nep-cba New Economics Papers
on Central Banking
Issue of 2022‒08‒22
nineteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary policy & anchored expectations: an endogenous gain learning model By Gáti, Laura
  2. Monetary policy normalization, central bank profits, and seigniorage By Zbigniew Polański; Mikołaj Szadkowski
  3. Targeted monetary policy, dual rates and bank risk taking By Barbiero, Francesca; Burlon, Lorenzo; Dimou, Maria; Toczynski, Jan
  4. The impact on the Polish economy of the Structural Open Market Operations programme conducted by NBP By Katarzyna Hertel; Marcin Humanicki; Marcin Kitala; Tomasz Kleszcz; Kamila Kuziemska-Pawlak; Jakub Mućk; Bartosz Rybaczyk; Maciej Stefański
  5. The consequences of the bank levy in Poland By Mariusz Kapuściński
  6. A global monetary policy factor in sovereign bond yields By Dimitris Malliaropulos; Petros Migiakis
  7. Macroprudential Regulation and Sector-Specific Default Risk By Sami Ben Naceur; Bertrand Candelon; Mohamed Belkhir; Jean-Charles Wijnandts
  8. The Labor Share is a Catalyst for Monetary Policy - Two Million Firms' Production Dynamics By Lea Steininger; Jan Philipp Fritsche
  9. Circular economy and central bank digital currency By Ozili, Peterson K
  10. The evolution of macroprudential policy use in Chile, Latin America and the OECD By Carlos Madeira
  11. The effects of Monetary Policy on Capital Flows A Meta-Analysis By Mauricio Villamizar-Villegas; Lucía Arango-Lozano; Geraldine Castelblanco; Nicolás Fajardo-Baquero; Maria A. Ruiz-Sanchez
  12. E pluribus plures: shock dependency of the USD pass-through to real and financial variables By Minesso, Massimo Ferrari; Gräb, Johannes
  13. Unconventional credit policies during crises: A structural analysis of the Chilean experience during the COVID-19 pandemic By Benjamín García; Mario González; Sebastián Guarda; Manuel Paillacar
  14. An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 1: Background and Historical Perspective By Alyssa G. Anderson; Dave Na; Bernd Schlusche; Zeynep Senyuz
  15. Modern Monetary Theory: the post-Crisis economy misunderstood? By Liu, Chunping; Minford, Patrick; Ou, Zhirong
  16. A Macro Financial Model for the Chilean Economy By Mauricio Calani; Benjamín García; Tomás Gómez; Mario González; Sebastián Guarda; Manuel Paillacar
  17. An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 2: Projections under Alternative Interest Rate Paths By Alyssa G. Anderson; Philippa Marks; Dave Na; Bernd Schlusche; Zeynep Senyuz
  18. Climate change versus price stability: How "green" central bankers and members of the European parliament became pragmatic (yet precarious) bedfellows By Massoc, Elsa C.
  19. Monetary Policy, Inflation Outlook, and Recession Probabilities By Andrea Ajello; Luca Benzoni; Makena Schwinn; Yannick Timmer; Francisco Vazquez-Grande

  1. By: Gáti, Laura
    Abstract: This paper analyzes monetary policy in a model with a potential unanchoring of inflation expectations. The degree of unanchoring is given by how sensitively the public’s long-run inflation expectations respond to inflation surprises. I find that optimal policy moves the interest rate aggressively when expectations unanchor, allowing the central bank to accommodate inflation fluctuations when expectations are well-anchored. Furthermore, I estimate the model-implied relationship that determines the extent of unanchoring. The data suggest that the expectations process is nonlinear and asymmetric: expectations respond more sensitively to large or downside surprises than to smaller or upside ones. JEL Classification: E52, E71, D84
    Keywords: anchored expectations, behavioral macro, optimal monetary policy
    Date: 2022–07
  2. By: Zbigniew Polański (SGH Warsaw School of Economics and National Bank of Poland); Mikołaj Szadkowski (SGH Warsaw School of Economics and National Bank of Poland)
    Abstract: This paper advances a simple framework explaining how monetary policy normalization (“exit policies”) may impact central bank profits and seigniorage formation with further implications for central bank transfers to the government. The cases of seven central banks of major and smaller economies serve as an illustration. The notion of the break-even point is applied to study the financial situation of these institutions for the period of 2014-2020. During the normalization process, interest rate increases may adversely affect profit changes, and through transfers may have an impact on the fiscal space available to the governments, creating political economy concerns. Possible remedies are discussed together with accompanying policy dilemmas.
    Keywords: central bank profit, seigniorage, break-even point, monetary policy normalization, exit policies
    JEL: E52 E58 E59
    Date: 2022
  3. By: Barbiero, Francesca; Burlon, Lorenzo; Dimou, Maria; Toczynski, Jan
    Abstract: We assess whether central bank credit operations influence the size and composition of bank credit in a negative interest rate environment. We exploit confidential information from the newly established European credit registry to capture bank lending conditions and bank risk taking. For identification, we use high-frequency reactions of bank bonds around the announcement of the April 2020 recalibration of the ECB’s Targeted Longer-Term Refinancing Operations (TLTROs). We find that the credit easing measures had a strong positive effect on bank credit, even when controlling for possible confounding factors. The increase in lending was not accompanied by excessive risk-taking, especially for banks with low intermediation margin, that is, those that were poised to benefit the most from TLTROs’ borrowing rates below the interest rates on central bank reserves. JEL Classification: E51, E52, G01, G21
    Keywords: bank lending, dual rates, risk taking, unconventional monetary policy
    Date: 2022–07
  4. By: Katarzyna Hertel (National Bank of Poland); Marcin Humanicki (National Bank of Poland); Marcin Kitala (National Bank of Poland); Tomasz Kleszcz (National Bank of Poland); Kamila Kuziemska-Pawlak (National Bank of Poland); Jakub Mućk (National Bank of Poland); Bartosz Rybaczyk (National Bank of Poland); Maciej Stefański (National Bank of Poland)
    Abstract: The paper presents estimates of the macroeconomic effects of the Structural Open Market Operations (SOMO) programme implemented by NBP in 2020 in response to the COVID-19 pandemic shock. In order to assess the ex-ante impact of bond purchases by the central bank on the real economy and prices in Poland, (i) the impact of unconventional monetary policy on financing conditions, identified indirectly using the shadow policy rate concept, and (ii) the impact of the SOMO on the exchange rate of the Polish zloty against the euro were estimated. The results of the NECMOD model simulations indicate that the unconventional monetary policy conducted by NBP reduced the extent of the decline in GDP growth and inflation by 0.1 and 0.2 percentage points in 2020 and 0.5 percentage points each in 2021. At the same time, the macroeconomic impact of the SOMO was similar to the effect of the interest rate cuts in the first half of 2020.
    Keywords: monetary policy, open market operations, COVID-19
    JEL: E31 E52 E5
    Date: 2022
  5. By: Mariusz Kapuściński (National Bank of Poland)
    Abstract: In this study I analyse the effects of a bank levy, as introduced in Poland, on areas which appear to be relevant from the perspective of a central bank. I apply the difference-in-differences method, using bank level panel data. I find that the introduction of the bank levy has affected the use of some monetary policy instruments, money market rates and volumes, and deposit and loan rates. However, I find little evidence of its impact on loan volumes, bank profitability, capital and risk-taking. This means that the bank levy has had important implications for monetary policy implementation, interest rate benchmark reform and monetary conditions, but (as yet) less so for financial stability. As an extension of the study, I document its effects on assets and Treasury bond holdings (including their changes at the end of the month), and estimate the impact of bank balance sheet adjustments on government revenues.
    Keywords: bank levy, difference-in-differences, panel data, monetary policy instruments, money market, financial stability
    JEL: C23 E43 E51 E52 G18 H26 H39
    Date: 2022
  6. By: Dimitris Malliaropulos (Bank of Greece); Petros Migiakis
    Abstract: We document the existence of a global monetary policy factor in sovereign bond yields, related to the size of the aggregate balance sheet of nine major central banks of developed economies that have implemented programs of large-scale asset purchases. Balance sheet policies of these central banks reduced the net supply of safe assets in the global economy, triggering a decline in global yields as investors rebalanced their portfolios towards more risky assets. We find that central banks’ large-scale asset purchases have contributed to significant and permanent declines in long-term yields globally, ranging from around 330 bps for AAA-rated sovereigns to 800 bps for non-investment grade sovereigns. The stronger decline in yields of high-risk sovereigns can be partly attributed to the decline in the foreign exchange risk premium as their currencies appreciated. Global central bank asset purchases during the Covid-19 crisis have more than counterbalanced the effects of expanding fiscal deficits on global bond yields, driving them to even lower levels. Our findings have important policy implications: normalizing monetary policy by scaling down central bank balance sheets to pre-crisis levels may lead to sharp increases in sovereign bond yields globally, widening spreads and currency depreciations of vulnerable sovereigns with severe consequences for financial stability and the global economy.
    Keywords: quantitative easing; central bank balance sheet policies; sovereign risk; interest rates; panel cointegration.
    JEL: E42 E43 G12 G15
    Date: 2022–07
  7. By: Sami Ben Naceur; Bertrand Candelon; Mohamed Belkhir; Jean-Charles Wijnandts
    Abstract: This paper studies the transmission of macroprudential policies across both financial and non financial sectors of the economy. It first documents that tighter macroprudential regulations implemented in Europe over the period 2008–2017 lowered default risk not only in the financial, but also in non-financial sectors. Second, the paper analyzes the impact of two reforms in the macroprudential framework. Higher capital requirements improve the long-run resilience of the financial sector but at the cost of raising long-term default risk in non-financial sectors. Strengthening the resolution framework for failing banks has beneficial long-run effects on the default risks of the financial and non-financial sectors. Our results concur with the literature documenting how banks adjust their balance sheet composition and credit supply in reaction to changes in their regulatory environment.
    Keywords: Macroprudential regulation; Default risk; Capital requirements; Bank bail-in
    Date: 2022–07–15
  8. By: Lea Steininger (Department of Economics, Vienna University of Economics and Business); Jan Philipp Fritsche (Humboldt University of Berlin, German Institute for Economic Research)
    Abstract: We study the role of firm heterogeneity and cost structure in determining the transmission of monetary policy. Using local projections and high dimensional fixed effects, we show that a one standard deviation contractionary monetary policy shock decreases firms' labor share by 0.4 percent, on average. However, reactions are heterogeneous along two dimensions: The labor share is most informative to discriminate firms by their response in payroll expenses, firms' leverage is most informative to discriminate by their response in value added. We interpret these findings by theorizing differential effects of factor input costs. Our results inform the policy debate on transmission and redistribution effects of monetary policy, and suggest that the effectiveness of monetary policy may depend on the labor intensity of production.
    Keywords: Monetary policy, firm heterogeneity, labor share, production dynamics, factor input costs
    JEL: D22 E52 D31 E23 E32
    Date: 2022–07
  9. By: Ozili, Peterson K
    Abstract: The emergence of central bank digital currency (CBDC) provides an opportunity for central banks to make an important contribution to the transition to a circular economy. This paper examines the role of a central bank digital currency in the circular economy. Central banks can contribute to the transition to a circular economy in two ways: first, by making central bank digital currency accessible to circular businesses and other players in the circular economy sector; and second, by looking into how the design features of CBDC can support circular economy goals. On the role of CBDC in the circular economy, I argue that a central bank digital currency offers a better payment option for circular economy financial transactions; central bank digital currency can lead to greater financial inclusion for ‘unbanked’ informal workers in the circular economy; CBDC can create a gateway that allows a central bank to offer financial assistance to distressed circular businesses; using a central bank digital currency can reduce illicit activities in the circular economy; a central bank digital currency can be used to provide stimulus funding to support circular businesses during crises; and, a central bank digital currency can offer low transaction cost for circular economy financial transactions. The paper also shows the link between CBDC and the circular economy. It also offers a critical perspective on the link between CBDC and the circular economy.
    Keywords: circular economy, central bank digital currency, circular finance, linear economy, resources, sustainability, central bank, CBDC design, blockchain, sustainable development, payment system, innovation.
    JEL: E42 Q2 Q54 Q56
    Date: 2022
  10. By: Carlos Madeira
    Abstract: This study compares the use of macroprudential policies and capital flow management in Chile versus other countries. I find that Chile made a lower net tightening of its macroprudential policies relative to 1990 than the other country groups, whether in terms of its overall index or any of its subcategories. This is explained in part because Chile had already adopted tight macroprudential policies after the Banking Law of 1986; therefore, it started the 1990s with a more conservative level of financial regulation than most countries. However, Chile still presents a restrictive Loan to Value regulation, close to the OECD average. In terms of Financial Openness and Capital Controls, Chile was very closed until the Asian crisis. Chile is more open with respect to capital inflows relative to all the country groups, although it is still more closed than the OECD and Advanced Economies for outflows.
    Date: 2022–07
  11. By: Mauricio Villamizar-Villegas; Lucía Arango-Lozano; Geraldine Castelblanco; Nicolás Fajardo-Baquero; Maria A. Ruiz-Sanchez
    Abstract: We investigate whether central banks are able to attract or redirect capital flows, by bringing together the entire empirical literature into the first quantitative meta-analysis on the subject. We dissect policy effects by the type of flow and by the origin of the monetary shock. Further, we assess whether policy effects depend on factors that drive investors to either search for yields or fly to safety. Our findings indicate a mean effect size of inflows in the amount of 0.09% of quarterly GDP in response to either a 100 basis point (bp) increase in the domestic policy rate or a 100bp reduction in the external rate. However, the effect size under a random effect specification is much lower (0.01%). Factors that significantly attract inflows include foreign exchange reserves, output growth, and financial openness, while factors that deter flows include foreign debt, capital controls, and departures from the uncovered interest rate parity. Also, both local and global risks matter (global risks exerting a larger pressure). Finally, we shed light on differences across the different types of flows: banking flows being the most responsive to monetary policy, while foreign direct investment being the least responsive. **** RESUMEN: Este trabajo representa el primer metanálisis cuantitativo sobre si los bancos centrales son capaces de atraer o redirigir los flujos de capital. Se analizan los efectos por tipo de flujo y por el origen del choque monetario. Además, se evalúa si los efectos de las políticas dependen de factores que impulsan a que inversionistas extranjeros busquen rendimientos o, por el contrario, busquen refugio. Nuestros hallazgos indican que, en promedio, el tamaño de las entradas de capital es de 0,09% del PIB trimestral en respuesta a un choque de 100 puntos básicos, ya sea en aumentos de la tasa de política doméstica o en reducciones de la tasa de política externa. Sin embargo, bajo una especificación de efectos aleatorios el tamaño del efecto es mucho menor (0,01%). Los factores que atraen significativamente flujos de capital incluyen el nivel de reservas internacionales, el crecimiento de la producción y el grado de apertura financiera, mientras que los factores que disuaden los flujos incluyen la deuda fiscal, controles de capital y desviaciones de la paridad descubierta de la tasa de interés. También, tanto los riesgos locales como los globales importan (aunque los riesgos globales ejercen una mayor presión). Finalmente, brindamos luces sobre las diferencias entre los tipos de flujos: los flujos bancarios siendo los más reactivos a la política monetaria, y los de inversión extranjera directa los menos reactivos.
    Keywords: Meta-Analysis, Capital Flows, Monetary Policy, Meta-Análisis, Flujos de Capital, Política Monetaria
    JEL: C83 E58 F21 F31 F32
    Date: 2022–08
  12. By: Minesso, Massimo Ferrari; Gräb, Johannes
    Abstract: This paper quantifies the pass-through of a US dollar appreciation on trade variables and domestic financial conditions in a panel of 34 countries. Pass-through coefficients are highly shock-dependent: if the appreciation is driven by a US expansionary shock, the positive effects of stronger global demand - the “real” channel dominate the negative effects of a stronger dollar - the “exchange rate” channel. As a result, a positive US demand (supply)-drive appreciation expands global trade and stock valuations up to 2.2 (2.5) and 8% (15%) respectively, while if the appreciation is driven by a monetary policy shock the sign is opposite, leading to a contraction in the order of 2.5% (3%) depending on the country. The coefficients also exhibit a large degree of cross-country heterogeneity, we find that financial and trade exposure to the US, trade openness and USD invoicing shares explain up to 60% of the USD pass-through after demand and supply shocks. Cross-country differences, instead, are not explained by dollar invoicing if monetary policy or risk shocks determine USD movements. We explain this finding with the endogenous policy reaction of monetary authorities in emerging markets that stabilizes the exchange rate against the dollar and weakens the invoicing channel of dollar shocks. JEL Classification: F31, F41, F44, E44, E32
    Keywords: Exchange rate, pass-through, USD, VAR
    Date: 2022–07
  13. By: Benjamín García; Mario González; Sebastián Guarda; Manuel Paillacar
    Abstract: With the economy facing an unprecedented hit due to the COVID-19 pandemic, the Central Bank of Chile and the Chilean government jointly implemented several programs aimed at increasing liquidity and maintaining the flow of funds in the economy. In this paper, we extend the model described in Calani et al. (2022), a structural large-scale DSGE model with a financial system and financial frictions, to assess the impact of the different credit programs implemented during the COVID-19 crisis. We find that the policies’ most significant impact was due to the FOGAPE program and from their joint ability to reduce credit risk. The quantitative analysis carried on in this paper shows that the contraction of GDP in 2020 was between 2.7 and 5.4 percentage points milder thanks to the implemented liquidity and credit policies.
    Date: 2022–05
  14. By: Alyssa G. Anderson; Dave Na; Bernd Schlusche; Zeynep Senyuz
    Abstract: As part of its implementation of monetary policy, the Federal Reserve (Fed) holds Treasury securities and agency mortgage-backed securities (MBS) in the System Open Market Account (SOMA). The market value of these securities and the Fed's income fluctuate with changes in interest rates. As such, the ongoing increases in policy rates to address inflationary pressures are expected to put downward pressure on the Fed's net income.
    Date: 2022–07–15
  15. By: Liu, Chunping (Nottingham Trent University); Minford, Patrick (Cardiff Business School); Ou, Zhirong (Cardiff Business School)
    Abstract: We set out Modern Monetary Theory (MMT) as a full DSGE model, and test it by indirect inference on post Financial Crisis US data, alongside a standard New Keynesian, NK, model. The MMT model is rejected, while the NK model has a high probability. We then evaluate replacing the fiscal and monetary policies within the NK model by MMT policies, and find that they imply a material loss of welfare
    Keywords: Modern Monetary Theory; DSGE model; fiscal activism; Wald test; indirect inference
    Date: 2022–07
  16. By: Mauricio Calani; Benjamín García; Tomás Gómez; Mario González; Sebastián Guarda; Manuel Paillacar
    Abstract: This paper presents a dynamic stochastic general equilibrium (DSGE) model built with a focus on frictional financial intermediation. The model, estimated for the Chilean economy, expands the quantitative analysis toolkit of the Central Bank of Chile, allowing for the study of how financial frictions shape the transmission mechanisms of several macroeconomic and financial shocks. The model builds on a simplified version of the Central Bank of Chile’s main DSGE model, described in Garcia et al. (2019), augmented to include a rich financial sector and financial frictions. The extensions include optimizing financial intermediaries, corporate and mortgage lending, long-term government bonds within a segmented bonds market, and the possibility for households, firms, and banks to default. The result is the Central Bank of Chile’s Macro Financial Model. The model captures many features of the Chilean economy and allows for a quantitative analysis of the financial system’s role in explaining the business cycle and of the interaction between the real and financial sides of the economy.
    Date: 2022–05
  17. By: Alyssa G. Anderson; Philippa Marks; Dave Na; Bernd Schlusche; Zeynep Senyuz
    Abstract: As discussed in the first note of this two-note series, net income of the Federal Reserve (Fed) and its remittances to the U.S. Treasury along with the unrealized gain or loss position of the System Open Market Account (SOMA) portfolio are affected by fluctuations in interest rates. The need for the Fed to increase the policy rate expeditiously to address the inflationary pressures is projected to result in the Fed's net income turning negative temporarily.
    Date: 2022–07–15
  18. By: Massoc, Elsa C.
    Abstract: The European Central Bank (ECB) recently proclaimed a more active role for itself in the fight against climate change. Did the European Parliament (EP) play a part in this regard, and if so what was it? To answer this question, this paper builds on a multi-method text analysis of original datasets compiling communications between the ECB and the EP across three accountability forums between 2014 and 2021. The paper shows that there has been discursive convergence between central bankers and parliamentarians concerning the role of the ECB in combatting climate change. It argues that this convergence has resulted from a pragmatic (yet precarious) adoption of a common repertoire1 between 'green' central bankers and parliamentarians who have favored a more active role for the ECB in the fight against climate change. The adoption of a common repertoire is pragmatic, in that it results from the strategic use of specific discursive elements that are ambitious enough to address their respective opponents and trigger political change, yet vague enough to allow both sets of actors to converge on them momentarily. It is also precarious in the sense that it involves discarding fundamental political tensions, which is hardly tenable in the long term. The paper shows that both organizational and politicization dynamics have been at work in the emergence of this pragmatic yet precarious bedfellowship between 'green' central bankers and parliamentarians.
    Keywords: accountability,politicization,European Central Bank,European Parliament,climate,price stability
    Date: 2022
  19. By: Andrea Ajello; Luca Benzoni; Makena Schwinn; Yannick Timmer; Francisco Vazquez-Grande
    Abstract: An inverted yield curve—defined as an episode in which long-maturity Treasury yields fall below their short-maturity counterparts—is a powerful near-term predictor of recessions. While most previous studies focus on the predictive power of the spread between long- and short-maturity Treasury yields, Engstrom and Sharpe (2019) have recently shown that a measure of the nominal near-term forward spread (NTFS), given by the difference between the six-quarter-ahead forward Treasury yield and the current three-month Treasury bill rate, dominates long-term spreads as a leading indicator of economic activity.
    Date: 2022–07–12

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