nep-cba New Economics Papers
on Central Banking
Issue of 2022‒09‒19
nineteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. New perspectives on monetary policy By Moritz Schularick
  2. DSGE Models and Machine Learning: An Application to Monetary Policy in the Euro Area By Daniel Stempel; Johannes Zahner
  3. Counter-cyclical fiscal rules and the zero lower bound By Hauptmeier, Sebastian; Kamps, Christophe; Radke, Lucas
  4. Can National Treasury do contractionary monetary policy By Luchelle Soobyah; Nicola Viegi
  5. House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data By Gorea, Denis; Kryvtsov, Oleksiy; Kudlyak, Marianna
  6. Occasional Bulletin Economic Notes 2201 Policy lessons from global retail Central Bank Digital Currency projects June 2022 By Nic Spearman
  7. Leaning against the wind with fiscal and monetary policy By Shaun de Jager; Chris Loewald; Konstantin Makrelov; Xolani Sibande
  8. Weather Shocks and Inflation Expectations in Semi-Structural Models By Jose Vicente Romero; Sara Naranjo Saldarriaga
  9. Cash, COVID-19 and the Prospects for a Canadian Digital Dollar By Walter Engert; Kim Huynh
  10. Policy Rules and Large Crises in Emerging Markets By Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez
  11. The risk of a recession period in the U.S. and the possible role of home equity By De Koning, Kees
  12. What Do Long Data Tell Us About the Inflation Hike Post COVID-19 Pandemic? By Stephanie Schmitt-Grohé; Martín Uribe
  13. Unravelling the Narratives Behind Macroeconomic Forecasts By Marcela De Castro-Valderrama; Santiago Forero-Alvarado; Nicolas Moreno-Arias; Sara Naranjo-Saldarriaga
  14. COVID and Financial Stability: Practice Ahead of Theory By Jing Yang; Hélène Desgagnés; Grzegorz Halaj; Yaz Terajima
  15. What Can Time-Series Regressions Tell Us About Policy Counterfactuals? By Christian K. Wolf; Alisdair McKay
  16. The Economics of Sovereign Debt, Bailouts and the Eurozone Crisis By Pierre-Olivier Gourinchas; Philippe Martin; Todd Messer
  17. Macrofinancial determinants of default probability using copula: A case study of Indonesian banks By Maulana Harris Muhajir
  18. Non-bank mortgage lending in Ireland: recent developments and macroprudential considerations By Gaffney, Edward; Hennessy, Christina; McCann, Feargal
  19. Risk Weights on Irish Mortgages By Lyons, Paul; Rice, Jonathan

  1. By: Moritz Schularick (University of Bonn and Sciences Po, Paris)
    Abstract: This paper presents and discusses new perspectives on the framework of monetary policy that challenge the current paradigm: (i) The development of heterogeneous agent models in which “divine coincidence†no longer holds and trade-offs between inflation and output stabilization arise; (ii) New theoretical and empirical evidence on the distributional effects of conventional and unconventional monetary policy; (iii) Evidence that stabilization policy by central banks invites more leverage, risktaking and a rising exposure of intermediaries to the systematic risks that central banks insure, which in turn increases financial and economic fragility.
    Keywords: monetary policy, heterogeneous agent model, inequality, asset prices, Central Banks´ mandate, stabilization policy
    JEL: E42 E52 E58 E64 H63
    Date: 2022–02
  2. By: Daniel Stempel (University of Duesseldorf); Johannes Zahner (University of Marburg)
    Abstract: In the euro area, monetary policy is conducted by a single central bank for 19 member countries. However, countries are heterogeneous in their economic development, including their inflation rates. This paper combines a New Keynesian model and a neural network to assess whether the European Central Bank (ECB) conducted monetary policy between 2002 and 2022 according to the weighted average of the inflation rates within the European Monetary Union (EMU) or reacted more strongly to the inflation rate developments of certain EMU countries. The New Keynesian model first generates data which is used to train and evaluate several machine learning algorithms. We find that a neural network performs best out-of-sample. Thus, we use this algorithm to classify historical EMU data. Our findings suggest disproportional emphasis on the inflation rates experienced by southern EMU members for the vast majority of the time frame considered (80%). We argue that this result stems from a tendency of the ECB to react more strongly to countries whose inflation rates exhibit greater deviations from their long-term trend.
    Keywords: New Keynesian Models, Monetary Policy, European Monetary Union, Neural Networks, Transfer Learning
    JEL: C45 C53 E58
    Date: 2022
  3. By: Hauptmeier, Sebastian; Kamps, Christophe; Radke, Lucas
    Abstract: We analyse the effectiveness of optimal simple and implementable monetary and fiscal policy rules in stabilising economic activity, inflation and government debt in face of an occasionally binding lower bound on the nominal interest rate in a New Keynesian model. We show that, within the traditional assignment of active monetary policy and passive fiscal policy, the optimal fiscal policy rule features a strong counter-cyclical response to the deviation of inflation from the central bank’s target - providing significant macroeconomic stabilisation especially at the lower bound - while also featuring a strong response to government debt. Our quantitative results show that the optimal counter-cyclical fiscal feedback to inflation significantly improves welfare and reduces the lower-bound frequency. In addition, the optimal simple monetary and fiscal rules almost completely resolve the deflationary bias associated with the lower bound. JEL Classification: E31, E52, E61, E62
    Keywords: deflationary bias, fiscal rules, inflation targeting, zero lower bound
    Date: 2022–08
  4. By: Luchelle Soobyah; Nicola Viegi
    Abstract: Can National Treasury do contractionary monetary policy
    Date: 2022–08–10
  5. By: Gorea, Denis (European Investment Bank); Kryvtsov, Oleksiy (Bank of Canada); Kudlyak, Marianna (Federal Reserve Bank of San Francisco)
    Abstract: Existing literature documents that house prices respond to monetary policy surprises with a significant delay, taking years to reach their peak response. We present new evidence of a much faster response. We exploit information contained in listings for the residential properties for sale in the United States between 2001 and 2019 from the CoreLogic Multiple Listing Service Dataset. Using high-frequency measures of monetary policy shocks, we document that a one-standard-deviation contractionary monetary policy surprise lowers housing list prices by 0.2–0.3 percent within two weeks—a magnitude on par with the effect on stock prices. House prices respond stronger to the surprises to future rates as compared to the surprise changes in the federal funds rate. Sale prices are mostly pre-determined by list prices and do not independently respond to monetary policy surprises.
    Keywords: house prices, monetary policy, transmission of monetary policy, list and sales prices
    JEL: E52 R21 R31
    Date: 2022–08
  6. By: Nic Spearman
    Abstract: Occasional Bulletin Economic Notes 2201 Policy lessons from global retail Central Bank Digital Currency projects June 2022
    Date: 2022–06–24
  7. By: Shaun de Jager; Chris Loewald; Konstantin Makrelov; Xolani Sibande
    Abstract: Leaning-against-the-wind-with-fiscal-and -monetary-policy
    Date: 2022–09–06
  8. By: Jose Vicente Romero (Banco de la Republica); Sara Naranjo Saldarriaga (Banco de la Republica)
    Abstract: Colombia is particularly affected by the El Nino Southern Oscillation (ENSO) weather fluctuations. In this context, this study explores how the adverse weather events linked to ENSO affect the inflation expectations in Colombia and how to incorporate these second-round effects into a small open economy New Keynesian model. Using BVARx models we provide evidence that the inflation expectations obtained from surveys and break-even inflation measures are affected by weather supply shocks. Later, using this stylised fact, we modify one of the core forecasting models of the Banco de la Republica by incorporating the mechanisms in which weather-related shocks affect marginal costs and inflation expectations. We find that ENSO shocks had an important role in both inflation and the dynamics of inflation expectations, and that policymakers should consider this fact.
    Keywords: Inflation; inflation expectations; inflation expectations anchoring; weather shocks
    JEL: D84 E31 E52 Q54
    Date: 2022–08–15
  9. By: Walter Engert; Kim Huynh
    Abstract: We provide an analysis of cash trends in Canada before and during the COVID-19 pandemic. Focusing on the pandemic period, we explore the implications on demand for, use of and access to cash. We find that cash demand has been strong pre-pandemic and increased sharply during the pandemic. While cash use fell initially due to the decreased number of in-person shopping opportunities, it recovered as containment measures eased. We explore the potential two scenarios for issuance of central bank digital currency or Canadian digital dollar. We discuss the Canadian experience in maintaining cash as an efficient and accessible method of payment and store of value.
    Keywords: Bank notes; Central bank research; Coronavirus disease (COVID-19); Digital currencies and fintech; Econometric and statistical methods
    JEL: C C12 C9 E E4 O O54
    Date: 2022–08
  10. By: Emilio Espino; Julian Kozlowski; Fernando M. Martin; Juan M. Sanchez
    Abstract: In response to the COVID-19 pandemic, Latin American countries temporarily suspended rules limiting debt, fiscal and monetary policies. Despite this increase in flexibility, the crisis implied a substantial deterioration of macroeconomic variables (e.g., real GDP declined by 9.5%) and high welfare costs (which we estimate as equivalent to a 13% one-time reduction in non-tradable consumption). This paper studies a sovereign default model with fiscal and monetary policies to assess the policy response and evaluate the gains from flexibility in times of severe distress.
    Keywords: COVID-19; crises; default; Sovereign debt; Exchange rate; inflation; fiscal policy; emerging markets; Markov equilibrium
    JEL: E52 E62 F34 F41 G15
    Date: 2022–08–31
  11. By: De Koning, Kees
    Abstract: The Bank of International Settlement in its latest report demonstrates how the inflation levels, especially of food and energy prices have affected the behaviour of households in the U.S and in other countries. This paper aims to set out a method to use home equity as a policy tool for the Federal Reserve.Home owners equity now far outstrips U.S. annual GDP level. During the Great Recession, households had no other option than to use private sector financing. In the paper it is demonstrated that such use was detrimental to household's interests. To avoid another Great Recession, the Fed might wish to take over this responsibility.
    Keywords: Home equity in the U.S. Accumulated values over the last 24 years. Quantitative Easing Home Equity (QEHE)
    JEL: E21 E24 E3 E31 E32 E4 E41 E42 E43 E44 E5 E52
    Date: 2022–08–08
  12. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: To what extent is the recent spike in inflation driven by a change in its permanent component? We estimate a semi-structural model of output, inflation, and the nominal interest rate in the United States over the period 1900-2021. The model predicts that between 2019 and 2021 the permanent component of inflation rose by 51 basis points. If instead we estimate the model using postwar data (1955--2021), the permanent component of inflation is predicted to have increased by 238 basis points. A possible interpretation of this finding is that the model estimated on the shorter sample assigns a larger increase in the permanent component of inflation because the period 1955-2021 does not contain sudden sparks in inflation like the one observed in the aftermath of the COVID-19 pandemic but only gradual ones---the great inflation of the 70s took more than 10 years to build up. By contrast, the period 1900-1954 is plagued with sudden inflation hikes---including one around the 1918 Spanish flu pandemic---which the estimated model endogenously recalls and uses to interpret inflation around the COVID-19 episode. This result suggests that prewar data might be of use to understand recent inflation dynamics.
    JEL: E31 E37 E52
    Date: 2022–08
  13. By: Marcela De Castro-Valderrama (Central Bank of Colombia); Santiago Forero-Alvarado (Central Bank of Colombia); Nicolas Moreno-Arias (Central Bank of Colombia); Sara Naranjo-Saldarriaga (Central Bank of Colombia)
    Abstract: What are the main narratives among the public regarding the future course of the Colombian economy, and how do they compare to those of the Central Bank of Colombia? Macroeconomic forecasts collected through surveys mainly assess observable variables; therefore, they offer little understanding of underlying narratives. Our study used a semi-structural general equilibrium model as an interpreter to infer the shocks behind Colombian economic analysts' forecasts in the Monthly Expectations Survey (MES), and thus, unravel their implicit narratives. Those narratives were compared to those implicit in the Central Bank's forecasts for each MES release at our disposal, covering a sample from 2020 to 2022. Analysts' narratives were qualitatively similar to those of the Central Bank. In particular, analysts broadly agreed with the Central Bank's view that the 2020 economic recession was driven more by demand than supply factors, and that in 2021, inflationary pressure was explained by demand recovery and adverse cost shocks. We observed that, over time, there was a tendency for the narratives of the public to converge with those of the Central Bank, which appeared to be an 'early mover' in response to economic shocks.
    Keywords: Macroeconomic expectations; Narratives; Central Bank; Monetary Policy; Professional forecasters; Survey
    JEL: C11 C32 C55 E47 E58 E37
    Date: 2022–08–15
  14. By: Jing Yang; Hélène Desgagnés; Grzegorz Halaj; Yaz Terajima
    Abstract: The COVID-19 pandemic forced policy-makers to deploy a range of unprecedented measures to support the economy. In this discussion paper, we discuss the outcome of the economic measures implemented in the context of financial stability in Canada. We also present related challenging policy questions that are being tackled by staff at the Bank. These include the uneven impact of the pandemic on households’ financial conditions and how it affects the transmission of policy, the challenges associated with setting banks’ countercyclical capital buffers, detecting imbalances in a buoyant housing market, and policy coordination challenges.
    Keywords: Coronavirus disease (COVID-19); Financial stability; Financial system regulation and policies
    JEL: H3 H84 G21 E61 E58
    Date: 2022–08
  15. By: Christian K. Wolf; Alisdair McKay
    Abstract: We show that, in a general family of linearized structural macroeconomic models, knowledge of the empirically estimable causal effects of contemporaneous and news shocks to the prevailing policy rule is sufficient to construct counterfactuals under alternative policy rules. If the researcher is willing to postulate a loss function, our results furthermore allow her to recover an optimal policy rule for that loss. Under our assumptions, the derived counterfactuals and optimal policies are robust to the Lucas critique. We then discuss strategies for applying these insights when only a limited amount of empirical causal evidence on policy shock transmission is available.
    JEL: E32 E61
    Date: 2022–08
  16. By: Pierre-Olivier Gourinchas; Philippe Martin; Todd Messer
    Abstract: Despite a formal 'no-bailout clause; we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a 'Southern view' of the crisis (transfers did not help) and a 'Northern view' (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of 'kicking the can down the road.' Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest.
    Keywords: Euro area; Monetary union; Sovereign debt; Sovereign default; Debt monetization
    JEL: F34 F45 G15
    Date: 2022–08–03
  17. By: Maulana Harris Muhajir (Neoma Business School)
    Abstract: In the aftermath of the global financial crisis of 2008, macrofinancial linkages have gained more attention from policymakers as primary issues of financial system stability. A clearer understanding of probability of default (PD) drivers may help predict if a bank will default on its portfolio liabilities. This presentation develops a method to assess a bank's PD based on a multivariate copula distribution to capture nonlinear relationships between variables with complex data structures. Then we use the generalized method of moments (GMM) to observe the relationship between PD to bank performance (bank-specific indicators) and the macroeconomic indicators. Our findings illustrate some critical links between PD and macroeconomic environments. For example, empirical evidence suggests that bank-specific indicators such as the CET 1 ratio, inefficiency ratio, and deposit ratio appear to be negatively and statistically significant to a bank's PD. When we examined the structural and macroeconomic variables, we found that the policy rate, the real exchange rate, economic growth, and the unemployment rate may reduce the PD. We also found that central state-owned banks tend to have a higher risk than other bank groups and that regional state-owned banks in the central region have the greatest likelihood of default.
    Date: 2022–08–11
  18. By: Gaffney, Edward (Central Bank of Ireland); Hennessy, Christina (Central Bank of Ireland); McCann, Feargal (Central Bank of Ireland)
    Abstract: In this Note, we outline the growing role that non-bank lenders are playing in the Irish mortgage market. We show that market share of new lending has increased from 3 per cent in 2018 to 13 per cent in 2021. Non-bank lending is currently concentrated in the buy-to-let and refinance segments of the market, when compared to lending by retail banks. On loan pricing, we show that non-banks had higher interest rates in 2018, but have reduced rates to the point where average interest rates were lower than retail banks in 2021. Among home buyers, customers of non-banks and retail banks have similar characteristics, with the exception that non-bank customers access mortgage finance almost uniquely through mortgage brokers. We complement the data with a discussion of the economic benefits that non-bank lending can bring, as well as sources of potential financial stability risks.
    Date: 2022–05
  19. By: Lyons, Paul (Central Bank of Ireland); Rice, Jonathan (Central Bank of Ireland)
    Abstract: Risk weighted assets for Irish residential mortgage lending are high in a European context. In this note, we explore the main contributors to these higher mortgage risk weights. One key driver is the underlying credit quality of the stock of outstanding mortgages. Mortgage default rates are higher in Ireland than many other European countries and this is true both historically and over recent years. The majority of recent defaults stem from pre-global financial crisis originated loans, highlighting the central role of these loans issued under weaker lending standards in pushing up risk weights. A second key driver of higher mortgage risk weights relates to higher modelled loss-givendefault. Irish loss rates on mortgage defaults that occurred in the financial crisis years (2009-2013) are more severe than that observed in most other EU countries. This is predominately due to the longer time to resolve defaulted loans in Ireland, associated with a particularly severe crisis. Moving forward, as banks originate new loans, with lower probability of default, these will replace crisis period loans and will place downward pressure on mortgage risk weights. Regulatory reforms such as the introduction of the ‘output floor’ under Basel III will narrow the gap between overall Irish risk weights and those in other countries. Nevertheless, the risk weight applicable to Irish mortgages will likely remain at the higher end of EU comparisons over the medium term.
    Date: 2022–02

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