nep-cba New Economics Papers
on Central Banking
Issue of 2022‒06‒27
fifteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Retail CBDC and U.S. Monetary Policy Implementation: A Stylized Balance Sheet Analysis By Matthew Malloy; Francis Martinez; Mary-Frances Styczynski; Alex Thorp
  2. Monetary Policy and Homeownership: Empirical Evidence,Theory, and Policy Implications By Daniel A. Dias; Joao B. Duarte
  3. Monetary-Based Asset Pricing: A Mixed-Frequency Structural Approach By Francesco Bianchi; Sydney C. Ludvigson; Sai Ma
  4. Look who’s Talking: Individual Committee members’ impact on inflation expectations By Dooruj Rambaccussing; Craig Menzies; Andrzej Kwiatkowski
  5. How Did It Happen?: The Great Inflation of the 1970s and Lessons for Today By Edward Nelson
  6. Private Overborrowing under Sovereign Risk By Arce, Fernando
  7. The Corona debt conundrum in the Eurozone: Limits to stabilisation by monetary policy and the search for alternatives By Tokarski, Paweł; Wiedman, Alexander
  8. Settlement Balances Deconstructed By Parnell Chu; Grahame Johnson; Scott Kinnear; Karen McGuinness; Matthew McNeely
  9. The Macroeconomic Expectations of Firms By Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
  10. Assessing Regulatory Responses to Banking Crises By Padma Sharma
  11. Structural relationships between cryptocurrency prices and monetary policy indicators By Jennifer Castle; Takamitsu Kurita
  12. Bubbles and Stagnation By Inês Xavier
  13. Embedded Supervision: How to Build Regulation into Decentralised Finance By Raphael A. Auer
  14. The Subjective Inflation Expectations of Households and Firms: Measurement, Determinants, and Implications By Michael Weber; Francesco D’Acunto; Yuriy Gorodnichenko; Olivier Coibion
  15. Quantifying Systemic Risk in the Presence of Unlisted Banks: Application to the Dutch Financial Sector By Daniel Dimitrov; Sweder van Wijnbergen

  1. By: Matthew Malloy; Francis Martinez; Mary-Frances Styczynski; Alex Thorp
    Abstract: This paper discusses how a Federal Reserve issued retail central bank digital currency (CBDC) could affect U.S. monetary policy implementation. Using a stylized balance sheet analysis, we analyze the effect a retail CBDC could have on the balance sheets of the Federal Reserve, commercial banks, and U.S. households. Then we consider how these balance sheet changes could affect monetary policy implementation for the Federal Reserve. We illustrate that the potential effects on monetary policy implementation from a retail CBDC are highly dependent on the initial conditions of the Federal Reserve’s balance sheet. Moreover, the analysis demonstrates how the Federal Reserve may use its existing tools to manage the effects of a retail CBDC on monetary policy implementation.
    Keywords: Bank behavior; Central banking; Households; Monetary policy implementation; Retail CBDC
    Date: 2022–05–31
  2. By: Daniel A. Dias; Joao B. Duarte
    Abstract: We show that monetary policy affects homeownership decisions and argue that this effect is an important and overlooked channel of monetary policy transmission. We first document that monetary policy shocks are a substantial driver of fluctuations in the U.S. homeownership rate and that monetary policy affects households' housing tenure choices. We then develop and calibrate a two-agent New Keynesian model that can replicate the estimated transmission of monetary policy shocks to homeownership rates and housing rents. We find that the calibrated model provides an explanation to the "price puzzle" and delivers two important results with policy implications. First, the homeownership decision channel amplifies the redistributive effects of monetary policy, with contractionary shocks benefiting more outright homeowners and disadvantaging more renters and homeowners with a mortgage. Second, a monetary authority that reacts to a price index that includes housing rents generates excess house price, rents, and output volatility and larger real effects.
    Keywords: Monetary policy; Homeownership; Housing rents and housing prices; Inflation dynamics; Housing tenure choice; “Price puzzle
    JEL: E31 E43 R21
    Date: 2022–05–19
  3. By: Francesco Bianchi; Sydney C. Ludvigson; Sai Ma
    Abstract: We integrate a high-frequency monetary event study into a mixed-frequency macro-finance model and structural estimation. The model and estimation allow for jumps at Fed announcements in investor beliefs, providing granular detail on why markets react to central bank communications. We find that the reasons involve a mix of revisions in investor beliefs about the economic state and/or future regime change in the conduct of monetary policy, and subjective reassessments of financial market risk. However, the structural estimation also finds that much of the causal impact of monetary policy on markets occurs outside of tight windows around policy announcements.
    JEL: E52 E58 E7 G12
    Date: 2022–05
  4. By: Dooruj Rambaccussing; Craig Menzies; Andrzej Kwiatkowski
    Abstract: We explore how speeches from individual members of the Monetary Policy Committee impact on inflation expectations, as proxied by the implied forward rate. Computational linguistics tools are used to quantify the sentiment (tonality) of individual speeches of members. External speakers have calming e ects on future expected inflation, whereas the e ects are somewhat mixed for the Bank’s Governor and the remaining internal members of the Committee. Members who deliver more speeches make the final selection in the model of the best fit. However, experience at the aggregate level does not unanimously imply more credibility. Speeches previously delivered by a selected few calm inflation expectations. The response to tonality di ers when considering pre-crisis, crisis and post-crisis regimes. The findings point out that markets’ are more responsive to the signals emitted by individual speeches in the post-crisis era.
    Keywords: Textual Analysis; Monetary Policy; Central Bank Communication; Committee Members
    JEL: D12 D84 E52 G53
    Date: 2022–06
  5. By: Edward Nelson
    Abstract: The pickup in the U.S. inflation rate to its highest rates in forty years has led to renewed attention being given to the Great Inflation of the 1970s. This paper asks with regard to the Great Inflation: “How did it happen?” The answer offered is the fact that, in both the United Kingdom and the United States, monetary policy and other policy instruments were guided by a faulty doctrine—a nonmonetary view of inflation that perceived the concerted restraint of aggregate demand as both ineffective and unnecessary for inflation control. In the paper’s analysis, the difference in the economic policy doctrine in the 1970s from that prevailing in more recent decades is represented algebraically, with this representation backed up by documentation of policymakers’ views. A key conclusion implied by the analysis is that the fact that a nonmonetary perspective on inflation is no longer prevalent in policy circles provides grounds for believing that monetary policy in the modern era is well positioned to prevent the recurrence of *entrenched* high inflation rates of the kind seen in the 1970s.
    Keywords: Great Inflation; Phillips curve; Monetary policy doctrine; Monetary policy strategy
    JEL: E58 E52
    Date: 2022–06–03
  6. By: Arce, Fernando
    Abstract: This paper proposes a quantitative theory of the interaction between private and public debt in an open economy. Excessive private debt increases the frequency of financial crises. During such crises the government provides fiscal bailouts financed with risky public debt. This response may cause a sovereign debt crisis, which is characterized by a higher probability of a sovereign default. The model is quantitatively consistent with the evolution of private debt, public debt, and sovereign spreads in Spain from 1999 to 2015, and provides an estimate of the degree of overborrowing, its effect on the spreads, and the optimal macroprudential policy.
    Keywords: Bailouts; credit frictions; financial crises; macroprudential policy; sovereign default
    JEL: E32 E44 F41 G01 G28
    Date: 2021–12–09
  7. By: Tokarski, Paweł; Wiedman, Alexander
    Abstract: One of the most serious economic and social consequences of the pandemic is the higher public debt of the Eurozone countries. The massive interventions of the Euro­system have lowered borrowing costs to record lows. For some time to come, the sustainability of the public finances of the most indebted Eurozone countries will depend on expansionary monetary policy. However, this approach raises questions. It is uncertain how long monetary policy can support the debt market of the EU-19, whether there are effective alternatives, and what impacts the high debt levels and the interventions of the European Central Bank (ECB) will have on the foundations of the Eurozone.
    Date: 2021
  8. By: Parnell Chu; Grahame Johnson; Scott Kinnear; Karen McGuinness; Matthew McNeely
    Abstract: Because of the COVID-19 pandemic, public interest in the Bank’s balance sheet and, more specifically, the size of settlement balances, has grown. This paper deconstructs the concept of settlement balances and provides some context on their history, current state and possible future evolution.
    Keywords: Central bank research; Coronavirus disease (COVID-19); Financial markets; Monetary policy implementation
    JEL: E E59 E6 G G01
    Date: 2022–06
  9. By: Bernardo Candia; Olivier Coibion; Yuriy Gorodnichenko
    Abstract: Using surveys of firms around the world, we review existing evidence on how firms form their macroeconomic expectations. Several facts stand out. First, the mean inflation forecasts of firms often deviate significantly from those of professional forecasters and households. Second, disagreement about inflation among firms is large. Third, firms often change their short-run and long-run inflation expectations jointly and by similar amounts. Fourth, firms in economies with a history of low and stable inflation are inattentive to inflation and monetary policy, but this is less true in countries with more volatile environments. Fifth, firms form expectations about inflation and the real economy jointly, but the way in which they do can differ widely across countries. Finally, we show that conditioning on firms’ inflation expectations generates a stable Phillips curve relationship. We also review evidence showing that exogenous variation in the macroeconomic expectations of firms affects their decisions.
    JEL: E03 E30 E40 E5
    Date: 2022–05
  10. By: Padma Sharma
    Abstract: During banking crises, regulators must decide between bailouts or liquidations, neither of which are publicly popular. However, making a comprehensive assessment of regulators requires examining all their decisions against their dual objectives of preserving financial stability and discouraging moral hazard. I develop a Bayesian latent class model to assess regulators on these competing objectives and evaluate banking and savings and loan (S&L) regulators during the 1980s crises. I find that the banking authority (FDIC) conformed to these objectives whereas the S&L regulator (FSLIC), which subsequently became insolvent, deviated from them. Timely interventions based on this evaluation could have redressed the FSLIC’s decision structure and prevented losses to taxpayers.
    Keywords: Bank failures; Bank resolution; Bailout; Liquidation; Savings and loans crisis; Markov Chain Monte Carlo (MCMC); Federal Deposit Insurance Corporation; Federal Savings and Loans Insurance Corporation (FSLIC); Bayesian inference; Discrete data analysis; Latent class models
    JEL: C11 C38 G21 G33 G38
    Date: 2022–05–10
  11. By: Jennifer Castle; Takamitsu Kurita
    Abstract: The rapid expansion of the global cryptocurrency market raises the question of whether there are stable relationships between the prices of representative cryptocurrencies and economic indicators capturing expectations of future monetary policy. In this paper multivariate time-series analysis reveals a single but significant cointegrating relationship between cryptocurrencies and the term spread. This evidence reveals direct policy implications for the implementation of monetary policy allowing for the growing influence of digital assets. While the cointegrating linkage plays a critical role in modelling cryptocurrencies in sample, it contributes little to forecasting them out of sample, thus indicating potential efficiency in the digital currency market.
    Date: 2022–06–08
  12. By: Inês Xavier
    Abstract: This paper studies the consequences of asset bubbles for economies that are vulnerable to persistent stagnation. Stagnation is the result of a shortage of assets that creates an oversupply of savings and puts downward pressure on the level of interest rates. Once the zero lower bound on the nominal interest rate binds, the real rate cannot fully adjust downward, forcing output to fall instead. In such context, bubbles are useful as they expand the supply of assets, absorb excess savings and raise the natural interest rate - the real rate that is compatible with full employment - crowding in consumption and raising welfare. While safe bubbles are more likely to expand economic activity, riskier bubbles command a risk premium that, in equilibrium, lowers the real interest rate. A lower rate loosens borrowing constraints, potentially improving welfare when financing conditions are especially tight. Finally, fiscal policy that promises a bail-out transfer in case of a bubble collapse can support an existing bubble and improve welfare.
    Keywords: Bubbles; Secular stagnation; Liquidity traps
    JEL: E31 E32 E43 E44 G11
    Date: 2022–05–31
  13. By: Raphael A. Auer
    Abstract: The emergence of so-called “decentralised finance” (DeFi) and a shadow financial system of cryptocurrency exchanges and stablecoin issuers raises the challenge of how to apply technology-neutral regulation so that similar risks are subject to the same rules. This paper makes the case for embedded supervision, ie a regulatory framework that provides for compliance in decentralised markets to be automatically monitored by reading the market’s ledger. This reduces the need for firms to actively collect, verify and deliver data. The paper explores the conditions under which distributed ledger data may be used to monitor compliance. To this end, a decentralised market is modelled that replaces today’s intermediary-based verification of legal data with blockchain-enabled credibility based on economic consensus. The key results set out the conditions under which the market’s economic consensus would be strong enough to guarantee that transactions are economically final, so that supervisors can trust the distributed ledger’s data. The paper concludes with a discussion of the legislative and operational requirements that would promote low-cost supervision and a level playing field for small and large firms.
    Keywords: decentralised finance, DeFi, tokenisation, asset-backed tokens, stablecoins, crypto-assets, cryptocurrencies, CBDC, regtech, suptech, regulation, supervision, Basel III, proportionality, blockchain, distributed ledger technology, digital currencies, proof
    JEL: D40 D20 E42 E51 F31 G12 G18 G28 G32 G38 K22 K24 L10 L50 M40
    Date: 2022
  14. By: Michael Weber; Francesco D’Acunto; Yuriy Gorodnichenko; Olivier Coibion
    Abstract: Households’ and firms’ subjective inflation expectations play a central role in macroeconomic and intertemporal microeconomic models. We discuss how subjective inflation expectations are measured, the patterns they display, their determinants, and how they shape households’ and firms’ economic choices in the data and help us make sense of the observed heterogeneous reactions to business-cycle shocks and policy interventions. We conclude by highlighting the relevant open questions and why tackling them is important for academic research and policy making.
    JEL: D1 D2 D8 D9 E2 E3 E4 E5 E7 J1
    Date: 2022–05
  15. By: Daniel Dimitrov (University of Amsterdam); Sweder van Wijnbergen (University of Amsterdam)
    Abstract: We propose a credit portfolio approach for evaluating systemic risk and attributing it across institutions. We construct a model that can be estimated from high-frequency CDS data. This captures risks from privately held institutions and cooperative banks, extending approaches that rely on information from the public equity market. We account for correlated losses between the institutions, overcoming a modeling weakness in earlier studies. A latent risk factor with heterogeneous exposures fitted on the implied default probabilities quantifies the potential for joint distress and losses. We apply the model to a universe of Dutch banks and insurers.
    Keywords: Systemic risk, CDS rates, implied market measures, financial institutions
    JEL: G01 G20 G18 G38
    Date: 2022–05–28

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