M. Ayhan Kose (World Bank; Brookings Institution; CEPR; CAMA); Franziska Ohnsorge (World Bank; CEPR; CAMA)
    Abstract: Global inflation has risen sharply from its lows in mid-2020, on rebounding global demand, supply bottlenecks, and soaring food and energy prices, especially since the Russian Federation’s invasion of Ukraine. Markets expect inflation to peak in mid-2022 and then decline, but to remain elevated even after these shocks subside and monetary policies are tightened further. Global growth has been moving in the opposite direction: it has declined sharply since the beginning of the year and, for the remainder of this decade, is expected to remain below the average of the 2010s. In light of these developments, the risk of stagflation—a combination of high inflation and sluggish growth—has risen. The recovery from the stagflation of the 1970s required steep increases in interest rates by major advanced-economy central banks to quell inflation, which triggered a global recession and a string of financial crises in emerging market and developing economies. If current stagflationary pressures intensify, they would likely face severe challenges again because of their less well-anchored inflation expectations, elevated financial vulnerabilities, and weakening growth fundamentals.
    Keywords: Inflation; growth; COVID-19; global recession; monetary policy; fiscal policy; disinflation.
    JEL: E31 E32 E52 Q43
    Date: 2022–06
  23. By: Carro, Adrian (Banco de España); Hinterschweiger, Marc (Bank of England); Uluc, Arzu (Bank of England); Farmer, J. Doyne (Institute for New Economic Thinking (INET) at the Oxford Martin School, University of Oxford)
    Abstract: We develop an agent-based model of the UK housing market to study the impact of macroprudential policy experiments on key housing market indicators. The heterogeneous nature of this model enables us to assess the effects of such experiments on the housing, rental and mortgage markets not only in the aggregate, but also at the level of individual households and sub-segments, such as first-time buyers, homeowners, buy-to-let investors, and renters. This approach can therefore offer a broad picture of the disaggregated effects of financial stability policies. The model is calibrated using a large selection of micro-data, including data from a leading UK real estate online search engine as well as loan-level regulatory data. With a series of comparative statics exercises, we investigate the impact of (i) a hard loan-to-value limit, and (ii) a soft loan-to-income limit, allowing for a limited share of unconstrained new mortgages. We find that, first, these experiments tend to mitigate the house price cycle by reducing credit availability and therefore leverage. Second, an experiment targeting a specific risk measure may also affect other risk metrics, thus necessitating a careful calibration of the policy to achieve a given reduction in risk. Third, experiments targeting the owner-occupier housing market can spill over to the rental sector, as a compositional shift in home ownership from owner-occupiers to buy-to-let investors affects both the supply of and demand for rental properties.
    Keywords: Agent-based model; housing market; macroprudential policy; borrower-based measures; buy-to-let sector
    JEL: D10 D31 E58 R20 R21 R31
    Date: 2022–04–22
  24. By: Martha López-Piñeros; Norberto Rodríguez-Niño; Miguel Sarmiento
    Abstract: Portfolio flows are an important source of funding for both private and public agents in emerging market economies. In this paper, we study the influence of changes in domestic and US monetary policy rates on portfolio inflows in an emerging market economy and discriminate among fixed income instruments (government securities and corporate bonds) and variable income instruments (stocks). We employ monthly data on portfolio inflows of non-residents in Colombia during the period 2011-2020 and identify the monetary policy shocks using a SVAR model with long-run restrictions. We find a positive and statistically significant response of portfolio inflows in government securities and corporate bonds to changes in both domestic and US monetary policy rates. Portfolio inflows in the stock market react more to changes in the inflation rate and do not react to changes in monetary policy rates. Our findings are consistent with the predictions of the interest rate channel and remark the predominant role of inflation in driving portfolio inflows. The results suggest that domestic and US monetary policy actions have an important effect on the behavior of portfolio inflows in emerging economies. **** RESUMEN: Los flujos de portafolio son una fuente importante de financiamiento para los agentes públicos y privados en las economías emergentes. En este artículo, estudiamos la influencia de los cambios en las tasas de política monetaria doméstica y de los Estados Unidos sobre los flujos de portafolio en una economía emergente, discriminando entre instrumentos de renta fija (títulos del gobierno y bonos corporativos) e instrumentos de renta variable (acciones). Empleamos datos mensuales sobre flujos de portafolio de no residentes en Colombia durante el período 2011-2020. Los choques de política monetaria se identifican utilizando un modelo SVAR con restricciones de largo plazo. Encontramos una respuesta significativa de los flujos de portafolio en títulos del gobierno y bonos corporativos a los cambios en las tasas de política monetaria tanto domésticas como de los Estados Unidos. Los flujos de portafolio en el mercado de acciones reaccionan más a cambios en la tasa de inflación y no reaccionan a cambios en las tasas de política monetaria. Nuestros hallazgos son consistentes con las predicciones del canal de las tasas de interés y resaltan el papel predominante de la inflación sobre la dinámica de los flujos de portafolio. Los resultados sugieren que las acciones de política monetaria doméstica y de los Estados Unidos tienen un efecto importante sobre el comportamiento de los flujos de portafolio en las economías emergentes.
    Keywords: portfolio inflows, emerging market economies, monetary policy, SVAR models, interest rate channel, nflujos de portafolio, economías de mercados emergentes, política monetaria, modelos SVAR, canal de tasas de interés
    JEL: F31 F32 F33 F36
    Date: 2022–05
  25. By: Richard Finlay (Reserve Bank of Australia); Dmitry Titkov (Reserve Bank of Australia); Michelle Xiang (Reserve Bank of Australia)
    Abstract: We examine the effect on government bond yields of three Reserve Bank of Australia policy measures implemented following the onset of the COVID-19 pandemic. We also assess the impact of the three measures on government bond market functioning. The three measures were: purchases to support government bond market function over early 2020; the yield target on 3-year Australian government bonds; and the bond purchase program to lower longer-term yields from late 2020 until early 2022. For purchases to support market function, we find that the announcement lowered short-dated Australian Government Securities (AGS) yields, but did not lower longer-dated AGS yields. We also find that such purchases led to lower yields as and when they were implemented, and that they supported market function by lowering bid-offer spreads. For the yield target, we find a substantial announcement effect and moderate implementation effects on yields. Conversely, the yield target appears to have detrimentally affected some aspects of government bond market function. For the bond purchase program, we find an announcement effect of around 30 basis points for longer-term AGS yields, while any implementation effects were small and temporary.
    Keywords: market function; yield target; quantitative easing; event study
    JEL: E52 E58 G12
    Date: 2202–05
  26. By: Toru Kitagawa; Weining Wang; Mengshan Xu
    Abstract: This paper develops a novel method for policy choice in a dynamic setting where the available data is a multivariate time series. Building on the statistical treatment choice framework, we propose Time-series Empirical Welfare Maximization (T-EWM) methods to estimate an optimal policy rule for the current period or over multiple periods by maximizing an empirical welfare criterion constructed using nonparametric potential outcome time-series. We characterize conditions under which T-EWM consistently learns a policy choice that is optimal in terms of conditional welfare given the time-series history. We then derive a nonasymptotic upper bound for conditional welfare regret and its minimax lower bound. To illustrate the implementation and uses of T-EWM, we perform simulation studies and apply the method to estimate optimal monetary policy rules from macroeconomic time-series data.
    Date: 2022–05
  27. By: Esteban Ramon Perez Caldentey; Lorenzo Nalin; Leonardo Rojas
    Abstract: This paper provides a critical view of macroprudential regulation/policies found in mainstream and post-Keynesian economics. The paper provides a macroeconomic framework that can be used as a basis for the analysis of macroprudential guidelines and policies. It is based on on five main principles/guidelines: (i) financial fragility is endogenous and results from the normal functioning of market based economies driven by the profit motive; (ii) financial fragility can originate in the financial and real sectors of an economy; (iii) financial cycles are not necessarily driven by boom and busts and financial fragility need not originate in an economic boom; (iv) macroprudential policies should be viewed from a dynamic perspective, that is they must take into account the changes in the international financial architecture/structure and be region/country specific; and (v) macroprudential regulation/guidelines requires a truly macroeconomic framework. These principles are captured in the specification of a baseline stock-flow model for Latin America and the Caribbean with five sectors (government, central bank, financial sector, private sector, and external sector). The model is a tool that can be used for evaluating other macroprudential policies.
    Keywords: Debt, external constraint, external financial cycle, financial flows, Latin America and the Caribbean, microprudential and macroprudential regulation, stock-flow
    JEL: B59 E32 E52 F21 F41 G15
    Date: 2022–05
  28. By: Gara Afonso; Domenico Giannone; Gabriele La Spada; John C. Williams
    Abstract: Does the federal funds rate respond to shocks when aggregate reserves are in the trillions of dollars? Has banks’ demand for reserves moved over time? We provide a structural time-varying estimate of the slope of the reserve demand curve over 2010-21. We estimate a time-varying vector autoregressive model at daily frequency with an instrumental variable approach to address endogeneity. Consistent with economic theory, our estimates show a nonlinear demand function that exhibits a negative slope in 2010-11 and 2018-19 but is flat over 2012-17 and after mid-2020. We also find that the curve has moved outward, both vertically and horizontally.
    Keywords: demand for reserves; federal funds market; monetary policy
    JEL: E41 E43 E52 E58 G21
    Date: 2022–05–01
  29. By: De Koning, Kees
    Abstract: Who, in the U.S., is ultimately responsible for servicing government debt levels? They are the individual households, directly and indirectly through the ownership of companies. The number of households increased from 116.01 million as per the end of 2007 to 129.93 million per the end of 2021. The U.S. government debt per household increased from $53,617 per household as at the end of 2007 to $94,444 as per the end of 2021. With a 2021 median household income of $67.463, the U.S. government debt per household is now 1.4 times the median annual household income level over 2021. All central banks aim to stabilise prices when price levels go up. The usual response is to increase interest base rates. It is likely that the Fed will further increase its interest rate levels this year. The option of even more Quantitative Easing is not a very attractive one as the source of repayment of government debts will ultimately have to come from higher taxes on households. U.S. households will bear the brunt of such upward interest rate changes as and when the Fed adjusts its interest rates due to the expected further rise in consumer goods prices. Increases in interest rates are aimed to slow down demand levels to lower inflation pressures. U.S. households are and will be confronted with rising prices, higher taxes and consequently a reduced level of purchasing powers. There are four variables that play a major role in the economic adjustment processes: two are related to current disposable income and tax levels while the other two are linked to savings for pensions and savings in home equity. Conversion of wealth into income levels is rarely a straightforward process. A new approach might need to be considered: “Using existing home equity levels as a generator for economic growth.” Such approach would be an asset-based approach. This approach can be called the bottom-up approach: Quantitative Easing Home Equity (QEHE). It starts with each household individually and the level of purchasing powers they require. To allow households to use some of their home equity at 0% interest rate could provide the U.S. economy with just the boost it needs. It could be a freedom of choice method for households within a macro economic program.
    Keywords: Inflation and Recession; Federal Reserve options; Cash from Home Equity;
    JEL: E21 E24 E3 E31 E4 E42 E44 E6 E61
    Date: 2022–05–07

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