nep-cba New Economics Papers
on Central Banking
Issue of 2022‒09‒26
twelve papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary policy and risk-taking: evidence from China's corporate bond market By Yang, Zheyu
  2. Average Inflation Targeting and Macroeconomic Stability By Piergallini, Alessandro
  3. Flexible Average Inflation Targeting: How Much Is U.S. Monetary Policy Changing? By Jarod Coulter; Roberto Duncan; Enrique Martinez-Garcia
  4. The Impacts of Crises on the Trilemma Configurations By Joshua Aizenman; Menzie D. Chinn; Hiro Ito
  5. Making a virtue out of necessity: the effect of negative interest rates on bank cost efficiency By Avignone, Giuseppe; Girardone, Claudia; Pancaro, Cosimo; Pancotto, Livia; Reghezza, Alessio
  6. Inflation as a Fiscal Limit By Francesco Bianchi; Leonardo Melosi
  7. Milton Friedman: An Early Advocate of Dollarization? By Emilio Ocampo
  8. Capital Ratios and the Weighted Average Cost of Capital: Evidence from Chilean Banks By Rodrigo Cifuentes; Tomás Gómez; Alejandro Jara
  9. Big data forecasting of South African inflation By Byron Botha; Rulof Burger; Kevin Kotze; Neil Rankin; Daan Steenkamp
  10. Characterizing the Anchoring Effects of Official Forecasts on Private Expectations By Barrera, Carlos
  11. Capital Control and Heterogeneous Impact on Capital Flows By Sanyal, Anirban
  12. New Principles For Stabilization Policy By Olivier Loisel

  1. By: Yang, Zheyu
    Abstract: I study the effects of monetary policy shocks on corporate bond prices in China. Using high-frequency comovement of interest rates and stock prices surprises around People’s Bank of China’s (PBoC) policy announcements on Reserve Requirements and a Bayesian structural vector autoregression, I disentangle the true monetary policy shocks from the central bank’s informational surprises. This paper documents a strong positive effect of monetary easings shocks on secondary market bond prices. More importantly, it shows that the effect is increasing with the credit risks of the bonds, i.e., risky bonds outperform safer bonds following monetary easings while underperform following monetary tightening, which is consistent with search for yield. The findings raise implications for financial stability and macroprudential policy.
    Keywords: risk-taking,monetary policy,asset price,China
    JEL: C11 E43 E52 G12
    Date: 2022
  2. By: Piergallini, Alessandro
    Abstract: I study the dynamic consequences of average inflation targeting in a tractable monetary model with sticky prices. I demonstrate that in the case in which the central bank attaches a relatively high weight on the distant past, average inflation targeting not only ensures local determinacy of equilibrium but is also capable of eradicating the liquidity trap problem—differently from standard Taylor rules. Specifically, I show the existence of a saddle connection from the deflationary steady state to the target steady state, along which reflation occurs in equilibrium due to limited and gradual increases in expected nominal interest rates.
    Keywords: Average Inflation Targeting; Local and Global Dynamics; Liquidity Traps.
    JEL: E31 E52
    Date: 2022–05–10
  3. By: Jarod Coulter; Roberto Duncan; Enrique Martinez-Garcia
    Abstract: One major outcome of the Federal Reserve’s 2019–20 framework review was the adoption of a Flexible Average Inflation Targeting (FAIT) strategy in August 2020. Using synthetic control methods, we document that U.S. inflation rose post-FAIT considerably more than predicted had the strategy not changed (an average of 1.18 percentage points during 2020:M8-2022:M2). To explore the extent to which targeting average inflation delayed the Fed’s response and contributed to post-FAIT inflation, we adopt a version of the open-economy New Keynesian model in Martínez-García (2021) and document the economic consequences of adopting alternative measures of average inflation as policy objectives. We document three additional major findings using this general equilibrium setup: First, depending on how far back and how much weight is assigned to past inflation misses, the policy outcomes under FAIT are similar to those under the pre-FAIT regime. Secondly, we find that the implementation of FAIT can have large effects over short periods of time as it tends to delay action. However, over longer periods of time—such as the 1984:Q1-2019:Q4 pre-FAIT period—its effects wash out and appear negligible. Finally, we find that different average inflation measures explain an average of 0.5 percentage points per quarter of the post-FAIT inflation surge, indicating that targeting average inflation by itself can only explain part of the inflation spike since August 2020.
    Keywords: Open-Economy New Keynesian Model; Monetary Policy; Flexible Average Inflation Targeting; Survey Expectations
    JEL: F41 F42 F47 E52 E58 E65
    Date: 2022–07–30
  4. By: Joshua Aizenman; Menzie D. Chinn; Hiro Ito
    Abstract: The “monetary trilemma” – the hypothesis that full monetary policy autonomy, exchange rate stability, and financial openness cannot simultaneously be achieved – has long been studied. Recently, holding international reserves (IR) has become an important policy instrument, insuring against liquidity shortages. We find that countries’ policy mixes are diverse, and have varied over time, sometimes in response to crises. We illustrate how the policy combinations changed drastically after the Asian Financial Crisis (AFC). In contrast, the Global Financial Crisis did not lead to a drastic change in the policy arrangements. We find that countries that faced large terms of trade shocks or negative economic growth during the crisis increased IR holding, post-AFC. Countries that had negative growth during the crisis also tended to pursue greater exchange rate flexibility and financial openness. This finding is true for commodity, but not manufactured goods, exporters. Countries with large current account deficits tend to be more sensitive to economic growth at the time of the AFC. Countries that are under IMF stabilization programs or those with sovereign wealth funds tended to hold more IR. In general, countries increased their IR holdings after the GFC, but did not otherwise respond concurrently to crisis conditions.
    JEL: F33 F38
    Date: 2022–08
  5. By: Avignone, Giuseppe; Girardone, Claudia; Pancaro, Cosimo; Pancotto, Livia; Reghezza, Alessio
    Abstract: Do negative interest rates affect banks’ cost efficiency? We exploit the unprecedented introduction of negative policy interest rates in the euro area to investigate whether banks make a virtue out of necessity in reacting to negative interest rates by adjusting their cost efficiency. We find that banks most affected by negative interest rates responded by enhancing their cost efficiency. We also show that improvements in cost efficiency are more pronounced for banks that are larger, less profitable, with lower asset quality and that operate in more competitive banking sectors. In addition, we document that enhancements in cost efficiency are statistically significant only when breaching the zero lower bound (ZLB), indicating that the pass-through of interest rates to cost efficiency is not effective when policy rates are positive. These findings hold important policy implications as they provide evidence on a beneficial second-order effect of negative interest rates on bank efficiency. JEL Classification: E43, E44, E52, G21, F34
    Keywords: bank cost efficiency, difference-in-differences, NIRP, Stochastic frontier approach
    Date: 2022–09
  6. By: Francesco Bianchi; Leonardo Melosi
    Abstract: Low and stable inflation requires an appropriate fiscal framework aimed at stabilizing government debt. Historically, trend inflation is critically influenced by actual or perceived changes to this framework, while cost-push shocks only account for short-lasting movements in inflation. Before the pandemic, a moderate level of fiscal inflation has counteracted deflationary pressures, helping the central bank to avoid deflation. The recent fiscal interventions in response to the Covid pandemic have altered the private sector’s beliefs about the fiscal framework, accelerating the recovery, but also determining an increase in fiscal inflation. This increase in inflation could not have been averted by simply tightening monetary policy. The conquest of post-pandemic inflation requires mutually consistent monetary and fiscal policies to avoid fiscal stagflation.
    Keywords: fiscal limits; Monetary policy; Fiscal policy; Inflation (Finance) - United States; Government Debt; fiscal staglation
    JEL: E50 E62 E30
    Date: 2022–08–29
  7. By: Emilio Ocampo
    Abstract: Milton Friedman’s longstanding advocacy in favor of floating exchange rates has contributed to a mistaken belief that he opposed currency board regimes or outright dollarization. Nothing could be further from the truth. Over a period of almost five decades Friedman consistently made it clear that he favored floating exchange rates for advanced nations but not for developing nations. In fact, he was one of the earliest advocates of dollarization for countries suffering from high and chronic inflation such as Argentina. Interestingly, it is rarely known that one of the earliest debates on the advantages and disadvantages of dollarization and currency boards took place in 1973 in Washington, D.C., during a Congressional Hearing which pitted Friedman against Argentine economist Ricardo Arriazu. The purpose of this brief note is to trace the evolution of Friedman’s thinking on the subject from the mid 1950s until his death and the events that influenced it.
    Keywords: Milton Friedman, Foreign Exchange Rate Regimes, Currency Boards, Dollarization, Monetary Policy, Argentina
    JEL: B2 B17 B3 B22 B27 F31 F32 O24
    Date: 2022–08
  8. By: Rodrigo Cifuentes; Tomás Gómez; Alejandro Jara
    Abstract: In this paper, we find that one additional percentage point of common equity Tier 1 to risk-weighted assets ratio is associated with an increase in the Weighted Average Cost of Capital (WACC) of Chilean banks by a maximum of only 11.7 basis points. This result is found by assessing the impact of capital ratios on the return of capital and the return of debt, following alternative empirical strategies, which consider both market data and banks’ balance sheet information. We find that higher capital ratios decrease the return on banks’ capital—partially because more capital makes banks less risky—in magnitudes similar to those found in the literature for other countries. Secondly, we study the role of capital on the return of banks’ debt. We find a strong impact of capital ratios on the return of subordinated debt, and no effect on senior debt.
    Date: 2022–08
  9. By: Byron Botha (Codera Analytics); Rulof Burger (Department of Economics, University of Stellenbosch, Stellenbosch, 7601, South Africa.); Kevin Kotze (School of Economics, University of Cape Town); Neil Rankin (Predictive Insights, 3 Meson Street, Techno Park, Stellenbosch, 7600, South Africa.); Daan Steenkamp (Codera Analytics and Research Fellow, Department of Economics, Stellenbosch University.)
    Abstract: We investigate whether the use of statistical learning techniques and big data can enhance the accuracy of inflation forecasts. We make use of a large dataset for the disaggregated prices of consumption goods and services, which we partially reconstruct, and a large suite of different statistical learning and traditional time series models. We find that the statistical learning models are able to compete with most benchmarks over medium to longer horizons, despite the fact that we only have a relatively small sample of available data, but are usually inferior over shorter horizons. Our findings suggest that this result may be attributed to the ability of these models to make use of relevant information, when it is available, and may be particularly useful during periods of crisis, when deviations from the steady state are more persistent. We find that the accuracy of the central bank's near-term inflation forecasts compare favourably with those of other models, while the inclusion of off-model information, such as electricity tariff adjustments and other sources of within-month data, provides these models with a competitive advantage. Lastly, we also investigate the relative performance of the different models as we experienced the effects of the pandemic.
    JEL: C10 C11 C52 C55 E31
    Date: 2022
  10. By: Barrera, Carlos
    Abstract: The paper proposes a method for simultaneously estimating the treatment effects of a change in a policy variable on a numerable set of interrelated outcome variables (different moments from the same probability density function). Firstly, it defines a non-Gaussian probability density function as the outcome variable. Secondly, it uses a functional regression to explain the density in terms of a set of scalar variables. From both the observed and the fitted probability density functions, two sets of interrelated moments are then obtained by simulation. Finally, a set of difference-in-difference estimators can be defined from the available pairs of moments in the sample. A stylized application provides a 29-moment characterization of the direct treatment effects of the Peruvian Central Bank’s forecasts on two sequences of Peruvian firms’ probability densities of expectations (for inflation −π− and real growth −g−) during 2004-2015.
    Keywords: C15, C30, E37, E47, E58, G14.
    JEL: C15 C30 E37 E47 E58 G14
    Date: 2022–08–19
  11. By: Sanyal, Anirban
    Abstract: This paper analyzes the heterogeneous direct and spillover effect of capital control on gross capital flows across three major institutional sectors namely public sector, banks and corporate. The paper examines the possible heterogeneity in the effect of capital control on the capital inflows to these institutional sectors using spatial econometric models. The empirical findings indicate that the direct effect of capital control moderates portfolio inflows to public sector whereas the portfolio inflows to banks and corporate sector does not respond to the capital control measures. The spillover effect of capital control increases capital inflows to all sectors in other countries. The paper explains the observed heterogeneity in the capital control effects by introducing signaling effect in a portfolio choice model. The paper argues that the heterogeneous direct effect is driven by private signals of capital control received by the investors about the state of economy whereas the spillover effect of capital control is mainly driven by the hedging and search for better yield.
    Keywords: Capital control, Spillover effect, Portfolio Choice, Signaling effect, Spatial Durbin Model
    JEL: C21 F32 F42
    Date: 2022–08–15
  12. By: Olivier Loisel (CREST, ENSAE Paris, Institut Polytechnique de Paris)
    Abstract: In a broad class of discrete-time rational-expectations models, I consider stabilizationpolicy rules making the policy instrument react with coecient ϕ ∈ R to a (past, current, or expected future) generic variable at time horizon h ∈ Z, possibly among other variables. Using two complex-analysis theorems, I establish some simple, necessary or sucient conditions on ϕ and h for these rules to ensure local-equilibrium determinacy. These conditions lead to new, general principles for stabilization policy. Building on these conditions, I characterize the circumstances under which (a generalized version of) the Taylor principle is necessary or sucient for determinacy. I also provide the rst hard guidelines for nding rules with robust determinacy properties across alternative models.
    Keywords: Stabilization policy, policy-instrument rule, local-equilibrium determinacy, Taylor principle, backward- and forward-looking policy, Rouché's theorem, Erdös-Turán theorem.
    JEL: E32 E52
    Date: 2022–08–18

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