nep-cba New Economics Papers
on Central Banking
Issue of 2022‒08‒29
nineteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Inflation Surges and Monetary Policy By Carl E. Walsh
  2. Shadow Rates as a Measure of the Monetary Policy Stance: Some International Evidence By Christina Anderl; Guglielmo Maria Caporale
  3. Digital Money as a Medium of Exchange and Monetary Policy in Open Economies By Daisuke Ikeda
  4. Central Bank Communication with the General Public: Promise or False Hope? By Alan S. Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
  5. Fiscal and macroprudential policies in a monetary union By Jose E Bosca; Javier Ferri; Margarita Rubio
  6. A Preferred Habitat View of Yield Curve Control By Junko Koeda; Yoichi Ueno
  7. Pass-through from monetary policy to bank interest rates: A-symmetry analysis By Juan Francisco Martínez; Daniel Oda; Gonzalo Marivil
  8. The Term Structure of Interest Rates in a Heterogeneous Monetary Union By James Costain; Galo Nuño; Carlos Thomas
  9. The role of financial surveys for economic research and policy making in emerging markets By Sofía Gallardo; Carlos Madeira
  10. A Sufficient Statistics Approach for Macro Policy Evaluation By Regis Barnichon; Geert Mesters
  11. The economic impact of the NPLcoverage expectations in the euro area By Budnik, Katarzyna; Dimitrov, Ivan; Groß, Johannes; Kusmierczyk, Piotr; Lampe, Max; Vagliano, Gianluca; Volk, Matjaz
  12. Institutional Innovation and Central Bank Independence 2.0 By Kenneth S. Rogoff
  13. Overborrowing and Systemic Externalities in the Business Cycle Under Imperfect Information By Juan Herreño; Carlos Rondón-Moreno
  14. Managing climate change risk: a responsibility for politicians not Central Banks By Ozili, Peterson K
  15. Monetary Union, Asymmetric Recession, and Exit By Keuschnigg, Christian
  16. How to refine the contributions to the Single Resolution Fund? Proposal for an alternative methodology By De Groen, Willem Pieter; Oliinyk, Inna
  17. Climate Change Mitigation: How Effective Is Green Quantitative Easing? By Raphael Abiry; Marien Ferdinandusse; Alexander Ludwig; Carolin Nerlich
  18. Output Losses in Europe During COVID-19: What Role for Policies? By Mr. Anil Ari; Jean-Marc B. Atsebi; Mar Domenech Palacios
  19. Leaning-against-the-wind Intervention and the “Carry-Trade” View of the Cost of Reserves By Eduardo Levy Yeyati; Juna Francisco Gómez

  1. By: Carl E. Walsh (Distinguished Professor Economics Emeritus, Department of Economics, University of California, Santa Cruz, and Honorary Adviser to the IMES (E-mail:
    Abstract: Similarities between the 1960s and 1970s raise concerns that central banks are repeating mistakes that led to the Great Inflation. Two explanations for this earlier period of inflation, that it was due to shocks and special factors or that it was the result of political pressures on monetary policy, seem particularly relevant today. Major central banks such as the Federal Reserve and the ECB have been slow to react to the surge in inflation due to COVID-19 and the war in Ukraine. I investigate the consequences of policy delay and the impact of a more aggressive reaction, conditional on policy being delayed. In assessing the persistence of inflation shocks and in dealing with uncertainty about inflation dynamics, policymakers seem to be ignoring lessons from the literature on monetary policy in the face of model uncertainty.
    Keywords: Inflation, Monetary policy, COVID-19
    JEL: E31 E52 E58
    Date: 2022–07
  2. By: Christina Anderl; Guglielmo Maria Caporale
    Abstract: This paper examines the usefulness of shadow rates to measure the monetary policy stance by comparing them to the official policy rates and those implied by three types of Taylor rules in both inflation targeting countries (the UK, Canada, Australia and New Zealand) and others that have only targeted inflation at times (the US, Japan, the Euro Area and Switzerland) over the period from the early 1990s to December 2021. Shadow rates estimated from a dynamic factor model are shown to suggest a much looser policy stance than either the official policy rates or those implied by the Taylor rules, and generally to provide a more accurate picture of the monetary policy stance during both ZLB and non-ZLB periods, since they reflect the full range of unconventional policy measures used by central banks. Further, generalised impulse response analysis based on two alternative Vector Autoregression (VAR) models indicates that monetary shocks based on the shadow rates are more informative than those related to the official policy rates, especially during the Global Financial Crisis and the recent Covid-19 pandemic, when unconventional measures have been adopted.
    Keywords: dynamic factor models, shadow rates, inflation targeting, monetary policy stance
    JEL: C38 E43 E52 E58
    Date: 2022
  3. By: Daisuke Ikeda (Director and Senior Economist, Institute for Monetary and Economic Studies (currently, Financial System and Bank Examination Department), Bank of Japan (E-mail:
    Abstract: The rise of digital money may bring about privately issued money that circulates across borders and coexists with public money. This paper uses an open-economy search model with multiple currencies to study the impact of such global money on monetary policy autonomy -- the capacity of central banks to set a policy instrument. I show that the circulation of global money can entail a loss of monetary policy autonomy, but it can be preserved if government policy that limits the amount or use of global money for transactions is introduced or if the global currency is subject to counterfeiting. The result suggests that global digital money and monetary policy autonomy can be compatible.
    Keywords: Cryptocurrency, Monetary policy autonomy, Currency counterfeiting, Government transaction policy
    JEL: D82 E4 E5 F31
    Date: 2022–07
  4. By: Alan S. Blinder; Michael Ehrmann; Jakob de Haan; David-Jan Jansen
    Abstract: Central banks are increasingly reaching out to the general public to motivate and explain their monetary policy actions. One major aim of this outreach is to guide inflation expectations; another is to ensure accountability and create trust. This article surveys a rapidly-growing literature on central bank communication with the public. We first discuss why and how such communication is more challenging than communicating with expert audiences. Then we survey the empirical evidence on the extent to which this new outreach does in fact affect inflation expectations and trust. On balance, we see some promise in the potential to inform the public better, but many challenges along the way.
    JEL: D12 D84 E52 E58 G53
    Date: 2022–07
  5. By: Jose E Bosca; Javier Ferri; Margarita Rubio
    Abstract: In the European Monetary Union (EMU), monetary policy is decided by the European Central Bank (ECB). This can create some imbalances that can potentially be corrected by national policies. So far, fiscal policy was the natural candidate to adjust those imbalances. Nevertheless, after the global financial crisis (GFC), a new policy candidate has emerged, namely national macroprudential policies, with the mission of reducing financial risks. This issue gives rise to an interesting research question: how do macroprudential and fiscal policies interact? By affecting real interest rates and the level of activity, a discretionary macroprudential policy alters the evolution of public debt and can impose a fiscal cost when the government is forced to increase tax rates to stabilize the public debt-to-GDP ratio. In a monetary union, a domestic macroprudential shock creates substantial crossborder financial effects and also influences the foreign country fiscal stance. Moreover, a discretionary government spending policy affects housing prices, so the strenght with which macroprudential policy reacts to a change in the price of houses has an impact on the fiscal multiplier.
    Keywords: Monetary union, macroprudential policy, fiscal policy, monetary policy
    Date: 2022
  6. By: Junko Koeda (Waseda University); Yoichi Ueno (Bank of Japan)
    Abstract: We extend the canonical preferred habitat term structure model of Vayanos and Vila (2021) to analyze yield curve control (YCC) by treating the central bank as a preferred habitat investor allowing the price elasticity of government bond demand to depend on its targeted yield. The price elasticity captures the strictness of YCC implemented by the central bank. We calibrate the model for Japan and find that sufficiently strict YCC requires limited additional bond purchases to keep the targeted yield within the targeted range, and attenuates the impact of short-rate changes in the yield curve. In the absence of YCC, the effect of bond demand and supply on bond yields increases once again as the influence of the effective lower bound on nominal interest rates weakens.
    Keywords: monetary policy; yield curve control; preferred habitat
    JEL: E43 E52 E58 G12
    Date: 2022–08–01
  7. By: Juan Francisco Martínez; Daniel Oda; Gonzalo Marivil
    Abstract: This paper analyzes the effect of monetary policy in the credit market, by modeling the dynamics of banks’ interest rates relative to its equilibrium level. We estimate the banks’ equilibrium interest rates, which include latent spreads and/or specific margins. Additionally, we allow a gradual convergence to the target and asymmetric adjustment speeds, as it may be different for active and passive rates and it depends on whether these adjust to higher or lower levels as compared to the current one. The use of regimes based on the relative level of the rate to its objective has advantages over only differentiating between increases and decreases in the monetary policy rate (MPR), since it also recognizes changes in spreads, which exploit the heterogeneity of the banks and include the effects of specific factors. Using Chilean data from January 2004 to September 2019, we find that although there is a direct transmission of MPR on the banks’ interest rates, this is not immediate. In particular, we show that the adjustment of deposits rates to changes in the MPR is faster in a monetary easing, while, for commercial rates, banks adjust their rates more rapidly to a tightening. This result is consistent with international evidence, in particular for larger institutions, but this effect is diluted in a period of less than a year.
    Date: 2022–03
  8. By: James Costain (Banco de España); Galo Nuño (Banco de España); Carlos Thomas (Banco de España)
    Abstract: The highly asymmetric reaction of euro area yield curves to the announcement of the ECB’s pandemic emergency purchase programme (PEPP) is hard to reconcile with the standard “duration risk extraction” view of the transmission of central banks’ asset purchase policies. This observation motivates us to build a no-arbitrage model of the term structure of sovereign interest rates in a two-country monetary union, in which one country issues default-free bonds and the other issues defaultable bonds. We derive an affine term structure solution, and we decompose yields into term premium and credit risk components. In an extension, we endogenise the peripheral default probability, showing that the possibility of rollover crises makes it an increasing function of bond supply net of central bank holdings. We calibrate the model to Germany and Italy, showing that it matches well the reaction of these countries’ yield curves to the PEPP announcement. A channel we call “default risk extraction” accounts for most of the impact on Italian yields. The programme’s flexible design substantially enhanced this impact.
    Keywords: sovereign default, quantitative easing, yield curve, affine model, COVID-19 crisis, ECB, pandemic emergency purchase programme
    JEL: E5 G12 F45
    Date: 2022–06
  9. By: Sofía Gallardo; Carlos Madeira
    Abstract: This chapter reviews the role of economic and financial surveys in the academic literature and policy-making, with a broad review of applications in emerging markets and developing economies. Surveys are increasingly used both in developed economies and emerging markets, providing information on a range of economic and financial phenomena, such as the updating of inflation expectations, the future economic outlook, the evolution of credit demand and supply factors, household balance sheets, plus behavioral biases and personal finance. These studies provide feedback regarding central bank credibility, the expected impact of monetary policy and financial regulation. Surveys also help to inform some common research puzzles in finance, such as the low financial market participation, unequal financial access, credit constraints and inaccurate economic expectations.
    Date: 2022–04
  10. By: Regis Barnichon; Geert Mesters
    Abstract: The evaluation of macroeconomic policy decisions has traditionally relied on the formulation of a specific economic model. In this work, we show that two statistics are sufficient to detect, often even correct, non-optimal policies, i.e., policies that do not minimize the loss function. The two sufficient statistics are (i) the effects of policy shocks on the policy objectives, and (ii) forecasts for the policy objectives conditional on the policy decision. Both statistics can be estimated without relying on a specific model. We illustrate the method by studying US monetary policy decisions.
    Keywords: optimal policy; impulse responses; forecasting
    JEL: C14 C32 E32 E52
    Date: 2022–04–27
  11. By: Budnik, Katarzyna; Dimitrov, Ivan; Groß, Johannes; Kusmierczyk, Piotr; Lampe, Max; Vagliano, Gianluca; Volk, Matjaz
    Abstract: This paper looks at the macroeconomic impact of the two policies proposed by ECB Banking Supervision to tackle the high share of non-performing loans (NPLs) on the balance sheets of euro area banks. The first is the coverage expectations for new NPLs set out in the Addendum to the ECB’s NPL Guidance, which aim to prevent the build-up of new NPLs, and the second is the coverage expectations for legacy NPLs, which target the reduction of already existing stocks of NPLs. The impact assessment of the package is analysed via a semi-structural model, the Banking Euro Area Stress Test (BEAST). The coverage expectations for NPLs are found to be effective in reducing banks’ NPLs. The phase-in of the policies can temporarily reduce bank profitability owing to increased loan loss provisioning targets. However, over a longer time horizon, lower NPL ratios reduce uncertainty and enable banks to access cheaper funding in the markets, ultimately benefiting lending and output growth. Furthermore, the coverage expectations can also moderately but persistently reduce procyclicality in the banking system. JEL Classification: E37, E58, G21, G28
    Keywords: banking sector, impact assessment, loan loss provisions, Non-performing loans, real-financial feedback mechanism, regulatory policy
    Date: 2022–07
  12. By: Kenneth S. Rogoff (Professor of Economics and Maurits C. Boas Chair of International Economics, Harvard University (E-mail:
    Date: 2022–07
  13. By: Juan Herreño; Carlos Rondón-Moreno
    Abstract: We study the interaction between imperfect information and financial frictions and its role in driving financial crises in small open economies. We use a model where households observe income growth but do not perceive whether the underlying shocks are permanent or transitory and borrowing is subject to a collateral constraint. The optimal macroprudential policy helps stabilize the economy by taxing debt procyclically. We show that the combination of imperfect information and borrowing constraints is a significant source of economic instability. The optimal tax under these conditions is six times larger than the tax in the perfect information limit.
    Date: 2022–03
  14. By: Ozili, Peterson K
    Abstract: This article discusses the need for climate change risk mitigation and why it is not the responsibility of Central Banks to mitigate climate change risk. The paper argues that the responsibility for managing climate change risk should lie with elected officials, other groups and institutions but not Central Banks. Elected officials, or politicians, should be held responsible to deal with the consequence of climate change events. Also, international organizations and everybody can take responsibility for climate change while the Central Bank can provide assistance - but Central Banks should not lead the climate policy making or mitigation agenda.
    Keywords: Climate change, environment, Central Bank, government, atmosphere, financial stability, risk management, climate change risk, financial sector, responsibility, financial institutions.
    JEL: G28 Q54 Q56
    Date: 2021
  15. By: Keuschnigg, Christian
    Abstract: We propose a New Keynesian DSGE model of the Eurozone and analyze an asymmetric recession in a vulnerable member state characterized by a trilemma of high public debt, weak banks, and deteriorating competitiveness. We compare macroeconomic adjustment under continued membership with two exit scenarios that introduce flexible exchange rates and autonomous monetary policy. An exit with stable investor expectations could significantly dampen the short-run impact. Stabilization is achieved by a targeted monetary expansion combined with depreciation. However, investor panic may lead to escalation, aggravate the recession and delay the recovery.
    Keywords: Currency union, exchange rate flexibility, fiscal consolidation, sovereign debt, banks
    JEL: E42 E44 E60 F30 F36 F45 G15 G21
    Date: 2022–08
  16. By: De Groen, Willem Pieter; Oliinyk, Inna
    Abstract: The Single Resolution Fund (SRF) needs to provide the necessary funding for resolutions, avoiding the need to bail out banks with taxpayers’ money. The SRF relies on the banks that are part of the Banking Union to collect the funds. However, the current methodology used to determine the SRF contributions is difficult to replicate, overly complex and not fully coherent with the remainder of the resolution framework and capital requirements. This study proposes an alternative methodology that could potentially address the challenges with the current SRF contribution methodology. The alternative methodology reduces and simplifies the number of indicators used, as well as the number of contributors. Additionally, the proposed alternative methodology significantly reduces the number of risk-adjusted contributors and is more aligned with other bank requirements.
    Date: 2021–12
  17. By: Raphael Abiry; Marien Ferdinandusse; Alexander Ludwig; Carolin Nerlich
    Abstract: We develop a two sector incomplete markets integrated assessment model to analyse the effectiveness of green quantitative easing (QE) in complementing fiscal policies for climate change mitigation. We model green QE through an outstanding stock of private assets held by a monetary authority and its portfolio allocation between a clean and a dirty sector of production. Green QE leads to a partial crowding out of private capital in the green sector and to a modest reduction of the global temperature by 0.04 degrees of Celsius until 2100. A moderate global carbon tax of 50 USD is 4 times more effective.
    Keywords: climate change, integrated assessment model, 2-sector model, green quantitative easing, carbon taxation
    JEL: E51 E62 Q54
    Date: 2022
  18. By: Mr. Anil Ari; Jean-Marc B. Atsebi; Mar Domenech Palacios
    Abstract: We use a decomposition methodology to analyze the factors underlying the differentiated output losses of European countries in 2020. Our findings are fourfold: First, 2020 growth outcomes can be explained by differences in mobility, underlying growth trends, and pre-pandemic country fundamentals. Second, fiscal and monetary policies helped alleviate output losses during the pandemic in all European countries but to a varying extent. Third, shallower recessions in emerging market economies in Europe can be attributed to higher underlying growth and younger populations. Fourth, fiscal multipliers were higher in countries where above-the-line measures accounted for a larger share of the total fiscal package, the size of the total fiscal package was smaller, and inequality and informality were greater, as well as in countries with IMF-supported program during the pandemic.
    Keywords: COVID-19 crisis; output losses; monetary policy; fiscal policy; fiscal multipliers; growth outcome; output loss; decomposition methodology; types of fiscal policies; monetary policy support; COVID-19; Central bank policy rate; Income inequality; Europe; Global
    Date: 2022–07–01
  19. By: Eduardo Levy Yeyati (Universidad Torcuato Di Tella); Juna Francisco Gómez (Universidad de Buenos Aires)
    Abstract: We estimate, for a sample of emerging economies, the quasi-fiscal costs of sterilized foreign exchange interventions as the P&L of an inverse carry trade. We show that these costs can be substantial when intervention has a neo-mercantilist motive (preserving an undervalued currency) or a stabilization motive (appreciating the exchange rate as a nominal anchor), but are rather small when interventions follow a countercyclical, leaning-against-the-wind (LAW) pattern to contain exchange rate volatility. We document that under LAW, central banks outperform a constant size carry trade, as they additionally benefit from buying against cyclical deviations, and that the cost of reserves under the carry-trade view is generally lower than the one obtained from the credit-risk view (which equals the marginal cost to the country´s sovereign spread).
    Keywords: Exchange rates, foreign exchange intervention, international reserves, selfinsurance
    Date: 2022–07

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