nep-cba New Economics Papers
on Central Banking
Issue of 2022‒07‒11
twelve papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Central Banks and Climate Policy: Unpleasant Trade–Offs? A Principal–Agent Approach By Donato Masciandaro; Riccardo Russo
  2. Would households understand average inflation targeting? By Hoffmann, Mathias; Pavlova, Lora; Mönch, Emanuel; Schultefrankenfeld, Guido
  3. Unconventional credit policy in an economy under zero lower bound By Jorge Pozo; Youel Rojas
  4. The Demand for Money, Near-Money, and Treasury Bonds By Arvind Krishnamurthy; Wenhao Li
  5. Political Shocks and Inflation Expectations: Evidence from the 2022 Russian Invasion of Ukraine By Lena Dräger; Klaus Gründler; Niklas Potrafke
  6. The Anatomy of Single-Digit Inflation in the 1960s By Jeremy B. Rudd
  7. A shot in the arm: stimulus packages and firm performance during Covid-19 By Deniz Igan; Ali Mirzaei; Tomoe Moore
  8. The Effects of Capital Controls on Housing Prices By Yang Zhou
  9. DLT-based enhancement of cross-border payment efficiency - a legal and regulatory perspective By Dirk Zetzsche; Linn Anker-Sørensen; Maria Lucia Passador; Andreas Wehrli
  10. What is the Effect of Domestic Demand Shocks on Inflation in a Small Open Economy? Chile 2000-2021 By Ramon Lopez; Kevin Sepulveda
  11. Banking in the shadow of Bitcoin? The institutional adoption of cryptocurrencies By Raphael Auer; Marc Farag; Ulf Lewrick; Lovrenc Orazem; Markus Zoss
  12. Credit market concentration and systemic risk in Europe By Merike Kukk; Alari Paulus; Nicolas Reigl

  1. By: Donato Masciandaro; Riccardo Russo
    Abstract: This paper focuses on the trade–offs that central banks would face if they were to start tackling climate change. Disruptive natural events can hamper growth and capital accumulation, thereby affecting price and financial stability – elements for which central banks are responsible. Yet, the array of instruments they could use to mitigate climate–related risks overlap with those already used in relation to their monetary and macroprudential mandates. By leveraging a principal–agent setting, we consider the conditions under which the central bank architecture would be fit to take on this objective without jeopardising the attainment of central banks’ core mandates. We also examine the corresponding effects in terms of climate risks. Our results show that central banks’ effectiveness in this regard depends on the degree of their independence from governments’ climate preferences and on their ability to calibrate their “green” easing, either monetary and/or regulatory, on the realised level of abatement and emissions.
    Keywords: monetary policy, macroprudential policy, fiscal policy, climate change, delegation, independence
    JEL: D02 E52 E58 E61 E63
    Date: 2022
  2. By: Hoffmann, Mathias; Pavlova, Lora; Mönch, Emanuel; Schultefrankenfeld, Guido
    Abstract: Yes, they would. In a randomized control trial, we provide groups of respondents from the Bundesbank Online Panel Households with information about a hypothetical alternative ECB monetary policy regime akin to the Federal Reserve's flexible average inflation targeting (AIT). Inflation expectations significantly increase for the treated individuals. When provided with additional information about near-term inflation, individuals update their expected inflation path in line with the central banks' intentions. This is particularly true for individuals with high trust in the ECB. We assess the economic significance of our findings by comparing two model economies under different monetary policy strategies, calibrated to match the difference in medium-term inflation expectations from our survey results. Under AIT, inflation is substantially less volatile and the frequency of hitting the lower bound on interest rates is considerably reduced.
    Keywords: Monetary Policy Strategy,Household Inflation Expectations,Randomized Control Trial,Survey Data
    JEL: F33 E31 E32
    Date: 2022
  3. By: Jorge Pozo; Youel Rojas
    Abstract: In this paper we develop a simple two-period model that reconciles credit demand and supply frictions. In this stylized but realistic model credit and deposit markets are interlinked and credit demand and credit supply frictions amplify each other in such a way that produces in equilibrium inefficiently low levels of credit and stronger reductions of the real and nominal interest rates, so an economy is much closer to the ZLB. However, an unconventional credit policy, that consists on central bank liquidity injection to banks provided they commit to issue loans (indirect central bank loans) that are guaranteed by the government, can undo partially the effects of the credit frictions and prevents the economy from reaching the ZLB. Since indirect central bank (CB) loans cannot be diverted by banks and are governmentguaranteed, credit market interventions rise aggregate credit supply and positively affect the aggregate credit demand, respectively. However, once the economy is at the ZLB the effect of a credit policy is reduced due to a relatively stronger inflation reduction, which in turn reduces entrepreneurs' incentives to demand bank loans, and due to that the relative cost reduction from having access to cheaper indirect CB loans is smaller.
    Keywords: unconventional credit policy, asymmetric information, moral hazard, zero lower bound
    JEL: E44 E5 G21 G28
    Date: 2022–05
  4. By: Arvind Krishnamurthy; Wenhao Li
    Abstract: Bank-created money, shadow-bank money, and Treasury bonds all satisfy investors' demand for a liquid transaction medium and safe store of value. We measure the quantity of these three forms of liquidity and their corresponding liquidity premium over a sample from 1934 to 2016. We empirically examine the links between these different assets, estimating the extent to which they are substitutes, and the amount of liquidity per unit delivered by each asset. Treasury bonds and bank deposits are imperfect substitutes, in contrast to the findings of perfect substitutes of Nagel (2016). This result is directly relevant to the monetary transmission mechanism running through shifts in asset supplies, such as quantitative easing policies. Our results on the imperfect substitutability of bank and shadow-bank money also inform analyses of the coexistence of the shadow-banking and regulated banking system. We construct a new broad monetary aggregate based on our estimates and show that it helps resolve the money-demand instability and missing-money puzzles of the monetary economics literature.
    JEL: E41 E43 G21 G23
    Date: 2022–05
  5. By: Lena Dräger; Klaus Gründler; Niklas Potrafke
    Abstract: How do global political shocks influence individuals’ expectations about economic outcomes? We run a unique survey on inflation expectations among 145 tenured economics professors in Germany and exploit the 2022 Russian invasion in Ukraine as a natural experiment to identify the effect of a global political shock on expectations about national inflation rates. We find that the Russian invasion increased short-run inflation expectations for 2022 by 0.75 percentage points. Treatment effects are smaller regarding mid-term expectations for 2023 (0.47 percentage points) and are close to zero for longer periods. Text analysis of open questions shows that experts increase their inflation expectations because they expect supplyside effects to become increasingly important after the invasion. Moreover, experts in the treatment group are less likely to favor an immediate reaction of monetary policy to the increased inflation, which gives further evidence of the shock being interpreted primarily as a supply-side shock.
    Keywords: Inflation expectations, belief formation, natural experiment, 2022 Russian invasion of Ukraine, survey, economic experts
    JEL: E31 E71 D74 D84
    Date: 2022
  6. By: Jeremy B. Rudd
    Abstract: Recently, the experience of the 1960s—when the U.S. inflation rate rose rapidly and persistently over a comparatively short period—has been invoked as a cautionary tale for the present. An analysis of this period indicates that the inflation regime that prevailed in the 1960s was different in several key regards from the one that prevailed on the eve of the pandemic. Hence, there are few useable lessons to be drawn from this experience, save that monetary policymaking remains a difficult undertaking.
    Keywords: Great Inflation; Martin Fed; Volcker disinflation; Inflation dynamics
    JEL: E52 N12 E31
    Date: 2022–05–20
  7. By: Deniz Igan; Ali Mirzaei; Tomoe Moore
    Abstract: We use firm-level data to provide some early evidence on the effectiveness of COVID-19 economic policy packages. Our empirical strategy relies on the varying degree of vulnerability to the pandemic across industries. We find a robust association of fiscal stimulus with changes in firm performance indicators (as measured by sales-to-assets ratio, profit margin, interest coverage ratio as well as probability of default) in pandemic-prone sectors. We also observe marginal effects of monetary policy on the sales-to-assets ratio and of foreign exchange intervention on the interest coverage ratio in the hardest-hit firms. These results broadly survive a battery of exercises to address endogeneity. Additionally, we show that firms with a better financial position are more likely to take advantage of the stimulus packages to withstand the pandemic shock. Overall, these provide preliminary evidence suggesting that policy interventions have bought time for the hardest-hit industries, by supporting turnover and improving liquidity.
    Keywords: economic stimulus, pandemic-prone, COVID-19, policy effectiveness
    JEL: G01 G14 G28 E65
    Date: 2022–05
  8. By: Yang Zhou (Graduate School of Economics, Kobe University and Junir Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN)
    Abstract: Policymakers increasingly use capital control policies (i.e., capital flow management) to manage capital flows. However, whether the implementation of such policies can effectively affect housing prices and to what extent is less discussed. In this paper, we study the effects of four types of granular capital control polices on housing prices using a large cross-country panel of 53 economies from 1995 to 2017. We find that the estimated effects of capital controls are distinct for different capital flow types and flow directions, but most capital control indices appear to reduce housing prices. Specifically, we find that capital controls have asymmetric effects on housing prices for advanced and emerging economies. The negative effects of capital controls on housing prices are mainly driven by pre-crisis subsample. This means that capital controls have been in effect several times before Global Financial Crisis. We also estimate the effects for boom and slump periods respectively and find that capital control policies are implemented in an acyclical way. Since there exists endogeneity for capital control on real estate transactions, we further use inverse probability weights to rebalance capital control actions and find that this method can weaken the negative effects on housing prices, and the attenuation effects can be attributed to endogenous factors.
    Keywords: Capital control policy; Housing price; Local projections; Inverse probability; Weighted regression adjusted estimator
    JEL: F21 F32 F38 F41 G28
    Date: 2022–06
  9. By: Dirk Zetzsche; Linn Anker-Sørensen; Maria Lucia Passador; Andreas Wehrli
    Abstract: Financial law and regulation have, to date, assumed that regulated activities and functions are concentrated in a single legal entity responsible and accountable for operations and compliance. Even with regard to financial market infrastructure where the regulatory perspective acknowledges the need for interoperability of many entities as a system, each entity is subject to its own rules and regulations, and can thus meet its own compliance requirements independent of other system participants. The entity-focused regulatory paradigm is under pressure in the world of DLT-based payment arrangements where some ledgers, and thus the performance of the services as such, are distributed. DLT arrangements could provide an alternative to the traditional reliance on a mutually trusted central entity to transfer funds and enable the creation of new foundational infrastructures by distributing technical functions or linking existing systems. As such, we identify and outline concepts for use cases where DLT is potentially improving the efficiency of cross-border payments, namely a Best Execution DLT, a DLT application for a Network of Central Banks, a DLT as an AML/KYC utility, as well as DLT arrangements for an Identity Platform, a Small Payments Platform and, finally, an Interoperability Platform connecting multiple closed-loop and proprietary banking systems.
    Keywords: distributed ledgers, blockchain, payments, central banks, cross-border payments, law
    JEL: G20 G21 G28 E42 E58 K23 K24 O16
    Date: 2022–05
  10. By: Ramon Lopez; Kevin Sepulveda
    Abstract: This study decomposes the factors that determined inflation in Chile during the period 2000-2021. We find that the main determinants of domestic inflation are variables of external origin and the exchange rate. Domestic demand has played a rather limited role as an inflationary factor. In general, in normal periods, increases in domestic demand explain no more than 20% of observed inflation. The average monthly inflation observed during the 2000-2021 period reached 0.3%, which means that domestic demand increases in normal periods explain a monthly inflation of 0.06%. Surprisingly, the extraordinary periods of rapid acceleration in demand as a result of highly expansionary fiscal policies and/or of the large withdrawals from pension retirement savings had a rather modest effect on the acceleration of inflation. Only in the last 5 months of 2021 we can detect some effects of the expansion in domestic demand on inflation. This study corroborates an expected fact in a small and open economy like Chile's: most domestic price changes are determined by foreign price changes.
    Date: 2022–05
  11. By: Raphael Auer; Marc Farag; Ulf Lewrick; Lovrenc Orazem; Markus Zoss
    Abstract: The phenomenal growth of cryptocurrencies raises important questions about their footprint on the financial system. What role are traditional financial intermediaries playing in cryptocurrency markets and what drives their engagement? Are new nodes emerging? We help answer these questions by leveraging a novel global supervisory database of banks' cryptocurrency exposures and by synthesising a range of complementary data sources for other types of institutions. We find that major banks' exposures currently remain at very modest levels. Across countries, higher innovation capacity, more advanced economic development, and greater financial inclusion are associated with a higher likelihood of banks taking on cryptocurrency exposures. We show that substantial activity is concentrated in lightly regulated crypto exchanges. This "shadow crypto financial system" serves both retail and institutional clients, such as dedicated investment funds. An uneven regulatory treatment across banks and crypto exchanges and significant data gaps suggest that a proactive, holistic and forward-looking approach to regulating and overseeing cryptocurrency markets is needed. It should focus on ensuring a more level playing field with regard to financial services provided by established financial institutions and intermediaries in the emerging crypto shadow financial system by introducing more stringent regulatory and supervisory oversight for the latter.
    Keywords: cryptocurrencies, decentralised finance, digital currencies, financial regulation, financial supervision, exchange, stablecoin, Bitcoin, Ethereum
    JEL: E42 G12 G21 G23 G28 O33
    Date: 2022–05
  12. By: Merike Kukk; Alari Paulus; Nicolas Reigl
    Abstract: We assess empirically the relationship between credit market concentration and a novel country-level systemic risk indicator that has been developed at the European Central Bank. We find a weakly U-shaped relationship between market concentration and systemic risk for Western European countries, where very low and high levels of market concentration are associated with higher systemic risk. Cumulative estimates with dynamic models show that systemic risk has a persistent negative response to an increase in market concentration from low and median levels of concentration. Local projection estimates for the period preceding the global financial crisis also suggest that an increase in market concentration may have further added to systemic risk at a time when it was building up in countries with high banking concentration, demonstrating the complexity of the relationship between systemic risk and market concentration
    Keywords: systemic risk, financial stability, credit institutions, credit growth, market concentration
    JEL: G10 G21 E58 C22 C54
    Date: 2022–03–24

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