nep-cba New Economics Papers
on Central Banking
Issue of 2022‒08‒15
34 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary policy in the open economy with digital currencies By Pietro Cova; Alessandro Notarpietro; Patrizio Pagano; Massimiliano Pisani
  2. Foreign monetary policy and domestic inflation in emerging markets By Marco Flaccadoro; Valerio Nispi Landi
  3. Does Household Behaviour Depend on Monetary Policy? Evidence from Cyprus By Nektarios Michail; Agorasti Patronidou; Ioanna Evangelou
  4. Monetary Policy Uncertainty and its impact on the real economy: Empirical Evidence from the Euro area By Quelhas, João
  5. On the use of current and forward-looking data in monetary policy: a behavioural macroeconomic approach By De Grauwe, Paul; Ji, Yuemei
  6. Forward guidance and expectation formation: A narrative approach By Christopher S Sutherland
  7. An estimated open-economy DSGE model for the evaluation of central bank policy mix By Solikin M. Juhro; Denny Lie; Aryo Sasongko
  8. Drivers of Turkish Inflation By Hakan Yilmazkuday
  9. Product quality, measured inflation and monetary policy By Rodnyansky, Alexander; Van der Ghote, Alejandro; Wales, Daniel
  10. COVID-19 and Exchange Rates: Spillover Effects of U.S. Monetary Policy By Hakan Yilmazkuday
  11. Does a CBDC Reinforce Inefficiencies? By Max Fuchs
  12. Good-Bye Original Sin, Hello Risk On-Off, Financial Fragility, and Crises? By Joshua Aizenman; Yothin Jinjarak; Donghyun Park; Huanhuan Zheng
  13. Effect of remittances on the macroeconomy: A Structural VAR study of Nepal By Sudyumna Dahal
  14. Inflation and climate change: the role of climate variables in inflation forecasting and macro modelling By Boneva, Lena; Ferrucci, Gianluigi
  15. Stress tests and capital requirement disclosures: do they impact banks’ lending and risk-taking decisions? By Konietschke, Paul; Ongena, Steven; Ponte Marques, Aurea
  16. Countercyclical capital buffer: building the resilience or taming the rapid financial cycle? By Widiantoro, Dimas Mukhlas
  17. Macroeconomic effects of the Covid-19 Pandemic in Germany and the European Monetary Union and economic policy reactions By Herr, Hansjörg; Nettekoven, Zeynep Mualla
  18. Corporate Debt Maturity Matters For Monetary Policy By Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott
  19. On the stabilizing role of cash for societies By Rösl, Gerhard; Seitz, Franz
  20. Developing a precautionary approach to financial policy: from climate to biodiversity By Chenet, Hugues; Kedward, Katie; Ryan-Collins, Josh; van Lerven, Frank
  21. Global shocks and international policy coordination By Ashima Goyal; Rupayan Pal
  22. Higher capital requirements and credit supply: evidence from Italy By Maddalena Galardo; Valerio Vacca
  23. Central banks and climate-related disclosures: applying the TCFD’s recommendations By Kyriakopoulou, Danae; Antonakaki, Theodora; Bekiari, Maria; Kartapani, Aliki; Rapti, Eleni
  24. Foreign exchange interventions and their impact on expectations: Evidence from the USD/ILS options market By Hertrich, Markus; Nathan, Daniel
  25. Sustainable and responsible management of central banks’ pension and own portfolios By Kyriakopoulou, Danae; Hyrske, Anna
  26. Why Have Interest Rates Been Low? By Ray C. Fair
  27. Using household-level data to guide borrower-based macro-prudential policy By Gaston Giordana; Michael H. Ziegelmeyer
  28. Aligning financial and monetary policies with the concept of double materiality: rationales, proposals and challenges By Boissinot, Jean; Goulard, Sylvie; Salin, Mathilde; Svartzman, Romain; Weber, Pierre-François
  29. Managing sovereign debts held by the ESCB: Operational and legal constraints By Micossi, Stefano
  30. Sustainable management of central banks’ foreign exchange (FX) reserves By Fender, Ingo; McMorrow, Mike; Zulaica, Omar
  31. How Do People View Price and Wage Inflation? By Monica Jain; Olena Kostyshyna; Xu Zhang
  32. Bad news for the Fed from the Beveridge space By Olivier J Blanchard; Alex Domash; Lawrence H. Summers
  34. Fed Implied Market Prices and Risk Premia By Charles W. Calomiris; Joanna Harris; Harry Mamaysky; Cristina Tessari

  1. By: Pietro Cova (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Patrizio Pagano; Massimiliano Pisani (Bank of Italy)
    Abstract: We assess the transmission of a monetary policy shock in a two-country New Keynesian model featuring a global private stablecoin and a central bank digital currency (CBDC). In the model, cash and digital currencies are imperfect substitutes that differ as to the liquidity services they provide. We find that in a digital-currency economy, where the stablecoin is a significant means of payment, the domestic and international macroeconomic effects of a monetary policy shock can be smaller or larger than in a (benchmark) mainly-cash economy, depending on how the assets backing the stablecoin supply respond to the shock. The benchmark transmission of the monetary policy shock can nonetheless substantially be restored in the digital-currency economy 1) if the stablecoin is fully backed by cash or 2) if the CBDC is a relevant means of payment.
    Keywords: digital currency, CBDC, monetary policy, international finance.
    JEL: E51 E52 F30
    Date: 2022–04
  2. By: Marco Flaccadoro (Bank of Italy); Valerio Nispi Landi (Bank of Italy)
    Abstract: We estimate the response of domestic inflation to a US interest rate shock in a sample of 27 emerging economies, using local projection methods. Our results point out that the sign of the inflation response crucially depends on the monetary policy framework: after a US monetary policy tightening, inflation decreases in peggers; inflation increases in floaters that do not target inflation; the inflation response is not statistically different from zero in floaters that are committed to an inflation target. We rationalize this outcome using a standard DSGE model. We show that pegging the exchange rate yields larger welfare losses compared to the other two monetary policy frameworks, even assuming dominant currency pricing.
    Keywords: inflation stabilization, inflation targeting, monetary policy, open economy macroeconomics
    JEL: E31 E52 F41
    Date: 2022–04
  3. By: Nektarios Michail (Central Bank of Cyprus); Agorasti Patronidou (Central Bank of Cyprus); Ioanna Evangelou (Central Bank of Cyprus)
    Abstract: The paper examines whether euro area monetary policy was able to affect the consumption and investment behaviour of households in Cyprus, using household level data for Cyprus obtained from the Household Finance and Consumption Survey. Using a panel analysis, we find that monetary policy only affects the deposit and consumption behaviour of indebted households, suggesting that the main transmission channel of monetary policy is via the change in loan instalments. Households without loans appear to be, in general, unaffected by monetary policy changes. This suggests that monetary policy can paradoxically be less effective when most needed, as, in times of financial stress, households tend to focus on deleveraging. Additional avenues with regards to the potential impact of monetary policy on investing behaviour are also explored.
    Keywords: HFCS; survey; monetary policy; interest rate; households
    JEL: C83 E52 G50
    Date: 2021–10
  4. By: Quelhas, João
    Abstract: In this paper, we construct a proxy for uncertainty that tracks monetary policy in the Euro area by text-mining thousands of newspaper articles in the press. We calibrate a nonlinear interacted vector autoregression model to study the impact of monetary policy uncertainty on the real economy and on the effectiveness of monetary policy. We find that higher uncertainty leads to a contraction in economic activity, with a higher dampening effect in uncertain times. Uncertainty also influences how strongly movements in the policy rate affect output, investment and consumption as, in uncertain times, average responses are up to three times less powerful than in tranquil times.
    Keywords: Monetary Policy, Uncertainty, Euro Area, Textual Analysis, SEIVAR Model
    JEL: E32 E40 E50 E52
    Date: 2022–05
  5. By: De Grauwe, Paul; Ji, Yuemei
    Abstract: We analyse the question of whether the use of forward-looking data in monetary policy is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that in a strict inflation targeting (SIT) regime, the use of forward-looking data leads to a lower quality of monetary policymaking than in a dual mandate monetary policy regime, because the first regime creates more extreme movements in output and inflation than the second one. We also find that nowcasting tends to improve the quality of monetary policy, especially in a SIT regime. Finally, we provide a case study of monetary policies in the USA and the eurozone during 2000–20.
    Keywords: OUP deal
    JEL: E30 E50
    Date: 2022–07–09
  6. By: Christopher S Sutherland
    Abstract: How forward guidance influences expectations is not yet fully understood. To study this issue, I construct central bank data that includes forward guidance and its attributes, central bank projections, and quantitative easing, which I combine with survey data. I describe how, when, and where forward guidance has worked. I find that forecasters revise their interest rate forecasts in the intended direction by five basis points on average following a change in forward guidance. I provide country estimates for The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Reserve Bank of Australia, Reserve Bank of New Zealand, Sveriges Riksbank, and Norges Bank. I offer preliminary evidence that commitment-based forward guidance is exceedingly rare, but can strongly amplify forward guidance. Finally, I provide estimates of the extent to which this effect may be attributable to central bank information effect.
    Keywords: forward guidance, central bank communication, information effects, expectations, survey data
    JEL: D83 D84 E37 E52 E58
    Date: 2022–06
  7. By: Solikin M. Juhro; Denny Lie; Aryo Sasongko
    Abstract: This paper builds and estimates a small open-economy dynamic stochastic general equilibrium (DSGE) model suitable for the evaluation of central bank policy mix, with a particular application on the Indonesian economy. The model has a rich array of shocks and frictions, including banking and financial frictions. We illustrate how the estimated model can be used to investigate the source of aggregate fluctuations in Indonesia and to evaluate and simulate a policy mix involving monetary and macroprudential policies. Our Bayesian estimation identifies the COVID-19 pandemic shocks as being mainly a combination of adverse supply-side (technology) and demand-side (preference and foreign-output) shocks. We show that a countercyclical capital requirement rule could be a potent addition to Bank Indonesia's policy mix arsenal. Despite its rich features, the model is scalable and can be readily extended for evaluating other types of central bank policy mix.
    Keywords: central bank policy mix; integrated policy framework; countercyclical macroprudential policy rule; DSGE model for Indonesia; COVID-19 pandemic; capital requirement;
    Date: 2022–05
  8. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the drivers of Turkish inflation by using a structural vector autoregression model, where monthly data on global oil prices, unemployment rates, inflation rates, policy rates and exchange rates are used. The empirical results show that Turkish inflation increases following a negative policy rate shock, a positive exchange rate shock, or a positive global oil price shock. The volatility of Turkish inflation is mostly explained by global oil prices and exchange rate movements in the long run, while the contribution of exchange rate shocks to Turkish inflation has continuously increased over time. As additional empirical results show that exchange rate depreciation can be reduced by positive policy rate shocks, it is implied that a conventional monetary policy increasing policy rates following an increase in inflation or a depreciation of Turkish lira would be optimal to achieve and maintain price stability in Turkey, which is the primary objective of the Central Bank of the Republic of Turkey.
    Keywords: Monetary Policy, Inflation, Unemployment, Exchange Rate, Turkey
    JEL: E31 E52 F41
    Date: 2022–03
  9. By: Rodnyansky, Alexander; Van der Ghote, Alejandro; Wales, Daniel
    Abstract: This paper proposes a tractable New Keynesian (NK) economy with endogenous adjustment in product quality that nests the canonical framework. Endogenous quality choice reduces the slope of the traditional NK Phillips curve and amplifies the economy’s response to productivity shocks. This leads to a less reactionary monetary policy where model misspecification of imperfectly observable quality adjustments matters more for macroeconomic stabilization than the mismeasurement of those adjustments. With no misperception of product quality by the monetary authority, the principles for optimal monetary policy are, nonetheless, unchanged as the quality extensions to the canonical NK model preserve divine coincidence. JEL Classification: E31, E32, E52, E58
    Keywords: inflation indexes, monetary policy, product quality
    Date: 2022–07
  10. By: Hakan Yilmazkuday (Department of Economics, Florida International University)
    Abstract: This paper investigates the spillover effects of U.S. monetary policy on exchange rates of 11 emerging markets and 12 advanced economies during the pre-COVID-19 period of 2019 versus the COVID-19 period of 2020. The investigation is achieved by a structural vector autoregression model, where year-on-year changes in weekly measures of economic activity, exchange rates and policy rates are used. The empirical results suggest evidence for the spillover effects of U.S. monetary policy for several countries during the pre-COVID-19 period, whereas they have been effective only for certain countries during the COVID-19 period that can be explained by the disease outbreak channel. It is implied that policies keeping the pandemic under control may help mitigate the unforeseen economic effects of the COVID-19 crisis.
    Keywords: COVID-19, Coronavirus, Exchange Rates, Monetary Policy, Spillover Effects
    JEL: E52 E58 F31 F42
    Date: 2022–06
  11. By: Max Fuchs (University of Kassel)
    Abstract: This paper examines whether a central bank digital currency (CBDC) reinforces inefficiencies in transactions with cash. In this case, the gap between the traded quantity and the welfare-maximizing one, which arises due to discounting or a suboptimal amount of money, increases further. To get some answers, the monetary search model of Trejos and Wright (1995) is extended by a CBDC. We show that an interest-bearing CBDC reinforces inefficiencies in transactions with cash since opportunity costs for cash holders and money supply increase. Nevertheless, a CBDC is able to increase welfare as long as the share of CBDC holders is limited.
    Keywords: CBDC, inefficiencies, welfare analysis
    JEL: E31 E41 E51
    Date: 2022
  12. By: Joshua Aizenman; Yothin Jinjarak; Donghyun Park; Huanhuan Zheng
    Abstract: We analyze the sovereign bond issuance data of eight major emerging markets (EMs) - Brazil, China, India, Indonesia, Mexico, Russia, South Africa and Turkey from 1970 to 2018. Our analysis suggests that (i) EM local currency bonds tend to be smaller in size, shorter in maturity, or lower in coupon rate than foreign currency bonds; (ii) EMs are more likely to issue local-currency sovereign bonds if their currencies appreciated before the global financial crisis of 2008 (GFC); (iii) inflation-targeting monetary policy increases the likelihood of issuing local-currency debt before GFC but not after; and (iv) EMs that offer higher sovereign yields are more likely to issue local-currency bonds after GFC. Future data will allow us to test and identify structural changes associated with the COVID-19 pandemic and its aftermath.
    Date: 2022–06
  13. By: Sudyumna Dahal
    Abstract: The paper examines the short-term macroeconomic impact of remittances using a case study of Nepal, one of the highest remittance-receiving countries in the world as a share of GDP. Despite the massive inflow of remittances during the turn of the century, the quantitative impact of remittances on the Nepali economy remains largely unexplored. Furthermore, macroeconomic modelling of the Nepali economy is at the infant stage primarily due to the unavailability of reliable data. Hence, using novel quarterly GDP data, this paper aims to fill both gaps by examining the effects of remittance and other macroeconomic variable shocks on the small open economy of Nepal between 2004 and 2019. Employing an SVAR model, the study finds that the impact of remittance shock on output (GDP) is not significant, but remittances significantly increased money supply and prices and appreciated the real exchange rate. These findings solve the price and exchange rate puzzles found in the earlier studies on Nepal. While foreign partners’ output primarily drives the remittance inflows to Nepal, the real exchange rate also plays a non-trivial role, but the domestic GDP or the interest rate do not appear to have a significant impact on the remittance inflows. Most of the macroeconomic variables do not respond to the policy rate; additionally, the reaction of money supply in response to a positive shock to inflation is not significant, which poses a further challenge to the policymakers in Nepal. Despite the monetary authorities in Nepal using money supply as the primary monetary policy tool, the transmission channel remains impaired.
    Keywords: remittance shock, Nepal, macro-economy, small open economy, structural VAR,
    JEL: F24 F62 O53 F22
    Date: 2022–07
  14. By: Boneva, Lena; Ferrucci, Gianluigi
    Abstract: Climate change is increasingly affecting the objective, conduct and transmission of monetary policy. Yet, climate-related shocks and trends are still generally absent from the canonical models used by central banks for their policy analysis and forecasting. This briefing paper reviews the potential pitfalls of using a modelling framework that omits climate-related information and provides some reflections on how central banks can integrate climate change considerations into their ‘workhorse’ models. This includes: accounting for an explicit role of the energy sector in the production structure and for specific climate change policies; improving the ability of models to cope with various sources of heterogeneity; and incorporating a more realistic representation of the financial sector, to analyse the possible stranding of assets and impairments in the transmission mechanism of monetary policy. It argues that a ‘suite-of-models’ strategy is a promising approach for central banks to cope with the climate challenge when designing a new generation of models. To complement theory with practice, several examples of central banks that have already integrated climate-related information into their analytical frameworks are provided. The paper concludes with some specific recommendations.
    JEL: F3 G3 J1
    Date: 2022–04–13
  15. By: Konietschke, Paul; Ongena, Steven; Ponte Marques, Aurea
    Abstract: How do banks respond to changes in capital requirements as a result of the stress tests? Does the disclosure of stress test results matter? To answer these questions, we study the impact of European stress tests on banks’ lending, their corresponding risk-taking, the ensuing effect on their profitability and the respective publication effect. Exploiting the centralised European stress tests in conjunction with two unique confidential databases containing (i) stress test information for the 2016 and 2018 exercises covering a total of 93 and 87 banks, respectively; and (ii) quarterly supervisory information on approximately 1000 banks (stress-tested and non-tested), allow us to implement a dynamic differencein-differences strategy for a comparable sample of banks. We find that banks participating in the stress tests reallocate credit away from riskier borrowers and towards safer ones in the household sector, making them in general safer but also less profitable. This is especially the case for the set of banks part of the Supervisory Review and Evaluation Process with undisclosed stress tests, which were also not disclosing their Pillar 2 Requirements voluntarily. Our results confirm that the publication of capital requirements can have a disciplinary effect since banks publishing their requirements tend to have more robust capital ratios, which improves market discipline and financial stability. JEL Classification: E51, E58, G21, G28
    Keywords: Credit supply, Financial stability, Market discipline, Profitability, Stress-testing
    Date: 2022–07
  16. By: Widiantoro, Dimas Mukhlas
    Abstract: Countercyclical capital buffer came in 2009 after Basel Committee proposed it through Basel III regulation to build banking resilience and tame the systemic risk due to excessive growth in the credit cycle. Basel committee proposed the credit to GDP gap or credit gap as the indicator of when such buffer is activated. In 2014, the European Central Bank recommended that European Economies adopt the countercyclical capital buffer or CCB in their macroprudential policies. However, in the implementation, every financial authority in EU markets imposed the CCB differently. Some groups use CCB to build resilience as their primary objective. At the same time, the other group attempted not only resilience but also to control the excessive credit growth as their primary objective. The next challenge in implementing CCB is the negative feedback on the usage of the credit gap as the indicator and guidance on setting the CCB rate. The input lies in the Hodrick-Prescott or HP filter containing polynomial drift with a structural break, creating a spurious result. There are two novelties in this paper. First, the paper attempts to see whether the differences in such purposes will affect the country's resilience and ability to tame excessive credit growth. Second, the paper will employ the boosted Hodrick-Prescott filter or bHP from Phillips and Shi (2021) and compare it to the original Hodrick-Prescott filter. The empirical analysis uses data from Germany as the resilience focus market and France focusing on resilience and taming the rapid financial cycle. Using quarterly data from 1999 to 2021, we find that the boosted HP filter significantly improves the accuracy of the credit gap and output gap by removing the polynomial drift in the original HP filter. By analyzing the speed of economic recovery after financial shock, Germany, which focuses primarily on building economic resilience, recovers faster than France. Later, we find no significant difference between the two markets in their ability to tame the financial cycle by analyzing the credit gap cycle after the CCB implementation shock. And last, we find that after 2014, Germany has been able to moderate credit procyclicality, better than the period before.
    Keywords: boosted Hodrick-Prescott filter, Output gap, Credit to GDP gap, Countercyclical capital buffer
    JEL: E61 E65
    Date: 2022–02–22
  17. By: Herr, Hansjörg; Nettekoven, Zeynep Mualla
    Abstract: The Covid-19 pandemic hitting the world in 2020 also caused a high death toll in Germany and in the European Monetary Union (EMU) at large. The health crisis worldwide and the precautions against Covid-19 rapidly induced a demand and supply recession simultaneously. The Covid-19 crisis was marked as the worst crisis since the Great Depression of the 1930s. It hit the EMU in an unfortunate moment, when economic growth was already low before the Covid-19 crisis started. The effects of the Great Financial Crisis and Great Recession 2008/2009 were not overcome at the beginning of the Covid-19 recession. Mega-expansionary monetary policy was still in place stimulating bubbles in stock and real estate markets in an overall constellation of partly very high levels of private and public debt. Macroeconomic policies in form of expansionary monetary policy, large-scale fiscal stimuli, and public guarantees, in Germany and the EMU smoothed the disastrous economic and social effects of the pandemic. Overall, the stabilisation policy during the Covid-19 pandemic in Germany was successful and prevented escalating inequalities. But the pandemic intensified long-lasting problems which have to be solved in the future. Public debt quotas cannot increase permanently without leading to an economically fragile situation. It also shows the need for a fiscal union in the EMU as an equal partner for the European Central Bank (ECB). In early 2022, the ECB is in a difficult situation. Price shocks drove the inflation rate up, but restrictive monetary policy as a response to such shocks slowdown growth and lead to unemployment.
    Keywords: Covid-19 crisis,Germany,EU,fiscal policy,monetary policy
    JEL: E61 F62 I18
    Date: 2022
  18. By: Joachim Jungherr; Matthias Meier; Timo Reinelt; Immo Schott
    Abstract: We provide novel empirical evidence that firms’ investment is more responsive to monetary policy when a higher fraction of their debt matures. In a heterogeneous firm New Keynesian model with financial frictions and endogenous debt maturity, two channels explain this finding: (1.) Firms with more maturing debt have larger roll- over needs and are therefore more exposed to fluctuations in the real interest rate (roll-over risk). (2.) These firms also have higher default risk and therefore react more strongly to changes in the real burden of outstanding nominal debt (debt overhang). In comparison to existing models, we show that a model which accounts for the maturity of debt and its distribution across firms implies larger aggregate effects of monetary policy.
    Keywords: monetary policy, investment, corporate debt, debt maturity
    JEL: E32 E44 E52
    Date: 2022–07
  19. By: Rösl, Gerhard; Seitz, Franz
    Abstract: In this paper, we focus on the stabilizing role of cash from a society-wide perspective. Starting with conceptual remarks on the importance of money for the economy in general, special attention is paid to the unique characteristics of cash. As these become apparent especially during crisis periods, a comparison of the Great Depression (1929 - 1933) and the Great Recession 2008/09 shows the devastating effects of a severe monetary contraction and how a fully elastic provision of cash can help to avoid such a situation. We find interesting similarities to both crises in two separate case studies, one on the demonetization in India 2016 and the other on cash supply during various crises in Greece since 2008. The paper concludes that supply-driven cash withdrawals from circulation (either by demonetization or by capital controls) destabilize the economy if electronic payment substitutes are not instantly available. However, as there is no perfect substitute for cash due to its unique properties, from the viewpoint of the society as a whole an efficient payment mix necessarily includes cash: It helps to stabilize the economy not only in times of crises in general, no matter which government is in place. Consequently, it should be the undisputed task of central banks to ensure that cash remains in circulation in normal times and is provided in a fully elastic way in times of crisis.
    Keywords: cash,banknotes,money,crises,stabilization
    JEL: E41 E51 E58
    Date: 2022
  20. By: Chenet, Hugues; Kedward, Katie; Ryan-Collins, Josh; van Lerven, Frank
    Abstract: Climate change and biodiversity loss have primarily been approached by financial authorities (central banks and supervisors) from the perspective of financial risk. The prevailing view is that there is insufficient information and understanding of environment-related financial risks within financial institutions. If such financial risks can be discovered, measured and disclosed, they can be priced into financial markets to support a smooth environmental transition and this market failure can be addressed. However, environment-related financial risks have particular features that make them less amenable than other types of risk to standard financial risk management approaches. In particular, the ‘radical uncertainty’ characterising the long time horizons and the endogenous and non-linear dynamics involved with environmental change make quantitative calculations of financial risk challenging, if not impossible. The authors propose in this paper an alternative, precautionary approach to financial policy, incorporating both prudential and monetary policies. As a framework it draws on the ‘precautionary principle’ and modern macroprudential policy traditions. A precautionary financial policy mindset acknowledges the importance of measurement practices and price discovery but justifies bolder policy action to shift the allocation of capital to shorter time frames better aligned with the uncertain and potentially catastrophic nature of environment-related threats, including the risks to, and posed by, financial institutions. The paper considers financial authorities’ tentative steps and possible tools in such a precautionary policy direction – and how these could be scaled up and mainstreamed.
    JEL: F3 G3
    Date: 2022–04–27
  21. By: Ashima Goyal (Indira Gandhi Institute of Development Research); Rupayan Pal (Indira Gandhi Institute of Development Research)
    Abstract: We argue emerging markets (EMs) have become large enough to make it in advanced economies (AEs) own interest to reduce negative spillovers to EMs. It follows the potential for international cooperation in macroeconomic and prudential policy increases. But entrenched perceptions and historical advantages are obstacles. These blocks are explored as well as possibilities in macroeconomic policies and in prudential regulation. Export of capital is a major way AEs earn a share in EM income. AE macroeconomic policy and volatile capital outflows from AEs are a source of negative spillovers for EMs, but preventive prudential regulation is not adequate in AEs. More regulation is likely to reduce short-term returns to capital flows but not long-term, since with fewer crises both AE and EM income streams would rise. Moreover, there is some evidence excess capital flow volatility has adverse effects on AEs themselves. It follows universal macro-prudential polices would benefit both country groups. International conventions should be refocused on reducing the probability of crises, instead of protecting creditors by ensuring they do not suffer a loss in case a crisis occurs. Major source countries should develop prudential regulation of their non-bank financial sectors, including commodity futures markets. The IMF should remove restrictions on pre-emptive implementation of capital flow management and its use before other measures.
    Keywords: International policy coordination, Covid-19, Quantitative easing, Capital flows, advanced economies, Emerging markets
    JEL: F42 F59 F36
    Date: 2022–06
  22. By: Maddalena Galardo (Bank of Italy); Valerio Vacca (Bank of Italy)
    Abstract: We use a rich dataset on bank loans to Italian firms matched to information on firms’ and banks’ characteristics, and exploit the implementation of Basel III reforms in Italy to investigate the impact of higher risk-based capital requirements on credit supply. While we do not address the steady state impact of capital requirements, we find that the introduction of higher requirements is associated with credit tightening in the early years after the reform. Banks affected to a larger extent by the new requirements tighten credit supply towards risky firms in favour of sounder ones. We also show that banks with particularly strong or particularly weak pre-reform capital positions tighten the credit to a lesser extent, i.e., the lending supply response is U-shaped with respect to initial capital, as predicted by the forced safety effect (Bahaj and Malherbe 2020). Finally, firms borrowing more from less capitalized banks were only partially able to switch their lenders, experienced a worsening in lending conditions and invested less compared to other firms after Basel III implementation.
    Keywords: financial institutions, Basel III, capital requirements, forced safety effect, lending conditions
    JEL: G21 G28 G38
    Date: 2022–06
  23. By: Kyriakopoulou, Danae; Antonakaki, Theodora; Bekiari, Maria; Kartapani, Aliki; Rapti, Eleni
    Abstract: Central banks are increasingly exploring how climate-related financial risks and opportunities impact their price and financial stability mandates, as well as their own operations. They are also beginning to consider how their own actions, and those of the financial institutions they supervise, may contribute to and exacerbate climate change risks and opportunities. Measuring and reporting – or disclosing – climate-related risks and opportunities is a key step in addressing these issues, for both individual institutions and thefinancial system as a whole. With this recognition, the Task Force on Climate-related Financial Disclosures (TCFD) was established, to guide financial institutions to make effective climate disclosures. The development of high quality, reliable, comparable and transparent climate disclosures can support decision-making and enable better understanding of the implications of climate change for central banks. Further, central banks can lead by example by demonstrating lessons learned from their own climate-related disclosures to other financial institutions and by using their influence over the financial rulebook to build the broader system architecture. This paper reviews key elements of the recommendations made by the TCFD – first released in 2017 – and their application by central banks to date. The paper also considers potential enhancements for central banks’ climate disclosures and their possible implications for the wider financial system. The fact that definitions, data, and methodologies for assessing climate-related issues are constantly evolving means that efforts to develop climate-related disclosures will need to follow a progressive approach, with the quantity and quality of disclosures improving in parallel with the progress made in these areas. A flexible framework also suits the distinct operational models and different mandates of central banks. The recommendations made in this paper can be applied to the different central bank portfolios, including monetary and non-monetary and credit facilities, as well as financial stability and physical operations. They are designed to support a wider and more practical application of the TCFD recommendations by central banks.
    JEL: F3 G3
    Date: 2022–05–12
  24. By: Hertrich, Markus; Nathan, Daniel
    Abstract: Using confidential daily data, we analyse how the intervention episode of the Bank of Israel (BOI) from 2013 to 2019 has affected the foreign value of the Israeli new shekel (ILS) and the expectations about its future value. We find that interventions amounting to US dollar (USD) 1 billion are on average associated with a depreciation of the ILS by 0.82%-0.85%, which is at the upper bound of the estimated impact in other studies. The (indirect) effect on the forward rate is smaller - the BOI's USD purchases have widened the negative deviation from covered interest parity. The higher moments of the risk-neutral probability distribution of future exchange rates proxied by the scaled price quotes of USD/ILS options, on the contrary, are unaffected. The USD purchases simply shift the whole distribution towards higher USD/ILS values. Crash risk, for instance, is unaffected. We also find that the USD/ILS options market anticipates intervention episodes and prices them in before they occur.
    Keywords: exchange rate,expectations,central bank intervention,Israeli new shekel,reaction function
    JEL: E52 E58 E65 F31 G14 G15
    Date: 2022
  25. By: Kyriakopoulou, Danae; Hyrske, Anna
    Abstract: Central banks are increasingly looking to align their operations with sustainability objectives within the constraints of their mandates. This agenda mainly originated in central banks within the broader remit of financial stability, in their capacity as supervisors. However, some central banks have also begun to explore and act on the sustainability implications for their identity as managers of investment portfolios, including sustainable and responsible investment of their pension and own portfolios. The drivers for doing so range from managing sustainability-related risks to aligning their activities with wider government policies and commitments, including with net-zero emissions targets. This challenges the conventional approach that calls for investments to be guided by the trinity of objectives of ‘liquidity, safety and return’, which overlooks the value of an environmental, social and governance (ESG) approach as a means to identify risks and opportunities. Yet central banks’ progress on this agenda to date has been relatively muted compared with their peers from the wider public investor community such as pension funds and sovereign wealth funds. Only a few central banks are signatories to the UN-supported Principles for Responsible Investment, have climate-related targets, or have made their responsible investment principles public. Low rates of adoption may be due to challenges relating to the availability of data, information and resources, to the particular characteristics of a typical central bank portfolio, or to issues of institutional independence and mandates. Central banks can learn from their peers from the central banking community that are more advanced in this process, as well as from the wider public investor community in implementing sustainable and responsible investment through strategies including active ownership, ESG integration, impact investing, screening and thematic investing. This paper identifies a recommended course of action for central banks in sequence across the different phases from developing and implementing relevant policy, to monitoring and reporting outcomes, to identifying further adjustments to the policy and its implementation.
    JEL: F3 G3 R14 J01
    Date: 2022–05–25
  26. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper uses an estimated interest rate rule of the Fed to argue that the low recent interest rates may be due to a change in Fed behavior. Prior to the Great Recession the Fed’s behavior is consistent with the rule. During the recession the zero lower bound was hit in 2008.4. The rule unconstrained called for negative nominal interest rates during this period, and so it became inoperative. The Fed kept the interest rate at roughly zero through 2015. This was a period of low inflation and still fairly high unemployment rates, and the rule called for essentially zero interest rates through about 2010. Beginning in 2011, however, the rule called for rising interest rates, and between 2011 and 2019 the predicted interest rates from the rule are always higher than the actual rates. Between 2011 and 2019 the Fed was more expansive than its historical behavior as estimated by the rule. The COVID experience through 2022.1 also shows the Fed setting historically low interest rates beginning in 2021 in the face of rising inflation and falling unemployment. In short, the low recent interest rates may be because of a change in Fed behavior.
    JEL: E12 E17
    Date: 2022–07
  27. By: Gaston Giordana; Michael H. Ziegelmeyer
    Abstract: In 2019, Luxembourg introduced borrower-based instruments in the macro-prudential toolkit to constrain credit to households who exceed a certain limit on their loan-to-value ratio, on their (mortgage) debt-to-income ratio or on their debt service-to-income ratio. This paper analyses the impact of setting these limits at different levels, using household-level data from Luxembourg. We calculate these debt burden ratios for individual households who recently purchased their main residence using data from the Household Finance and Consumption Survey conducted in 2010, 2014 and 2018. On January 1, 2021 authorities imposed a legally binding limit on the loan-to-value (LTV) ratio for new mortgages. This may be 80%, 90% or 100% depending on the category of borrower. Had the least restrictive LTV limit envisaged by the law (100%) been applied in 2018, credit would have been rationed to 24% of households with recent mortgages on their main residence. This limit would have required a 7% reduction in the overall debt of this group of households. Had the most restrictive LTV limit envisaged by the law (75%) been applied in 2018, credit would have been rationed to 64% of households with recent mortgages on their main residence, requiring an 18% reduction in overall debt in this group. More generally, we evaluate how well borrower-based instruments can target those households that are financially vulnerable (according to conventional measures from the literature). By simulating an adverse scenario, we find that combining several ratios one could better target households that were not financially vulnerable in the benign conditions of 2018 but would become vulnerable after a shock to income. However, any borrower-based instrument inevitably generates some classification errors (either granting credit to households that are financially vulnerable or constraining credit to households that are not financially vulnerable). Using different assumptions on policymaker preferences, we apply the signals approach to derive limits that are “optimal” in the sense of minimising classification errors.
    Keywords: Household debt, Financial vulnerability, Macro-prudential policy, Markets, Housing Wealth; Affordability
    JEL: D10 D14 G21 G28
    Date: 2022–07
  28. By: Boissinot, Jean; Goulard, Sylvie; Salin, Mathilde; Svartzman, Romain; Weber, Pierre-François
    Abstract: The concept of double materiality is developing rapidly, with potential implications for monetary and financial policies. Double materiality builds on the historical accounting and auditing convention of materiality and expands it by considering that non-financial and financial corporations are not only materially vulnerable to environment-related events and risks, but also materially contribute to enabling dirty activities and environmental degradation. Three rationales that support the use of double materiality are distinguished in this paper, each with different policy implications: i) an idiosyncratic perspective – closely connected to the concept of dynamic materiality – which considers that an entity’s environmental impacts are relevant as they provide information on the institution’s own risks; ii) a systemic risk perspective – closely connected to the concept of endogeneity of financial risks – which seeks to reduce financial institutions’ contribution to negative environmental externalities because of the systemic financial risks that could result from them; and iii) a transformative perspective seeking to reshape financial and corporate practices and values in order to make them more inclusive of different stakeholders’ interests and compatible with the actions needed for an ecological transition. Each of these rationales has potential implications for monetary and financial policies, as well as possible theoretical and practical challenges. While the adoption of a double materiality perspective remains an open question, the concept proposes the opportunity to think more comprehensively about the role of the financial system in urgently addressing the ecological challenges of our times.
    JEL: F3 G3 J1
    Date: 2022–06–09
  29. By: Micossi, Stefano
    Abstract: Following the proposal by Avgouleas and Micossi (2021) and Micossi (2021), several authors (Amato and Saraceno 2022, Baglioni and Bordignon 2022, Cottarelli and Galli 2021, D’Amico et al. 2022) have engaged in the debate on how to manage the sovereign debt portfolio accumulated by the European System of Central Banks (ESCB) as a result of their purchase programmes undertaken since 2015 to fight deflation in the eurozone and provide emergency support to the economy in response to the Covid-19 pandemic. These proposals share the common goal of addressing an important and urgent public policy problem but differ in their specific institutional solutions. This paper provides an assessment of their consistency with present European legal and institutional arrangements in order to assess their practical relevance. The conclusion is that a new mechanism is needed to free the ESCB of the encumbrance of the sovereigns acquired following their assets purchase programmes. The ESM could perform that task while respecting all relevant European law.
    Date: 2022–02
  30. By: Fender, Ingo; McMorrow, Mike; Zulaica, Omar
    Abstract: Central banks are playing an increasingly active role in promoting the move towards a sustainable global economy. One key motivation is the need to mobilise funds for the large-scale public sector investment required to reach the goals of the Paris Agreement on climate change. This paper explores the role central banks’ foreign exchange (FX) reserves portfolios can play in this context. Central banks’ frameworks for managing FX reserves have traditionally balanced a triad of objectives: liquidity, safety and return. Incorporating sustainability requires expanding this usual triad into a tetrad. This can be achieved either explicitly, by introducing new economic uses of reserves, or implicitly, by recognising the ways in which sustainability affects existing policy objectives – or through a combination of both approaches. Pursuing sustainability, however, may give rise to trade-offs over and above the usual tensions between liquidity and safety and return. This paper explores sustainability-enhanced reserve management in the context of these trade-offs and outlines 12 different channels (classified into four different types) that reserve managers can use to ‘green’ their operations. Each of these channels comes with its own advantages and limitations, so – given the constraints faced at the individual reserve manager’s level – choosing the right channels is key.
    JEL: F3 G3
    Date: 2022–07–08
  31. By: Monica Jain; Olena Kostyshyna; Xu Zhang
    Abstract: This paper examines novel household-level data from the Canadian Survey of Consumer Expectations (CSCE) from 2014Q4 to 2022Q1 to understand households’ expectations about price and wage inflation, their respective links to views about labour market conditions, and their subsequent impact on households’ outlook for real spending growth. We find, consistent with recent research, that households associate higher expected price inflation with worse labour market conditions. In contrast, higher expected wage growth is linked to better labour market outcomes—an avenue not previously explored—and consistent with standard macroeconomic models. These differing supply-side and demand-side views of price inflation and wage inflation are reflected in households’ spending outlook: expected real spending is negatively linked to inflation expectations but positively linked to expected wage inflation. Finally, the link between households’ inflation expectations and wage growth expectations is weak, suggesting limited pass-through from consumers’ inflation expectations into their expected wage gains, and thus a lower likelihood of entering a wage-price spiral.
    Keywords: Inflation and prices; Monetary policy communications
    JEL: E24 E31 C83 D84
    Date: 2022–07
  32. By: Olivier J Blanchard (Peterson Institute for International Economics); Alex Domash (Harvard University); Lawrence H. Summers (Harvard University)
    Abstract: The Federal Reserve seeks to cool an overheated US labor market to ease wage hikes and reduce job vacancies, without a painful spike in unemployment. But empirical evidence indicates that these goals have never been accomplished together and remain unlikely now. In fact, fighting inflation will require a reduction in job vacancies and also an increase in unemployment. The inverse relationship between job vacancies and unemployment is measured by the Beveridge curve, named after a British economist. Blanchard, Domash, and Summers find that the Fed's hope that vacancies can be decreased without increasing unemployment flies in the face of historical empirical evidence. The current low unemployment rate and the very high vacancy-to-unemployment ratio suggest that the labor market is overheating and the natural unemployment rate has increased. It has increased about 1.3 percentage points from its pre-COVID level, implying the labor market is even more overheated than suggested by the current unemployment rate.
    Date: 2022–07
  33. By: Gabriel Montes-Rojas (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET); Nicolás Bertholet (Instituto Interdisciplinario de Economía Política de Buenos Aires - UBA - CONICET)
    Abstract: This paper presents empirical evidence on the short- and medium-run contractionary effects of exchange rate shocks and currency devaluations for bimonetary (i. e., highly dollarized) countries. In particular, for Argentina for the period January 2004-December 2018. Using a VAR representation with quantile heterogeneity, it implements a multivariate model with four macroeconomic variables: exchange rate variations, inflation, economic activity and nominal wage growth. The empirical results show a 30% price pass-through effects and a bimodal effect on output, with both positive and negative effects. Wages adjust less than prices with the consequent effect that real wages have a negative elasticity of 0.23 with respect to exchange rate shocks. Further analysis on the multivariate responses show that the negative effect on output is associated with a decline in real wages: a 1% fall in real wages after a currency devaluation produces a 2.3% decline in output.
    Keywords: Impulse-response functions, Vector autoregressive models, Multivariate quantiles, Exchange rate, Pass-through Recession
    JEL: C13 C14 C22
    Date: 2022–06
  34. By: Charles W. Calomiris; Joanna Harris; Harry Mamaysky; Cristina Tessari
    Abstract: We introduce FDIF, a measure of Fed communication surprise based on the text of FOMC statements. FDIF measures the difference between text-implied and actual values of key market variables. Positive FDIF of countercyclical variables (e.g., credit spreads) is associated with negative macroeconomic forecast revisions; the opposite holds for procyclical variables. Industries that hedge bad FDIF news earn low returns on FOMC announcement days, but high returns on non-FOMC days. The opposite holds for FDIF-exposed industries, and the return differences are large. Controlling for FDIF exposure, rate-based policy surprise measures are not priced in the cross-section of industry returns.
    JEL: E32 E44 E52 G1 G12
    Date: 2022–07

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