nep-cba New Economics Papers
on Central Banking
Issue of 2022‒08‒08
seventeen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Unregulated Lending, Mortgage Regulations and Monetary Policy By Ugochi Emenogu; Brian Peterson
  2. Monetary policy announcements and expectations: the case of Mexico By Ana Aguilar; Carlo Alcaraz Pribaz; Victoria Nuguer; Jessica Roldán-Peña
  3. Monetary policy press releases: an international comparison By Mario Gonzalez and Raul Cruz Tadle; Raul Cruz Tadle
  4. Shaky foundations Central bank independence in the 21st century By Laurence Scialom; Gaëtan Le Quang; Jérôme Deyris
  5. Navigating the well-being eects of monetary policy: Evidence from the European Central Bank By Mehdi EL HERRADI; Aurélien LEROY
  6. Making Sense of Negative Nominal Interest Rates By Cynthia Balloch; Yann Koby; Mauricio Ulate
  7. Communication, monetary policy, and financial markets in Mexico By Ana Aguilar; Fernando Pérez-Cervantes
  8. A Horse Race of Monetary Policy Regimes: An Experimental Investigation By Olena Kostyshyna; Luba Petersen; Jing Yang
  9. Japan's Low Inflation Conundrum By Thomas Mayer; Gunther Schnabl
  10. International Transmission of Quantitative Easing Policies: Evidence from Canada By Serdar Kabaca; Kerem Tuzcuoglu
  11. Government Deficits and Interest Rates: A Keynesian View By Brett Palatiello; Philip Pilkington
  12. Effects of Banco de la Republica's communication on the yield curve By Luis Fernando Melo; Juan J Ospina-Tejeiro; Julian A Parra-Polania
  13. The effects of Federal Reserve’s quantitative easing and balance sheet normalization policies on long-term interest rates By Sophocles N. Brissimis; Evangelia A. Georgiou
  14. Real Effects of Financial Market Integration: Evidence from an ECB Collateral Framework Change By Pia Hüttl; Matthias Kaldorf
  15. Inflation in the Time of Corona and War By Servaas Storm
  16. Dollarization of Argentina: Revival of a Zombie Idea By Otaviano Canuto
  17. Estimating the Currency Composition of Foreign Exchange Reserves By Matthew Ferranti

  1. By: Ugochi Emenogu; Brian Peterson
    Abstract: Macroprudential policies are often aimed at the traditional banking sector while non-depository financial institutions or shadow banks have limited or no prudential regulations. This paper studies the macroeconomic impact of household-side macroprudential tightening in the presence of unregulated lenders. Our result shows that the presence of unregulated lenders dampens the impact of the policies on house prices and household debt. We also find that leakage to the unregulated sector increases when monetary policy is tightened.
    Keywords: Financial institutions; Financial system regulation and policies; Monetary policy transmission
    Date: 2022–06
  2. By: Ana Aguilar; Carlo Alcaraz Pribaz; Victoria Nuguer; Jessica Roldán-Peña
    Abstract: In this paper we study the effects of Mexico's Central Bank monetary policy decisions on the expectations about inflation and monetary policy rate expectations of private forecasters. We estimate a fixed effect model at analyst level using a panel of professional forecasters from 2010 to 2017. We study the differences in expectations before and after a monetary policy announcement and we compare them when there are no announcements. We find that professional forecasters "listen" to the central bank, i.e. the changes in their short-run expectations are different when there are monetary policy announcements. Also, we find that analysts' surprises in realized inflation affect short-term inflation expectations but do not affect long-term inflation expectations suggesting anchored inflation expectations. Aditionally, monetary policy surprises have an impact on end-of-the-year inflation expectations and reference rate expectations.
    Keywords: central bank communication, survey microdata, monetary policy interest rate expectations
    JEL: E43 E59 D84 C83
    Date: 2022–06
  3. By: Mario Gonzalez and Raul Cruz Tadle; Raul Cruz Tadle
    Abstract: Around the world, several countries have adopted inflation targeting as their monetary policy framework. These institutions set their target interest rates in monetary policy meetings. These decisions are then circulated through press releases that explain the policy rationale. The information contained in the press releases includes current policies, economic outlook, and signals about likely future policies. In this paper, using linguistic methods, such as Latent Dirichlet Allocation (LDA) and semi-automated content analysis, we examine the information contained in the monetary press releases of inflation targeting countries. In addition, we build a custom dictionary for analyzing monetary policy press releases. Using Semi-automated Content Analysis, we then develop a measure, which we refer to as the Sentiment Score index, that quantifies the policy tilt implied in the information provided in the press releases. We find that for a significant majority of the in flation targeting countries, the index provides additional information that helps predict monetary policy rate movements.
    Keywords: central bank, financial market, monetary policy, communication
    JEL: E44 E52 E58
    Date: 2022–06
  4. By: Laurence Scialom; Gaëtan Le Quang; Jérôme Deyris
    Abstract: Central bank independence (CBI) has often been presented as a superior institutional arrangement demonstrated by economists in the 1980s for achieving a common good in a non-partisan manner. In this article, we argue that this view must be challenged. First, research in the history of economic facts and thought shows that the idea of CBI is not new, and was adopted under peculiar socio-historical conditions, in response to particular interests. Rather than an indisputable progress in economic science, CBI is the foundation for a particular configuration of the monetary regime, perishable like its predecessors. Secondly, we argue that the simplistic case imagined by the CBI theory (the setting of a single interest rate disconnected from political pressures) is long overdue. For nearly two decades, central banks have been increasing their footprint on the economy, embarking on large asset purchase programs and adopting macroprudential policies. This pro-activism forces independent central banks to constantly address new distributional - and therefore political - issues, leading to a growing number of criticisms of their actions with regard to inequality or climate change. This growing gap between theory and practices makes plausible a further shift of the institutional arrangement towards a democratization of monetary policy.
    Keywords: central bank independence, monetary policy, macroprudential policy
    JEL: E58 G28 N20
    Date: 2022
  5. By: Mehdi EL HERRADI; Aurélien LEROY
    Abstract: This paper assesses whether monetary policy announcements have an impact on households’ (subjective) well-being by analysing life satisfaction on the days before and after monetary surprises in Germany. To do so, we use individual-level information on life satisfaction from the German Socio-Economic Panel (SOEP) survey and identify the day on which each answer is submitted to the survey. We also exploit the Euro Area Monetary Policy event study Database (EA-MPD) to obtain daily-level information on European Central Bank (ECB) monetary surprises. Our results show that life satisfaction is significantly affected by monetary policy surprises: tightening surprises decrease life satisfaction, while easing surprises increase it.
    Keywords: Monetary policy, Subjective Well-Being, Survey data, European Central Bank
    JEL: E52 E58 I31
    Date: 2022
  6. By: Cynthia Balloch; Yann Koby; Mauricio Ulate
    Abstract: Several advanced economies implemented negative nominal interest rates in the middle of the last decade, seeking to provide further monetary accommodation once cuts in positive territory had been exhausted. Negative rates affect banks in novel ways, mostly because during times of negative policy rates the interest rate that banks pay households on their deposits usually remains close to zero. In this review, we analyze the large literature that studies the impact of negative nominal interest rates, proceeding in four steps. First, we explain the theoretical channels through which negative rates affect banks. Second, we discuss the empirical findings about bank outcomes under negative rates. Third, we describe the aggregate transmission channels that influence the macroeconomic implications of a policy rate cut in negative territory. Finally, we compare the general-equilibrium models that have been used to quantify the effectiveness of negative rates and highlight why they have obtained mixed results. We conclude that, if properly implemented, negative rates are a valuable tool that central banks should not discard outright. However, negative rates can have quantifiable costs for the financial sector, and their effectiveness is likely to decline if implemented for long periods.
    Keywords: negative nominal interest rates; Negative Interest Rates; ZLB; ELB; Monetary Policy; Bank Profitability; Central Banking
    JEL: E32 E44 E52 E58 G21
    Date: 2022–06–23
  7. By: Ana Aguilar; Fernando Pérez-Cervantes
    Abstract: We determine if the communication of private banks to their clients with financial interests in Mexico changes or not after Mexico's Central Bank communicates its monetary policy decision (MPD) and also two weeks later, with the publication of the minutes of Mexico's Central Bank monetary policy decision (MMPD) between 2011 and 2019. We use unsupervised Natural Language Processing (NLP) techniques to turn the text that private banks send to their clients about the Mexican economy into vectors of topics. We find that every time, private banks cover a large diversity of topics and words before the MMPD with no evident consensus of topics, and that almost always the quantities of terms and topics are reduced and repeated by almost every bank after the MMPD indicating some surprise (notable exception: the liftoff in December 2015), and that the topics vary depending on the date of the MMPD. The fact that private banks discuss the same topics and write to their clients with sentences that contain the exact same words indicates that the private banks react to the MMPD, independent of their opinion about the Central Bank's statements. We also found weak evidence that a measure of the size of the changes in the private bank's communication with their clients is positively correlated to changes in the long-term yields but negatively correlated to the size of exchange rate movements.
    Keywords: natural language processing, unsupervised sentence embedding, central bank communication, Mexico
    JEL: C6 E5 E6
    Date: 2022–06
  8. By: Olena Kostyshyna; Luba Petersen; Jing Yang
    Abstract: We provide a comprehensive assessment of five monetary policy regimes—inflation targeting (IT), dual mandate (DM), average inflation targeting under 4-period (AIT-4) and 10-period (AIT-10) horizons, price level targeting (PLT), and nominal GDP level targeting (NGDP)—in a unified experimental framework. We study how participants can understand different regimes and form expectations during periods of economic stability and during a demand-driven recession that temporarily brings the economy to the ELB. Our results suggest a distinct ranking of policy regimes in terms of their ability to achieve macroeconomic stability. DM and IT are the most stabilizing regimes, followed by AIT and then level-targeting regimes PLT and NGDP. AIT with a shorter horizon performs better than AIT with a longer horizon. Monetary policy regimes that are framed around the inflation rate (e.g., AIT-10) are found to deliver significantly more stable economic outcomes than those that target price levels (PLT). Participants have greater difficulty understanding regimes that are more history-dependent and forecasting in the rationally expected direction. They instead rely on trend-chasing heuristics to form their expectations. Trend-chasing forecasting is more destabilizing for regimes with more history dependence. Participants also “need to see it to believe it.” PLT and NGDP initially have mixed success at achieving their targets, and these regimes do not gain credibility before the economy enters into the ELB, where credibility is needed more than ever.
    Keywords: Inflation targets; Monetary policy; Monetary policy communications; Monetary policy framework
    JEL: C9 D84 E58
    Date: 2022–07
  9. By: Thomas Mayer; Gunther Schnabl
    Abstract: The paper analyses the reasons for Japan’s persistently low inflation since the bursting of the Japanese bubble economy (low inflation conundrum). It is shown that Japan experienced a structural break from a high-growth period with relatively high inflation to a low-growth period with exceptionally low inflation since the early 1990s. We show based on a stylized accounting model, how funds are created in a country open to international capital flows by domestic savings, credit creation of banks and net capital inflows, being absorbed either by rising asset prices, newly issued bonds or more money being held. Government expenditure financed by government bond purchases of commercial banks is shown to be an important channel of money creation in Japan’s post-bubble period. With the price level being assumed to be dependent on both goods with free market prices and goods with prices controlled by the government we show that inflation in Japan has been kept low by mainly three factors directly or indirectly influenced by the Bank of Japan: increased money holding of households and corporations, central bank-backed debt-financed price controls and net capital outflows.
    Keywords: Japan, inflation, monetary policy, money supply, fiscal policy, asset prices inflation, balance of payments, price controls, subsidies
    JEL: E31 E51 E58
    Date: 2022
  10. By: Serdar Kabaca; Kerem Tuzcuoglu
    Abstract: What are the cross-border spillovers from major economies’ quantitative easing (QE) policies to their trading partners? We provide evidence by concentrating on spillovers from the US to Canada during the zero lower bound period when QE policies were actively used. We identify QE shocks in the US and estimate their impact on a large number of Canadian macroeconomic and financial variables. We then analyze transmission channels of foreign QE shocks to the domestic economy. Our results suggest that US QE shocks are expansionary for Canada despite a currency appreciation. This is because they spill over to domestic borrowing costs, lowering long-term rates as well as financial premiums, and increasing asset prices. We find evidence for both portfolio balance and risk channels.
    Keywords: Business fluctuations and cycles; International topics; Monetary policy transmission
    JEL: E52 F41 F44
    Date: 2022–06
  11. By: Brett Palatiello (Ridgewood Analytica); Philip Pilkington (Savenay Advisers)
    Abstract: We test the neoclassical loanable funds model which postulates that, ceteris paribus, government borrowing increases the long-term rate of interest. The empirical literature exploring such a connection remains largely mixed. We clarify the conflicting results by deploying an ARDL model to decompose the relationship in the United States into long and short-run effects across multiple measures of the government deficit and long-term interest rate. We find a tendency for changes in the deficit to increase long-term interest rates in the short run but the effect is reversed in the long run. We argue that these results are consistent with John Maynard Keynes’ view of the long-term rate as being heavily influenced by monetary policy, central bank credibility and market convention.
    Keywords: budget deficits, interest rates, crowding out, central bank, monetary policy, Keynes
    JEL: E43 E50 E58 E60 G10
    Date: 2022–04–09
  12. By: Luis Fernando Melo; Juan J Ospina-Tejeiro; Julian A Parra-Polania
    Abstract: We analyze the effect on the yield curve of Banco de la Republica's communication through two specific outlets, the minutes of the monetary policy meetings and the inflation reports during the period 2011-Q2 to 2018-Q4. We extract numeric information from the inflation reports' fan charts, and narrative information -using Latent Dirichlet Allocation, a computational linguistics tool- from the text of both outlets. We use an event-study approach to analyze the impact on four specific maturities: one-year spot, three-year forward, five-year forward and five-year ahead five-year forward rates. We find no evidence that numeric information has any effect on market yields. Regarding narrative variables we find that (i) for the inflation report, there is a significant effect on just two yields (one-year spot and five-year forward), and (ii) for the minute, there is a significant effect on all yields. We believe that these results may be explained by the publication lag of the inflation report during the period of analysis.
    Keywords: communication, monetary policy, text mining, event study, yield curve
    JEL: E52 E58 C40 G14
    Date: 2022–06
  13. By: Sophocles N. Brissimis (University of Piraeus and Bank of Greece); Evangelia A. Georgiou (Bank of Greece and University of Piraeus)
    Abstract: This paper develops a macro-finance term structure model based on the expectations hypothesis extended to include a time-varying term premium. The model establishes inter alia the link between quantitative easing and the term premium, allowing us to measure the total impact on the bond yield of all phases of the Fed’s unconventional monetary policy implementation, including balance sheet expansion and normalization. Furthermore, by focusing on the long-run behavior of the model, an estimate of the equilibrium real interest rate is derived capturing longer-run macroeconomic trends, including the Fed’s, pre-financial crisis, balance-sheet trend.
    Keywords: Quantitative easing; balance sheet normalization; term structure; time-varying term premium;equilibrium real interest rate
    JEL: E43 E44 E52 E58
    Date: 2022–06
  14. By: Pia Hüttl (Humboldt University Berlin, DIW Berlin); Matthias Kaldorf (University of Cologne)
    Abstract: This paper studies the effects of harmonizing collateral policy in a monetary union. In 2007, the European Central Bank replaced national collateral lists with a single list specifying which assets euro area banks can pledge as collateral. Banks holding newly eligible assets experience a reduction in their cost of funding and increase loan supply compared to banks without such assets. The effect is driven by core banks increasing credit supply to riskier and less productive firms located in periphery countries. These firms in turn experience growth in employment and investment. Our results suggest that a harmonized collateral framework facilitates cross-border lending to borrowing-constrained firms and, thereby, increases financial market integration in a monetary union.
    Keywords: E44, E52, E58, G20, G21
    Date: 2022–06
  15. By: Servaas Storm (Delft University of Technology.)
    Abstract: Reliance on established macroeconomic thinking is not of much use in trying to understand what to do in response to the constellation of forces driving up inflation in these times of COVID-19 and war. This paper attempts to reduce the heat and turn up the light in the debate on the return of high inflation and looming stagflation - by providing evidence-based answers to the main (policy) questions concerning the return of high inflation: is the increased inflation due to (global) supply and/or demand factors? Is the inflation in the US exceptional or are other OECD and emerging economies experiencing similar inflationary pressures? Is the increase in inflation permanent or transitory? Can the Fed safely bring down inflation? Is fiscal policy the underlying cause of inflation? Are there alternative, less socially costly, ways to bring inflation down? And what will happen to inflation in the longer run, when the US and other economies will face the impacts of global warming?
    Keywords: Monetary policy; inflation targeting; fiscal policy; inflation; global supply chains; COVID-19 crisis; stagflation; spill-over effects to emerging economies.
    JEL: E0 E5 E6 E62 O23
    Date: 2022–05–30
  16. By: Otaviano Canuto
    Abstract: Last March, a proposal of dollarizing Argentina’s economy arrived at its Congress. We summarize here the potential consequences of such a route in case the bill succeeds in getting approval. First, we point out the broad implications of dollarizing an economy. Then, we set out some cases of Latin American experiences with dollarization. Finally, we address the case of Argentina. The main potential benefit of dollarization would be elimination of domestic inflation, but at a very high cost. Argentina’s fiscal imbalances will not be eliminated by dollarization. Even though dollarization would prevent the printing of money, it imposes no constraints on government spending and borrowing. The only result is that monetary policy ceases to be available as an option, leaving almost no response capacity in case of external shocks. Moreover, dollarization creates the possibility of being exposed to pro-cyclical monetary policies unrelated to domestic necessities. It also eliminates seigniorage benefits. On top of more general features of dollarization and case studies, implementing dollarization now in Argentina would have to face hard-to-overcome challenges. Proposing dollarization under current conditions would require a selective default of domestic currency liabilities, a brutal devaluation, and/or a unilateral conversion of public deposits.
    Date: 2022–04
  17. By: Matthew Ferranti
    Abstract: Central banks manage over \$12 trillion in foreign exchange reserves, influencing global exchange rates and asset prices. However, some of the largest holders of reserves report minimal information about their currency composition, hindering empirical analysis. I develop a Hidden Markov Model to estimate the composition of a central bank's reserves by relating the fluctuation in the portfolio's valuation to the exchange rates of major reserve currencies. I apply the model to China and Singapore, two countries that collectively hold over \$3.5 trillion in reserves and conceal their composition. The results underscore the U.S. dollar's predominance in foreign exchange reserves.
    Date: 2022–06

This nep-cba issue is ©2022 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.