nep-cba New Economics Papers
on Central Banking
Issue of 2022‒09‒12
thirty-two papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Does the European Central Bank speak differently when in parliament? By Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
  2. BigTech credit and monetary policy transmission: Micro-level evidence from China By Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
  3. Fiscal Histories By John H. Cochrane
  4. Unconventional Monetary Policy According to HANK By Eric R. Sims; Jing Cynthia Wu; Ji Zhang
  5. ECB Monetary Policy and the Term Structure of Bank Default Risk By Tom Beernaert; Nicolas Soenen; Rudi Vander Vennet
  6. The economics of central bank digital currency By Ahnert, Toni; Assenmacher, Katrin; Hoffmann, Peter; Leonello, Agnese; Monnet, Cyril; Porcellacchia, Davide
  7. Monetary policy transmission in segmented markets By Eisenschmidt, Jens; Ma, Yiming; Zhang, Anthony Lee
  8. A new age of uncertainty? Implications for monetary policy By Weidmann, Jens
  9. The optimal quantity of CBDC in a bank-based economy By Burlon, Lorenzo; Montes-Galdón, Carlos; Muñoz, Manuel A.; Smets, Frank
  10. The relationship between central bank auctions and bill market liquidity By Bats, Joost; Hoondert, Jurian J.A.
  11. Macroprudential regulation of investment funds By di Iasio, Giovanni; Kaufmann, Christoph; Wicknig, Florian
  12. Informing macroprudential policy choices using credit supply and demand decompositions By Barbieri, Claudio; Couaillier, Cyril; Perales, Cristian; Rodriguez d’Acri, Costanza
  13. How to limit the spillover from an inflation surge to inflation expectations By Dräger, Lena; Lamla, Michael; Pfajfar, Damjan
  14. Responses of Swiss bond yields and stock prices to ECB policy surprises By Thomas Nitschka; Diego M. Hager
  15. Risk and State-Dependent Financial Frictions By Martin Harding; Rafael Wouters
  16. Rightsizing Bank Capital for Small, Open Economies By McInerney, Niall; O'Brien, Martin; Wosser, Michael; Zavalloni, Luca
  17. Assessing Structure-Related Systemic Risk in Advanced Economies By O'Brien, Martin; Wosser, Michael
  18. Preferred habitat and monetary policy through the looking-glass By Carboni, Giacomo; Ellison, Martin
  19. Inflation-based fiscal consolidation: a DSGE approach By Busato, Francesco; Albanese, Marina; Varlese, Monica
  20. Latent fragility: conditioning banks' joint probability of default on the financial cycle By Bochmann, Paul; Hiebert, Paul; Schüler, Yves S.; Segoviano, Miguel
  21. The current account and monetary policy in the euro area By Schuler, Tobias; Sun, Yiqiao
  22. Can EU bonds serve as euro-denominated safe assets? By Bletzinger, Tilman; Greif, William; Schwaab, Bernd
  23. Monetary Policy and Risk-Taking: Evidence from Thai Corporate Bond Markets By Warinthip Worasak; Nuwat Nookhwun; Pongpitch Amatyakul
  24. Funding deposit insurance By Oosthuizen, Dick; Zalla, Ryan
  25. The Macroeconomic Consequences of Natural Rate Shocks: An Empirical Investigation By Stephanie Schmitt-Grohé; Martín Uribe
  26. Macroprudential policy and the role of institutional investors in housing markets By Muñoz, Manuel A.; Smets, Frank
  27. Interbank credit exposures and financial stability By Schneorson, Oren
  28. Portfolio shocks and the financial accelerator in a small open economy By Ortiz, Marco; Miyahara, Ken
  29. How do Members of the European Parliament (MEPs) hold the European Central Bank (ECB) accountable? A descriptive quantitative analysis of three accountability forums (2014-2021) By Massoc, Elsa Clara
  30. Expectations and term premia in EFSF bond yields By Andrea Carriero; Lorenzo Ricci; Elisabetta Vangelista
  31. Skewed SVARs: tracking the structural sources of macroeconomic tail risks By Carlos Montes-Galdón; Eva Ortega
  32. Changing anchor of the renminbi: A Bayesian learning approach to the decade-long transition By Chen Zhang; Ying Fang; Linlin Niu

  1. By: Fraccaroli, Nicolò; Giovannini, Alessandro; Jamet, Jean-Francois; Persson, Eric
    Abstract: Parliamentary hearings are a fundamental tool to hold independent central banks accountable. However, it is not clear what type of information central banks provide when they communicate with parliaments compared to other existing information channels. In this article, we address this question by comparing the communication of the European Central Bank (ECB) in parliamentary hearings to its communication in the regular press conferences that follow monetary policy decisions. Using text analysis on the ECB President’s introductory statements in parliamentary hearings and press conferences from 1998 to 2021, we show that the ECB uses parliamentary hearings to discuss topics that are less covered in press conferences. We also find that the ECB’s policy stance in the hearings tends to reflect the stance in press conferences, and that the degree of language complexity is similar in the two fora. These findings support the view that the ECB mainly uses parliamentary hearings to further explain policy decisions first presented at press conferences but also to put them in a broader context. JEL Classification: E02, E52, E58
    Keywords: Central Bank accountability, Central Bank communication
    Date: 2022–08
  2. By: Huang, Yiping; Li, Xiang; Qiu, Han; Yu, Changhua
    Abstract: This paper studies monetary policy transmission through BigTech and traditional banks. By comparing business loans made by a BigTech bank with those made by traditional banks, it finds that BigTech loans tend to be smaller, and the BigTech bank grants credit to more new borrowers compared with conventional banks in response to expansionary monetary policy. The BigTech bank's advantages in information, monitoring, and risk management are the potential mechanisms. The analysis also finds that BigTech and traditional bank credits to firms that have already borrowed from these banks respond similarly to changes in monetary policy. Overall, BigTech credit amplifies monetary policy transmission mainly through the extensive margin. In addition, monetary policy has a stronger impact on the real economy through BigTech lending than traditional bank loans.
    Keywords: bank lending,financial technology,monetary policy transmission
    JEL: E52 G21 G23
    Date: 2022
  3. By: John H. Cochrane
    Abstract: The fiscal theory states that inflation adjusts so that the real value of government debt equals the present value of real primary surpluses. Monetary policy remains important. The central bank can set an interest rate target, which determines the path of expected inflation, while news about the present value of surpluses drives unexpected inflation. I use fiscal theory to interpret historical episodes, including the rise and fall of inflation in the 1970s and 1980s, the long quiet zero bound of the 2010s, and the reemergence of inflation in 2021, as well as to analyze the gold standard, currency pegs, the ends of hyperinflations, currency crashes, and the success of inflation targets. Going forward, fiscal theory warns that inflation will have to be tamed by coordinated monetary and fiscal policy. I thank Erik Hurst, Ed Nelson, Nina Pavcnik, and Timothy Taylor for helpful comments.
    JEL: E42 E52 E58 E61 E62 E63 E65
    Date: 2022–08
  4. By: Eric R. Sims; Jing Cynthia Wu; Ji Zhang
    Abstract: This paper studies the implications of household heterogeneity for the effectiveness of quantitative easing (QE). We consider a heterogeneous agent New Keynesian (HANK) model with uninsurable household income risk. Financial intermediaries are subject to an endogenous leverage constraint that allows QE to matter. We find that macro aggregates react very similarly to a QE shock in the HANK model compared to a representative agent (RANK) version of the model. This finding is robust across different micro- and macro- distributions of wealth.
    JEL: E12 E52
    Date: 2022–08
  5. By: Tom Beernaert; Nicolas Soenen; Rudi Vander Vennet (-)
    Abstract: Euro Area banks have been confronted with unprecedented monetary policy actions by the ECB. Monetary policy may affect bank risk profiles, but the consequences may differ for short-term risk versus long-term or structural bank risk. We empirically investigate the association between the ECB’s monetary policy stance and market-perceived shortterm and long-term bank risk, using the term structure of default risk captured by bank CDS spreads. The results demonstrate that, during the period 2009-2020, ECB expansionary monetary policy diminished bank default risk in the short term. However, we do not observe a similar decline in long-term bank default risk, since we document that monetary stimulus is associated with a steepening of the bank default risk curve. The reduction of bank default risk is most pronounced during the sovereign debt crisis and for periphery Euro Area banks. From 2018 onwards, monetary policy accommodation is associated with increased bank default risk, both short term and structurally, which is consistent with the risk-taking hypothesis under which banks engage in excessive risk-taking behavior in their loan and securities portfolios to compensate profitability pressure caused by persistently low rates. The increase in perceived default risk is especially visible for banks with a high reliance on deposit funding.
    Keywords: Monetary policy, ECB, Bank default risk, Term structure of credit risk
    JEL: C58 G21 G32 E52
    Date: 2022–08
  6. By: Ahnert, Toni; Assenmacher, Katrin; Hoffmann, Peter; Leonello, Agnese; Monnet, Cyril; Porcellacchia, Davide
    Abstract: This paper provides a structured overview of the burgeoning literature on the economics of CBDC. We document the economic forces that shape the rise of digital money and review motives for the issuance of CBDC. We then study the implications for the financial system and discuss of a number of policy issues and challenges. While the academic literature broadly echoes policy makers’ concerns about bank disintermediation and financial stability risks, it also provides conditions under which such adverse effects may not materialize. We also point to several knowledge gaps that merit further work, including data privacy and the study of end‐user preferences for attributes of digital payment methods. JEL Classification: E41, E42, E51, E52, E58, G21
    Keywords: Central Bank Digital Currency, digital money, financial stability, monetary policy, payments
    Date: 2022–08
  7. By: Eisenschmidt, Jens; Ma, Yiming; Zhang, Anthony Lee
    Abstract: We show that dealer market power impedes the pass-through of monetary policy in repo markets, which is an important first stage of monetary policy transmission. In the European repo market, most participants do not have access to trade on centralized exchanges. Rather, they rely on OTC intermediation by a small number of dealers that exhibit significant market power. As a result, the passthrough of the ECB’s policy rate to the majority of non-dealer banks and non-banks is inefficient and unequal in repo markets. Our estimates imply that a secured funding facility like the Fed’s RRP may alleviate dealer market power and improve the transmission efficiency of monetary policy to banks and non-bank financial institutions. JEL Classification: E4, E5, G2
    Keywords: market power, monetary policy, non-banks, pass-through efficiency, repo market
    Date: 2022–08
  8. By: Weidmann, Jens
    Abstract: Central banks have faced a succession of crises over the past years as well as a number of structural factors such as a transition to a greener economy, demographic developments, digitalisation and possibly increased onshoring. These suggest that the future inflation environment will be different from the one we know. Thus uncertainty about important macroeconomic variables and, in particular, inflation dynamics will likely remain high. Discussion on what this could mean for monetary policy
    Date: 2022
  9. By: Burlon, Lorenzo; Montes-Galdón, Carlos; Muñoz, Manuel A.; Smets, Frank
    Abstract: We provide evidence on the estimated effects of digital euro news on bank valuations and lending and find that they depend on deposit reliance and design features aimed at calibrating the quantity of CBDC. Then, we develop a quantitative DSGE model that replicates such evidence and incorporates key selected mechanisms through which CBDC issuance could affect bank intermediation and the economy. Under empirically-relevant assumptions (i.e., central bank collateral requirements and imperfect substitutability across CBDC, cash and deposits), the issuance of CBDC yields non-trivial trade-offss and effects through an expansion of the central bank balance sheet and profits. The issuance of CBDC exerts a smoothing effect on lending and real GDP by stabilizing deposit holdings. Such "stabilization effect" improves the well-known liquidity services/disintermediation trade-off induced by CBDC and permits to rank different types of CBDC rules according to individual and social preferences. Welfare-maximizing CBDC policy rules are effective in mitigating the risk of bank disintermediation and induce significant welfare gains. JEL Classification: E42, E58, G21
    Keywords: bank intermediation, central bank digital currency, DSGE models
    Date: 2022–07
  10. By: Bats, Joost; Hoondert, Jurian J.A.
    Abstract: This paper investigates the relationship between central bank (reverse) auctions and bill market liquidity. The analysis includes data on the purchases of bills in the auctions by the Dutch Central Bank under the European Central Bank’s Pandemic Emergency Purchase Programme (PEPP). The results indicate that auctions contribute to smooth market functioning. Two findings stand out. First, by purchasing bills using auctions rather than bilaterally, the central bank increases the bid-to-cover ratio at bill issuance, especially in times of stress. Second, bills are offered at larger sizes and lower prices in central bank auctions near primary issuance. JEL Classification: E42, E44, E52, E58, G12
    Keywords: bills, Central bank auctions, liquidity
    Date: 2022–08
  11. By: di Iasio, Giovanni; Kaufmann, Christoph; Wicknig, Florian
    Abstract: The investment fund sector, the largest component of the non-bank financial system, is growing rapidly and the economy is becoming more reliant on investment fund financial intermediation. This paper builds a dynamic stochastic general equilibrium model with banks and investment funds. Banks grant loans and issue liquid deposits, which are valuable to households. Funds invest in corporate bonds and may hold liquidity in the form of bank deposits to meet investor redemption requests. Without regulation, funds hold insufficient deposits and must sell bonds when hit by large redemptions. Bond liquidation is costly and eventually reduces investment funds’ intermediation capacity. Even when accounting for side effects due to a reduction of deposits held by households, a macroprudential liquidity requirement improves welfare by reducing bond liquidation and by increasing the economy’s resilience to financial shocks akin to March 2020. JEL Classification: E44, G18, G23
    Keywords: liquidity regulation, macroprudential policy, non-bank financial intermediation
    Date: 2022–08
  12. By: Barbieri, Claudio; Couaillier, Cyril; Perales, Cristian; Rodriguez d’Acri, Costanza
    Abstract: Macroprudential policies should strengthen the banking sector throughout the financial cycle. However, while bank credit growth is used to capture cyclical exuberance and calibrate buffer requirements, it depends on potentially heterogeneous dynamics on the borrower and lender side. By decomposing credit growth into a common component and components capturing heterogeneity in supply and demand à la Amiti and Weinstein, 2018 applied on the euro area credit register ("AnaCredit"), we can inform the policy debates in two ways. Ex ante, we introduce a framework mapping the decomposition to different types of macroprudential instruments, specifically broad vs. targeted measures. Ex post, we also show that the resulting decomposition can be used to assess the effectiveness of adopted measures on credit supply or demand. We find evidence that buffer releases and credit guarantees increased bank credit supply during the COVID-19 pandemic and interacted positively with banks' profitability. JEL Classification: E58, E52, E44, G21
    Keywords: bank-lending channel, buffer releases, capital requirements, credit dynamics, European economy
    Date: 2022–08
  13. By: Dräger, Lena; Lamla, Michael; Pfajfar, Damjan
    Abstract: We study the effects of forward looking communication in an environment of rising inflation rates on German consumers' inflation expectations using a randomized control trial. We show that information about rising inflation increases short- and long-term inflation expectations. This initial increase in expectations can be mitigated using forward looking information about inflation. Among these information treatments, professional forecasters' projections seems to reduce inflation expectations by more than policymaker's characterization of inflation as a temporary phenomenon.
    Keywords: short-run and long-run inflation expectations,inflation surge,randomized control trial,survey experiment,persistent or transitory inflation shock
    JEL: E31 E52 E58 D84
    Date: 2022
  14. By: Thomas Nitschka; Diego M. Hager
    Abstract: We analyse spillovers from European Central Bank (ECB) policy surprises to asset markets outside the euro area using Switzerland as a case study. Our results suggest that Swiss asset price responses to ECB policy surprises are significant. They depend on the type and nature of the surprise and change over time. Decomposing bond yields into expected short-term interest rates and the term premium reveals that both signalling and portfolio rebalancing effects explain the responses of bond yields of various maturities to surprises resulting from scheduled ECB policy decisions. ECB policy surprises are more important to Swiss government bond yields than Swiss stock prices.
    Keywords: Bond, event study, international spillovers, monetary policy, stock
    JEL: E43 E52 G15
    Date: 2022
  15. By: Martin Harding; Rafael Wouters
    Abstract: We augment a standard New Keynesian model with a financial accelerator mechanism and show that financial frictions generate large state-dependent amplification effects. We fit the model to US data and show that show that, when shocks drive the model far away from the steady state, the nonlinear model produces much stronger propagation of shocks than the linearized model. We document that these amplification effects are due to endogenous variation in financial conditions and not due to other nonlinearities in the model. Motivated by these findings, we propose a regime-switching dynamic stochastic general equilibrium framework where financial frictions endogenously fluctuate between moderate (low risk) and severe (high risk), depending on the state of the economy. This framework allows for efficient estimation with many state variables and improves fit with respect to the linear model.
    Keywords: Central bank research; Credit and credit aggregates; Financial stability; Monetary policy
    JEL: E52 E58
    Date: 2022–08
  16. By: McInerney, Niall (Central Bank of Ireland); O'Brien, Martin (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland); Zavalloni, Luca (Central Bank of Ireland)
    Abstract: In a macroeconomic cost versus benefit framework, we determine the appropriate Tier 1 capital ratio for the banking system of advanced economies. Of particular interest is the appropriate bank capital range for countries sharing similar macrofinancial structural characteristics, during times of normal prevailing risk conditions. The characteristics considered include the relative size of the economy, trade and financial openness, the degree to which the country is FDI-dependent and various measures of banking system concentration. We find that, when the prevailing systemic risk environment is neither elevated nor subdued and other critical modelling parameters are set to plausible levels, an appropriate level for the Tier 1 capital ratio in advanced economies can lie in the range of 12% to 20%, with our benchmark estimate being 16%. When considering the additional risk inherent with being a small, open, FDI-reliant economy with a concentrated banking system, this range and benchmark can be up to 1.25 percentage points higher.
    Keywords: optimal bank capital, macroprudential policy, macro-financial structure, systemic risk, financial crises, financial regulation.
    JEL: E5 G01 G17 G28 R39
    Date: 2022–06
  17. By: O'Brien, Martin (Central Bank of Ireland); Wosser, Michael (Central Bank of Ireland)
    Abstract: We examine the role that economic size, the degree of trade and financial openness, dependancy on inward foreign direct investment and various aspects of banking system concentration play in determining systemic risk across advanced economies. Across the three systemic risk measures evaluated, we find that small, financially open and FD Idependent economies with more concentrated banking systems are more susceptible to severe tail risk outcomes and higher costs of crises than the average advanced economy. Small and financially open economies appear more likely to experience a systemic banking crisis than their counterparts. In most instances, the joint presence of these structural characteristics combine to further increase systemic risk levels and do not offset each other. Our findings suggest that a more activist macroprudential policy stance may be warranted for countries sharing these characteristics, so that the level of resilience is commensurate to the higher level of risk.
    Keywords: Systemic Risk, systemic banking crises, macroprudential policy, macrof inancial structure, macroprudential policy, financial stability.
    JEL: E5 G01 G21 G28
    Date: 2022–06
  18. By: Carboni, Giacomo; Ellison, Martin
    Abstract: The ability of monetary policy to influence the term structure of interest rates and the macroeconomy depends on the extent to which financial market participants prefer to hold bonds of different maturities. We microfound such preferred-habitat demand in a fully-specified dynamic stochastic general equilibrium model of the macroeconomy where the term structure is arbitrage-free. The source of preferred habitat demand is an insurance fund that issues annuities and adopts a liability-driven strategy to minimise the duration risk on its balance sheet. The optimising behaviour of the insurance fund implies a preferred-habitat demand function that is upward-sloping in bond prices and downward-sloping in bond yields, especially when interest rates are low. This supports the operation of a recruitment channel at low interest rates, whereby long-term interest rates react strongly to short-term policy rates because of complementary changes in term premia induced by preferred-habitat demand. The strong reaction extends to inflation and output in general equilibrium, a through-the-looking-glass result that challenges conventional wisdom that preferred habitat weakens the transmission of monetary policy. JEL Classification: E43, E44, E52, G21, G22
    Keywords: general equilibrium, interest rates, preferred habitat, term structure
    Date: 2022–08
  19. By: Busato, Francesco; Albanese, Marina; Varlese, Monica
    Abstract: This paper investigates under which conditions a permanent increase in inflation target might entail public debt reduction, in a Two Agents New Keynesian model with sticky prices and distortionary taxation. In light of that, this paper contributes to the more recent lively debate among economists and policymakers regarding whether an increase in inflation could contribute to a public debt reduction without damaging macroeconomic stability. Real and welfare effects caused by changes in the inflation target from 2% to 5% are discussed. Overall, results show that an increase in inflation affects the economy positively in the short run but negatively in the long term. Consistently, higher inflation worsens households’ welfare. Moreover, a sensitivity analysis of the model’s key parameters is carried out. Quite interestingly, it emerges that fiscal consolidation through an increase in inflation is far from obvious. A more sluggish inflation adjustment path influences households’ expectations, entailing debt-to-GDP ratio increases rather than decreases.
    Keywords: Inflation, Public debt-to-GDP ratio, Monetary policy, Welfare effects
    JEL: D6 E31 E44 E58 H63
    Date: 2022–07–16
  20. By: Bochmann, Paul; Hiebert, Paul; Schüler, Yves S.; Segoviano, Miguel
    Abstract: We propose the CoJPoD, a novel framework explicitly linking the cross-sectional and cyclical dimensions of systemic risk. In this framework, banking sector distress in the form of the joint probability of default of financial intermediaries (reflecting contagion from both direct and indirect interconnectedness) is conditioned on the financial cycle (reflecting the buildup and unwinding of system-wide balance sheet leverage). An empirical application to large systemic banks in the euro area, US and UK illustrates how the unravelling of excess leverage can magnify banking sector distress. Capturing this dependence of banking sector distress on prevailing financial imbalances can enhance risk surveillance and stress testing alike. An empirical signaling exercise confirms that the CoJPoD outperforms the individual capacity of either its unconditional counterpart or the financial cycle in signaling financial crises particularly around their onset - suggesting scope to increase the precision with which macroprudential policies are calibrated. JEL Classification: C19, C54, E58, G01, G21
    Keywords: financial crises, financial cycle, multivariate density optimization, portfolio credit risk, systemic risk
    Date: 2022–08
  21. By: Schuler, Tobias; Sun, Yiqiao
    Abstract: We investigate the factors driving current account and monetary policy developments in the euro area. We estimate an open-economy structural vector autoregression (VAR) model with zero and sign restrictions derived from a multi-country dynamic stochastic general equilibrium (DSGE) model to identify relevant shocks and analyse their impact on the current account and interest rate. Examining the VAR impulse responses for Germany, Italy and Spain we find that investment shocks and preference shocks drive the current account and interest rates in the opposite directions. By contrast, external demand shocks and productivity shocks cause both the current account balance and interest rate to move in the same direction. We also provide evidence for spillovers to the euro area from US preference shocks and US interest rate policy shocks. JEL Classification: E32, F32, F45
    Keywords: current account, macroeconomic shocks, monetary policy
    Date: 2022–08
  22. By: Bletzinger, Tilman; Greif, William; Schwaab, Bernd
    Abstract: A safe asset is of high credit quality, retains its value in bad times, and is traded in liquid markets. We show that bonds issued by the European Union (EU) are widely considered to be of high credit quality, and that their yield spread over German Bunds remained contained during the 2020 Covid-19 pandemic recession. Recent issuances and taps under the EU’s SURE and NGEU initiatives helped improve EU bonds' market liquidity from previously low levels, also reducing liquidity risk premia. Eurosystem purchases and holdings of EU bonds did not impair market liquidity. Currently, one obstacle to EU bonds achieving a genuine euro-denominated safe asset status, approaching that of Bunds, lies in the one-off, time-limited nature of the EU’s Covid-19-related policy responses. JEL Classification: E58, G12, H63
    Keywords: EU-issued bonds, European Central Bank, European Union, market liquidity, NextGenerationEU (NGEU), Pandemic Emergency Purchase Programme (PEPP)
    Date: 2022–08
  23. By: Warinthip Worasak; Nuwat Nookhwun; Pongpitch Amatyakul
    Abstract: This paper examines the risk-taking channel of monetary policy in the context of Thai corporate bond market. Based on newly-issued non-financial corporate bonds from 2001 to the third quarter of 2020, we find that low interest rates are associated with greater issuance of bonds with worse risk ratings, which is more pronounced for bonds from the property sector. In addition, these bonds tend to have longer maturity. However, we do not find evidence of compression of risk premium or underpricing of risks during these low-rate periods. We then examine whether any types of bond investors are prone to the search-for-yield behaviour. Using the Bank of Thailand's confidential debt securities holding dataset from 2013 onward, our results show that individuals, rather than banks and institutional investors, are the prime holder of high-risk bonds. Conditional on bond risk ratings, only two groups of bondholders appear to bias toward higher-yield bonds. These include individuals and other depository financial institutions, namely saving cooperatives and money market mutual funds. Our results point toward weak evidence of risk-taking among corporate bond investors during the low-rate environment.
    Keywords: Monetary policy; Interest rate; Risk taking; Search for yield; Corporate bond; Underpricing of risk; Excess bond premium
    JEL: E44 E52 G11 G12
    Date: 2022–08
  24. By: Oosthuizen, Dick; Zalla, Ryan
    Abstract: We present a quantitative model of deposit insurance. We characterize the policymaker’s optimal choices of coverage for depositors and premiums raised from banks. Premiums contribute to a deposit insurance fund that lowers taxpayers’ resolution cost of bank failures. We find that risk-adjusted premiums reduce moral hazard, enabling the policymaker to increase deposit insurance coverage by 3 percentage points and decrease the share of expected annual bank failures from 0.66% to 0.16%. The model predicts a fund-to-covered-deposits ratio that matches the data and declines in taxpayers’ income due to taxpayers’ risk aversion. JEL Classification: G21, G28
    Keywords: bank regulation, bank runs, deposit insurance
    Date: 2022–08
  25. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: Much of the empirical literature on the natural rate of interest has focused on estimating its path. This paper addresses the question of how exogenous movements in the natural rate of interest affect aggregate activity and inflation in the short and long runs. To this end it proposes a semi-structural model of output, inflation, and the policy interest rate inspired by the DSGE literature but with fewer identification and cross-equation restrictions. It then estimates it on U.S. data over the period 1900 to 2021. We find that a permanent decline in the natural rate of interest has a large negative effect on the trend of output and is contractionary and deflationary in the short run. When the economy is constrained by the zero lower bound (ZLB), these results are consistent with the secular stagnation hypothesis. However, we find that negative natural rate shocks depress the trend of output even when the economy is away from the ZLB. Thus, the results of this paper call for a more general theory of the trend effects of natural rate shocks.
    JEL: E30 E4
    Date: 2022–08
  26. By: Muñoz, Manuel A.; Smets, Frank
    Abstract: Since the onset of the Global Financial Crisis, the presence of institutional investors in housing markets has steadily increased over time. Real estate funds (REIFs) and other housing investment •rms leverage large-scale buy-to-rent real estate investments that enable them to set prices in rental markets. A significant fraction of this funding is being provided in the form of non-bank lending - which is not subject to regulatory LTV ratios - and REIFs are generally not constrained by leverage limits. We develop a quantitative DSGE model that incorporates the main features of the REIF industry and identify leakages of existing macroprudential policy: (i) already existing countercyclical LTV rules on residential mortgages trigger a credit reallocation towards the REIF sector that can amplify financial and business cycles; while (ii) "non-existent" countercyclical LTV rules on lending to REIFs are particularly effective in taming such cycles. Due to the different mechanisms through which they operate, both types of LTV rules complement each other and jointly yield larger welfare gains (for savers and borrowers) than in isolation. JEL Classification: E44, G23, G28
    Keywords: leakages, leverage, loan-to-value ratios, real estate funds, rental housing
    Date: 2022–08
  27. By: Schneorson, Oren
    Abstract: This paper investigates how interbank credit exposures affect financial stability. Policy makers often see such exposures as undermining stability by exacerbating cascading losses through the financial system. I develop a model that features a trade-off between cascading losses and risk-sharing. In contrast to previous studies I find that reducing interbank connectivity may destabilize the financial system via the bank-run channel. This is because it decreases the risk-sharing benefits of interbank connectivity. A bank-run model features two islands that are connected via a long term debt claim. Varying the size of this claim (interbank connectivity), I study how the decision to `run on the bank' is affected. I run a simulation of the model, calibrated to the U.S. banking system between 1997-2007. I find that large bankruptcy costs are required to trump the risk-sharing benefits of interbank credit exposures. JEL Classification: G01, G21, G28
    Keywords: bank runs, credit risk, derivatives, financial stability
    Date: 2022–08
  28. By: Ortiz, Marco; Miyahara, Ken
    Abstract: We study a small open economy with two salient properties: an entrepreneurial sector that borrows in foreign currency and is subject to costly state-verification and risk averse FX market intermediaries. This economy thus features a financial accelerator, an endogenous expected cost of capital, and foreign exchange dynamics dependent on the open position of financial intermediaries. we aim to quantitatively assess the extent to which portfolio shocks can reproduce contractionary depreciations and how central bank's optimal simple rules can improve welfare in a stylized economy.
    Keywords: Exchange rate dynamics, exchange rate intervention, financial accelerator, incomplete financial markets
    JEL: F3 F31 F34 F41 G15
    Date: 2022–08–15
  29. By: Massoc, Elsa Clara
    Abstract: The ECB is independent, but it is also accountable to the European parliament (EP). Yet, how the EP has held the ECB accountable has largely been overlooked. This paper starts addressing this gap by providing descriptive statistics of three accountability modalities. The paper highlights three findings. First, topics of accountability have changed. Climaterelated accountability has increased quickly and dramatically since 2017. Second, if the relationship between price stability and climate change remains an object of conflict among MEPs, a majority within the EP has emerged to put pressure for the ECB to take a more active stance against climate change, precisely on behalf of its price stability mandate. Third, MEPs engage with the climate topic in very specific ways. There is a gender divide between the climate and the price stability topics. Women engage more actively with climate-related topics. While the Greens heavily dominate the climate topic, parties from the Right dominate the topic of Price stability. Finally, MEPs adopt a more united strategy and a particularly low confrontational tone in their climate-related interventions.
    Keywords: accountability,European Central Bank,European Parliament,climate,price stability
    Date: 2022
  30. By: Andrea Carriero (Queen Mary University of London, University of Bologna); Lorenzo Ricci (ESM); Elisabetta Vangelista (ESM)
    Abstract: The European Financial Stability Facility (EFSF) was set up in June 2010 as a temporary crisis resolution mechanism. In October 2012, its tasks were taken over by European Stability Mechanism (ESM), a permanent institution with a capital-based structure. Liquidity conditions for EFSF bonds in the secondary market are different from those of large sovereign bond issuers, which affects bond pricing. This paper offers the first study of the term structure of EFSF bond yields and a decomposition into expected interest rates and risk premia, based on a state-of-the-art no-arbitrage term structure model. A joint model of the EFSF curve and the swap curve allows to further identify the liquidity and credit components of both yield curves and disentangle an additional element of liquidity typical of bonds. This component is closely related to the ECB monetary policy. This model can be extended to other supranational institutions.
    Keywords: Term structure, volatility, density forecasting, no arbitrage
    JEL: C32 C53 E43 E47 G12
    Date: 2022–07–29
  31. By: Carlos Montes-Galdón (European Central Bank); Eva Ortega (Banco de España)
    Abstract: This paper proposes a vector autoregressive model with structural shocks (SVAR) that are identified using sign restrictions and whose distribution is subject to time-varying skewness. It also presents an efficient Bayesian algorithm to estimate the model. The model allows for the joint tracking of asymmetric risks to macroeconomic variables included in the SVAR. It also provides a narrative about the structural reasons for the changes over time in those risks. Using euro area data, our estimation suggests that there has been a significant variation in the skewness of demand, supply and monetary policy shocks between 1999 and 2019. This variation lies behind a significant proportion of the joint dynamics of real GDP growth and inflation in the euro area over this period, and also generates important asymmetric tail risks in these macroeconomic variables. Finally, compared to the literature on growth- and inflation-at-risk, we found that financial stress indicators do not suffice to explain all the macroeconomic tail risks.
    Keywords: Bayesian SVAR, skewness, growth-at-risk, inflation-at-risk
    JEL: C11 C32 C51 E31 E32
    Date: 2022–03
  32. By: Chen Zhang; Ying Fang; Linlin Niu
    Abstract: China’s exchange rate reform, initiated in 2005, had the goal of switching from a fixed U.S. dollar (USD) peg to a floating mechanism with reference to a trade-weighted currency basket. Over a decade of gradual transition, the renminbi (RMB) has gained importance in the international monetary system and has shown higher flexibility in its dollar value. However, previous studies have demonstrated the inertia of the RMB in maintaining a de facto dollar peg, with little evidence of the up-to-date effectiveness of the official currency basket. We present a Bayesian time-varying coefficient regression on the currency peg or basket weight suitable for studying transition process. We show that the “8.11” reform in 2015 triggered an eventual anchor switching, driving down the dollar weight from 1 to around 0.3. Since 2016, the weight of the official basket has been double that of the USD. SVAR and TVP-VAR analysis, controlling for endogeneity, provide consistent evidence of this regime change, which has important implications for China and the global economy.
    Keywords: Renminbi, exchange rate regime, dollar peg, currency basket
    JEL: F31 F41 C11
    Date: 2022–08–24

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