nep-cba New Economics Papers
on Central Banking
Issue of 2022‒07‒25
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Digital Money and Central Bank Operations By Mr. Charles M. Kahn; Jihad Alwazir; Mr. Manmohan Singh
  2. Advancing the Monetary Policy Toolkit through Outright Transfers By Sascha Buetzer
  3. Considerations on the Monetary Policy Framework of the European Central Bank By Andrea Giorgio Tosato
  4. Monetary policy transmission during QE times: role of expectations and term premia channels By Kaminska, Iryna; Mumtaz, Haroon
  5. Tracking Economic and Financial Policies During COVID-19: An Announcement-Level Database By Ms. Prachi Mishra; Mr. Divya Kirti; Yang Liu; Jan Strasky; Soledad Martinez Peria
  6. Do Monetary Policy Outcomes Promote Stability in Fragile Settings? By Patrick A. Imam; Oumar Diallo; Steve Loris Gui-Diby
  7. The local supply channel of QE: evidence from the Bank of England’s gilt purchases By Froemel, Maren; Joyce, Michael; Kaminska, Iryna
  8. Output Gap Estimation and Monetary Policy with Imperfect Knowledge By Pei Kuang; Kaushik Mitra; Li Tang
  9. Cross-Border Central Bank Digital Currencies, Bank Runs and Capital Flows Volatility By Ms. Adina Popescu
  10. Monetary Policy and Exchange Rate Dynamics in a Behavioral Open Economy Model By Pawel Zabczyk; Marcin Kolasa; Sahil Ravgotra
  11. Quantitative Easing and Credit Rating Agencies By Nordine Abidi; Matteo Falagiarda; Ixart Miquel-Flores
  12. The credit channel of monetary transmission in the US: Is it a bank lending channel, a balance sheet channel, or both, or neither? By Sophocles N. Brissimis; Michalis-Panayiotis Papafilis
  13. Regulatory complexity, uncertainty, and systemic risk: are regulators hedgehogs or foxes? By Maurizio Trapanese
  14. Measuring Capital at Risk in the UK banking sector: a microstructural network approach By Covi, Giovanni; Brookes, James; Raja, Charumathi
  15. Statistics for economic analysis: the experience of the Bank of Italy By Giovanni D’Alessio; Riccardo De Bonis; Matteo Piazza; Luigi Infante; Giorgio Nuzzo; Silvia Sabatini; Francesca Zanichelli; Romina Gambacorta; Guido de Blasio; Stefano Federico; Juri Marcucci; Laura Bartiloro; Elena San Martini
  16. Household Expectations and Dissent Among Policymakers By Moritz Grebe; Peter Tillmann
  17. When It Rains, It Pours: Cyber Risk and Financial Conditions By Thomas M. Eisenbach; Anna Kovner; Michael Junho Lee
  18. Hidden Stagflation By Takahashi, Yuta; Takayama, Naoki
  19. Monetary/Fiscal Policy Mix And The Size Of Government Spending Multiplier By Rym Aloui
  20. Early warning models for systemic banking crises: can political indicators improve prediction? By Tran Huynh; Silke Uebelmesser
  21. A model of system-wide stress simulation: market-based finance and the Covid-19 event By di Iasio, Giovanni; Alogoskoufis, Spyridon; Kördel, Simon; Kryczka, Dominika; Nicoletti, Giulio; Vause, Nicholas

  1. By: Mr. Charles M. Kahn; Jihad Alwazir; Mr. Manmohan Singh
    Abstract: The rise of new and proposed monetary vehicles, including CBDC, stablecoins, payment service providers etc., are unprecedented. An important question for central banks is the extent to which these innovations upend the role of and implementation of monetary policy. The paper focuses on the interest rate channel and if digital money (especially CBDC) will change monetary policy and central bank operations. We argue that new policy instruments make sense only to the extent that there is limited substitutability between the various payment sectors. We analyze trends in currency-in-circulation, and how it may impact central bank’s seigniorage, monetary base, and transactional velocity of digital money if money demand declines. Liquidity outside the monetary base will also be important to understand.
    Keywords: Base money; CBDC; central banking operations; currency in circulation; digital money; mobile phone operators; seigniorage; central bank operations Charles Kahn; jihad Alwazir; lender-of-last-resort facilities; payments assets; phone company payments account; central bank profits; central bank regulation; Monetary base; Digital currencies; Central Bank digital currencies; Currencies; Commercial banks
    Date: 2022–05–06
  2. By: Sascha Buetzer
    Abstract: This paper argues that in reserve currency issuing economies at the effective lower bound, outright transfers from the central bank to households are both more equitable and more effective in achieving monetary policy objectives than asset purchases or negative interest rates. It shows that concerns pertaining to central banks’ policy solvency and equity position can be addressed through a careful assessment of a central bank's loss absorbing capacity and, if need be, tiered reserve remuneration policies. It also spells out key differences to a debt or money financed fiscal stimulus, which are particularly pronounced in a currency union without a central fiscal capacity. The paper concludes by discussing broader institutional, political, and legal considerations.
    Keywords: Monetary Policy; Outright Transfers; Central Bank Balance Sheet; Central Bank Solvency; Central Bank Equity; Helicopter Money; Inequality; policy solvency; equity position; revaluation account; Unconventional monetary policies; Financial statements; Global
    Date: 2022–05–06
  3. By: Andrea Giorgio Tosato (Central Bank of Malta)
    Abstract: This working paper offers some considerations on the monetary policy framework of the European Central Bank. The trade-offs arising from adopting a point target configuration over a range target one are assessed in terms of their flexibility vs. inflation anchoring properties. This layout is then confronted with the policy framework in use in the euro area prior to the adoption of the new monetary strategy, which is interpreted as leaning on the side of flexibility. The increased likelihood of dis-anchoring of long-term inflation expectations experienced in the euro area since 2013, however, suggests that the policy framework could benefit from a rebalancing towards a formulation with stronger anchoring properties. The inflation aim of the ECB could thus be reformulated with the introduction of a symmetric 2%-point target. By evaluating this arrangement in terms of the price stability definition, two regions emerge where either the policy aim (symmetric 2%-point target) or the price stability definition (between 0% and 2%) are satisfied, but not both. To avoid any inconsistency in the policy framework, an inflation aim centred at 2% requires an amendment of the price stability definition.
    JEL: E42 E52 E58
    Date: 2022
  4. By: Kaminska, Iryna (Bank of England); Mumtaz, Haroon (Queen Mary University of London)
    Abstract: This paper studies monetary policy transmission mechanisms during QE. Using high frequency yield curve event studies of monetary policy announcements in combination with a dynamic term structure model, we can identify four types of monetary policy surprises: action, signalling (working through expected policy rates), policy uncertainty and QE‑specific gilt supply (both working through term premia). Applying the method to the case of the UK, we find that these channels have often operated together. Importantly, their transmission mechanisms into financial markets and macroeconomy differ, as do their relative strengths. These findings emphasize that for a proper evaluation of QE macroeconomic effects, it is key to identify yield curve channels operating during a particular QE programme.
    Keywords: Monetary policy; quantitative easing; monetary transmission mechanism; high frequency data; dynamic term structure model; local projection model
    JEL: C58 E43 E52 E58 G12
    Date: 2022–05–13
  5. By: Ms. Prachi Mishra; Mr. Divya Kirti; Yang Liu; Jan Strasky; Soledad Martinez Peria
    Abstract: We introduce a new comprehensive announcement-level database tracking the extraordinary fiscal, monetary, prudential, and other policies that countries adopted in response to Covid-19. The database provides detailed information, including sizes where available, for 28 granular policies adopted by 74 countries during 2020. About 5,500 policy measures were announced during this period. Importantly, the database is organized and presented in a format easy for researchers to use in empirical analyses. Announcements were highly correlated across the broad fiscal, monetary, and prudential categories and at more granular levels. Advanced economies (AEs) introduced larger fiscal measures than emerging and developing economies (EMDEs) and relied primarily on large unconventional monetary policies. Bank capital requirements were relaxed widely in both AEs and EMs, while relaxation of provisioning requirements was more common among EMs. Supervisory expectations and reporting requirements were widely relaxed.
    Keywords: Monetary policy; Fiscal policy; Macroprudential policy; Covid-19; Advanced economies; policy measure; bank capital requirement; granular policy; asset purchase; Reserve requirements; Central bank policy rate; Countercyclical capital buffers; Global
    Date: 2022–06–03
  6. By: Patrick A. Imam; Oumar Diallo; Steve Loris Gui-Diby
    Abstract: This paper assesses how monetary policy outcomes affect fragility. Diving into the universe of the most prominent combinations of pursued monetary policy objectives across fragile settings, we examine the relationships between monetary policy outcomes and fragility and find the combination of reduction of inflation and lower unemployment to be the one that delivers the highest payoff in terms of promoting peace and cohesion. Setting aside challenges of monetary policy transmission, results from our analysis broadly confirm the above “winning” combination, with low inflation as a primary desired outcome and low unemployment rate as a secondary one. We also carry out a series of robustness tests, which confirm our findings. Overall, our results lend credence to the importance of paying attention—in the context of reducing fragility—to monetary policy outcomes.
    Keywords: Fragility; monetary policy; objectives; monetary policy outcome; pursued monetary policy objective; monetary policy transmission; Fragile settings; outcome variable; Inflation; Unemployment rate; Exchange rates; Monetary policy frameworks; Price stabilization; Global
    Date: 2022–05–20
  7. By: Froemel, Maren (Bank of England); Joyce, Michael (Bank of England); Kaminska, Iryna (Bank of England)
    Abstract: One way quantitative easing (QE) purchases of government bonds by central banks may affect the yield curve is by creating scarcity in the purchased securities, leading to an increase in their prices or equivalently a reduction in their yields. We analyse and compare the importance of this so-called 'local supply' (or scarcity) channel across all of the Bank of England’s QE government bond purchase programmes during 2009 to 2020. We find strong evidence overall for the role of the local supply channel in explaining gilt yield reactions both to QE announcements ('ex ante'), as well as after purchases have begun ('ex post'). The largest impact on the yield curve through local supply seems to have been in response to the initial QE1 announcements in 2009, both in terms of total impact (the impact of the announced programme), marginal impact (the impact of a given amount of purchases) and relative impact (the proportion of the total change in yields explained). Our findings also imply there may have been an increase in the relative importance of other channels and/or policies over time.
    Keywords: QE; local supply; preferred habitat; yield curve; monetary policy.
    JEL: E43 E52 E58 E65 G11 G12
    Date: 2022–05–13
  8. By: Pei Kuang (University of Birmingham); Kaushik Mitra (University of Birmingham); Li Tang (Middlesex University)
    Abstract: We analyze stability of a large number of recommended output gap estimation methods and their monetary policy implications – not studied in the existing literature – in a New Keynesian model where the policymaker estimates the output gap over time. A sufficiently large response to inflation and small response to output gap estimates robustly delivers good welfare performance, irrespective of the choice of detrending methods. Across all methods, while the optimal response to inflation is similar in magnitude, that to output gap estimates varies considerably. Methods that intrinsically produce large and volatile output gap estimates are prone to self-reinforcing deflation spirals with large welfare loss; the optimal response to output gap estimates in these methods is small.
    Keywords: Detrending, Monetary policy, Expectations, Learning, Inflation, Welfare
    JEL: C18 E17 E32 E52
    Date: 2022–07
  9. By: Ms. Adina Popescu
    Abstract: Central banks around the world are increasingly exploring central bank digital currencies (CBDCs). This paper investigates the possible impacts of cross-border CBDCs on capital flows and financial stability in a simple open economy extension of a classical model of bank runs, augmented with the presence of a credible foreign central bank, which issues an account-based interest bearing CBDC available to nonresidents. The paper finds that the presence of a foreign CBDC which acts as an international safe asset may increase the risk of financial disintermediation in the domestic banking sector, which can be accompanied by higher and more volatile capital flows.
    Keywords: Central bank digital currency; CBDC; capital flows; open-economy; financial stability; deposit contract; capital flows volatility; cross-border CBDCs; model of bank runs; CBDC deposit; CBDC issuer; Central Bank digital currencies; Commercial banks; Foreign banks; Bank deposits; Capital account; Global
    Date: 2022–05–06
  10. By: Pawel Zabczyk; Marcin Kolasa; Sahil Ravgotra
    Abstract: We develop an extension of the open economy New Keynesian model in which agents are boundedly rational à la Gabaix (2020). Our setup nests rational expectations (RE) as a special case and it can successfully mitigate many “puzzling” aspects of the relationship between exchange rates and interest rates. Since the model implies an uncovered interest rate parity (UIP) condition featuring behavioral expectations, our results are also consistent with recent empirical evidence showing that several UIP puzzles vanish when actual exchange rate expectations are used (instead of realizations implicitly coupled with the RE assumption). We find that cognitive discounting dampens the effects of current monetary shocks and lowers the efficacy of forward guidance (FG), but its relative importance in mitigating the so-called FG puzzle is decreasing in openness. Finally, we show that accounting for myopia exacerbates the small open economy unit-root problem, makes positive monetary spillovers more likely, and increases the persistence of net foreign assets and the real exchange rate.
    Keywords: Monetary Policy; Exchange Rates; Bounded Rationality
    Date: 2022–06–03
  11. By: Nordine Abidi; Matteo Falagiarda; Ixart Miquel-Flores
    Abstract: This paper investigates the behaviour of credit rating agencies using a natural experiment in monetary policy. We exploit the corporate QE of the Eurosystem and its rating-based specific design which generates exogenous variation in the probability for a bond of becoming eligible for outright purchases. We show that after the launch of the policy, rating activity was concentrated precisely on the territory where the incentives of market participants are expected to be more sensitive to the policy design. Our findings contribute to better assessing the consequences of the explicit reliance on CRAs ratings by central banks when designing monetary policy. They also support the Covid-19 monetary stimulus, and in particular the waiver of private credit rating eligibility requirements applied to recently downgraded issuers.
    Keywords: Credit Rating Agencies; Monetary Policy; Quantitative Easing; eligibility requirement; rating activity; behaviour of credit rating agencies; rating Agency Disclaimer; eligibility frontier; Bonds; Bond ratings; Corporate bonds; Credit ratings; Unconventional monetary policies; Global; Middle East and Central Asia
    Date: 2022–06–03
  12. By: Sophocles N. Brissimis (University of Piraeus and Bank of Greece); Michalis-Panayiotis Papafilis (University of Piraeus)
    Abstract: We develop a theoretical framework that extends the Bernanke and Blinder (1988) model to incorporate imperfect substitution between internal and external finance of firms in order to study the operation of both the bank lending and the balance sheet channels of monetary transmission in the US. Our model is used to quantify the financial accelerator effects due to the operation of these channels. Empirically, we employ multivariate cointegration techniques to identify the equilibrium relationships included in our model, and we provide evidence that only the balance sheet channel is operational for the period before and after the global financial crisis.
    Keywords: Monetary transmission mechanism; bank lending channel; balance sheet channel; financial structure; multivariate cointegration
    JEL: C32 C52 E44 E51 E52
    Date: 2022–07
  13. By: Maurizio Trapanese (Banca d'Italia)
    Abstract: This paper explores the relationship between regulatory complexity and systemic risk. Building upon the distinction between measurable risk and uncertainty, it outlines the fundamentals of the main regulatory frameworks of the last two decades (with a focus on the Basel Accords). The resulting outcome in terms of excessively regulatory complexity might turn out to be costly, and sub-optimal for crisis prevention. Since modern finance is characterized by uncertainty (rather than risk), less complex rules could be given greater consideration. Rebalancing regulation towards simplicity may produce Pareto-improving solutions, and encourage better decision making by authorities and regulated entities. However, addressing systemic risk in a complex financial system should not entail the replacement of overly complex rules with overly simple or less stringent regulations. The challenge is to define criteria and methods to assess the degree of unnecessary complexity in regulation. To this end, the paper proposes some options affecting the content of the rules, the regulatory policy mix for certain financial sectors, as well as the rulemaking process.
    Keywords: economic theory, uncertainty, financial crises, financial regulation
    JEL: B20 D81 G01 G28
    Date: 2022–06
  14. By: Covi, Giovanni (Bank of England); Brookes, James (Bank of England); Raja, Charumathi (Bank of England)
    Abstract: In this paper we construct and analyse the UK banking system’s Global Network of granular exposures which captures roughly 90% of the UK banking system’s total assets for the period 2018 Q1 to 2021 Q4. We thus study the microstructure of UK banking system focusing on the role played by concentration risk and interconnectedness across sectors. We then estimate the quarterly evolution of expected losses (Capital at Risk) for the UK banking sector, and via Monte Carlo simulations the stochastic distribution of UK banks’ losses to study the severity and likelihood of tail-events (Conditional Capital at Risk). In the end, we provide insights on the impact of the Covid-19 pandemic on UK banking system’s loss distribution by decomposing the sources of average and tail risks.
    Keywords: Financial network; systemic risk; stress testing; Covid-19 pandemic.
    JEL: D85 G21 G32 L14
    Date: 2022–05–27
  15. By: Giovanni D’Alessio (Bank of Italy); Riccardo De Bonis (Bank of Italy); Matteo Piazza (Bank of Italy); Luigi Infante (Bank of Italy); Giorgio Nuzzo (Bank of Italy); Silvia Sabatini (Bank of Italy); Francesca Zanichelli (Bank of Italy); Romina Gambacorta (Bank of Italy); Guido de Blasio (Bank of Italy); Stefano Federico (Bank of Italy); Juri Marcucci (Bank of Italy); Laura Bartiloro (Bank of Italy); Elena San Martini (Bank of Italy)
    Abstract: The paper provides an overview of the main statistics produced by the Bank of Italy: financial accounts, monetary statistics, balance of payments, household and business surveys. The volume discusses the problems related to the measurement of economic phenomena, how statistics can be used for policy evaluation, the challenges for official statistics posed by globalization, the digital economy and big data. Finally, we show the policy adopted by the Bank of Italy for the dissemination of statistics and the role of the Research Data Center.
    Keywords: central bank statistics, financial accounts, monetary and banking statistics, balance of payment, household surveys, business surveys, financial literacy, policy evaluation, official statistics, globalization, digital economy, big data, dissemination
    JEL: C40 C80
    Date: 2022–06
  16. By: Moritz Grebe (University of Giessen); Peter Tillmann (University of Giessen)
    Abstract: This paper studies the impact of dissent in the ECB's Governing Council on uncertainty surrounding households' inflation expectations. We conduct a randomized controlled trial using the Bundesbank Online Panel Households. Participants are provided with alternative information treatments concerning the vote in the Council, e.g. unanimity and dissent, and are asked to submit probabilistic inflation expectations. The results show that the vote is informative. Households revise their subjective inflation forecast after receiving information about the vote. Dissenting votes cause a wider individual distribution of future inflation. Hence, dissent increases households' uncertainty about inflation. This effect is statistically significant once we allow for the interaction between the treatments and individual characteristics of respondents. The results are robust with respect to alternative measures of forecast uncertainty and hold for different model specifications. Our findings suggest that providing information about dissenting votes without additional information about the nature of dissent is detrimental to coordinating household expectations.
    Keywords: central bank communication, disagreement, inflation expectations, randomized controlled trial, survey
    JEL: E52 E43 E32
    Date: 2022
  17. By: Thomas M. Eisenbach; Anna Kovner; Michael Junho Lee
    Abstract: We analyze how systemic cyber risk in the wholesale payments network relates to adverse financial conditions. We show that at the onset of the COVID-19 pandemic, payment activity increased, became more concentrated, and showed intraday liquidity stress. Cyber vulnerability was elevated in late February and early March 2020, with the potential impact of a cyberattack about 40 percent greater than in the remainder of 2020. Policy interventions to stabilize markets mitigated cyber vulnerability, particularly corresponding to large increases in aggregate reserves. We observe that cyber vulnerability and other financial shocks cannot be treated as uncorrelated risks and policy solutions for cyber security need to be calibrated for adverse financial conditions.
    Keywords: cyber; banks; networks; payments; COVID-19
    JEL: G12 G21 G28
    Date: 2022–06–01
  18. By: Takahashi, Yuta; Takayama, Naoki
    Abstract: We present evidence that the rise in inflation in Japan since 2014 is a result of a hidden stagflation: the relative prices of durable consumption and ICT investment goods stopped declining, reflecting technology stagnation and exerting an inflationary pressure on the economy and; the real side of the Japanese economy simultaneously started stagnating even further. We construct a multi-good monetary model to account for these facts together and quantify the impact of the technology stagnation on the aggregate inflation rate. We develop a new sign restriction approach to construct informative lower bounds to the impact of the technology stagnation on long-run inflation without relying on the exact Euler equation and some of the balanced growth path properties. By using the lower bounds, we find that inflation would be close to 0% or even negative without the technology stagnation. Moreover, the technology stagnation explains a sizable fraction of the observed slowdown in the real GDP and consumption growth. Our findings challenge the conventional view that Japan emerged from long-lasting deflation owing to the unconventional monetary policies. Finally, we apply our analysis to European countries and uncover the hidden stagflation there as well.
    JEL: E31 E43 E52 E58
    Date: 2022–07
  19. By: Rym Aloui (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: This paper analyzes the size of government spending multiplier in two policy mix cases: Active Monetary/Passive Fiscal policy (regime M) in the first instance and Passive Monetary/Active Fiscal policy (regime F), in the sense of Leeper (1991), in the second. I develop a New-Keynesian model where preferences are subject to external deep habits and where some households do not have access to financial markets. I show that these two specifications allow for the crowding in of private consumption in both regimes. However, the private investment falls in regime M while it rises in regime F as a response to a government spending shock. In addition, I show that the impact multiplier increases with the degree of deep habits in regime M, while it decreases in regime F. In this framework, in a low nominal interest rate environment, the government spending multiplier is not too large as vast studies show. However, I find that the global effectiveness of government spending is larger in regime F than in regime M, even though the impact multiplier is greater than unity in both regimes.
    Keywords: Wealth Effects, Government Spending Multiplier, Zero Lower Bound, Fiscal Theory of the Price Level, Monetary and Fiscal Rules, Public Debt.
    JEL: E63 E52 E62 E32
    Date: 2022
  20. By: Tran Huynh (Friedrich Schiller University Jena); Silke Uebelmesser (Friedrich Schiller University Jena and CESifo)
    Abstract: This study provides the first attempt to evaluate whether a logit early warning system (EWS) for systemic banking crises can produce better predictions when political indicators are used alongside traditional macro-financial indicators. Based on a dataset covering 32 advanced economies for the period 1975-2017, we show that the inclusion of political indicators helps improve the predictive performance of the model. While the improvement is small, it is statistically significant and consistent for several different performance measures and robustness tests. Among the newly employed political variables, variables indicating the political ideology of the ruling party and the time in office of the incumbent chief executive show significant correlations with the likelihood of systemic banking crises. The results suggest that a systemic banking crisis is less likely when the government is left-wing and when the chief executive officer has been in office longer.
    Keywords: early warning systems, systemic banking crises, vulnerability, political indicators, macro-financial indicators
    JEL: C35 C53 E60 F37 G01 G28
    Date: 2022–06–24
  21. By: di Iasio, Giovanni; Alogoskoufis, Spyridon; Kördel, Simon; Kryczka, Dominika; Nicoletti, Giulio; Vause, Nicholas
    Abstract: We build a model to simulate how the euro area market-based financial system may function under stress. The core of the model is a set of representative agents reflecting key economic sectors, which interact in asset, funding, and derivatives markets and face solvency and liquidity constraints on their behaviour. We illustrate the model's behaviour in a two-layer approach. In Layer 1 the deterioration in the outlook for the corporate sector triggers portfolio reallocation by the model's agents. Layer 2 adds a rating downgrade shock where a fraction of investment grade corporate bonds is downgraded to high yield, which creates further rebalancing pressure and price movements. The model predicts (i) asset flows (buying and selling of marketable securities) across agents and (ii) balance sheet losses. It also provides quantitative evidence on equilibrium effects of the macroprudential regulation of nonbanks, which we illustrate by varying investment fund cash buffers. JEL Classification: G17, G21, G22, G23
    Keywords: COVID-19, market-based finance, stress testing, systemic risk
    Date: 2022–06

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