nep-cba New Economics Papers
on Central Banking
Issue of 2022‒10‒03
27 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The impact of providing information about the ECB's instruments on inflation expectations and trust in the ECB. Experimental evidence By Nils Brouwer; Jakob de Haan
  2. Nr. 4 (2022): On the capitalisation of central banks By Dirk Broeders; Paul Wessels
  3. The ECB and the Ukraine war: threats to price, economic and financial stability By Luigi Bonatti,; Roberto Tamborini
  4. Inflation-at-Risk in in the Middle East, North Africa, and Central Asia By Mr. Maximilien Queyranne; Romain Lafarguette; Kubi Johnson
  5. Inflation Measured Every Day Keeps Adverse Responses Away: Temporal Aggregation and Monetary Policy Transmission By Margaret M. Jacobson; Christian Matthes; Todd B. Walker
  6. On the Empirical Relevance of the Exchange Rate as a Shock Absorber at the Zero Lower Bound By David Finck; Mathias Hoffmann; Patrick Huertgen
  7. Banks’ Seasoned Equity Offerings Announcements and Central Bank Lending Operations By Massimo Giuliodori; Jan Kakes; Dimitris Mokas
  8. Central Bank Policy Mix: Policy Perspectives and Modeling Issues By Juhro, Solikin M.; Sahminan, Sahminan; Wijoseno, Atet; Waluyo, Jati; Bathaluddin, M. Barik
  9. A New Approach to Estimating the Natural Rate of Interest By Luca Benati
  10. The Eurosystem’s bond market share at an all-time high: what does it mean for repo markets? By Tomás Carrera de Souza; Tom Hudepohl
  11. “Green†fiscal policy measures and non-standard monetary policy in the euro area By Anna Bartocci; Alessandro Notarpietro; Massimiliano Pisani
  12. Quarterly Projection Model for the Bank of Ghana By Shalva Mkhatrishvili; Valeriu Nalban; Philip Abradu-Otoo; Ivy Acquaye; Abubakar Addy; Nana Kwame Akosah; James Attuquaye; Simon Harvey; Zakari Mumuni
  13. How binding is supervisory guidance? Evidence from the European calendar provisioning By Franco Fiordelisi; Gabriele Lattanzio; Davide S. Mare
  14. Cross-Selling in Bank Household Relationships. Implications for Deposit Pricing, Loan Pricing, and Monetary Policy. By Christoph Basten; Ragnar Juelsrud
  15. The ECB?s Financial Stability impact on Credit Default Swaps Market By Georgios Alexopoulos
  16. Firm liquidity and the transmission of monetary policy By Margherita Bottero; Stefano schiaffi
  17. Cyber risk in central banking By Sebastian Doerr; Leonardo Gambacorta; Thomas Leach; Bertrand Legros; David Whyte
  18. Labour market and inflation relationship indicator By Evgeny Postnikov; Dmitry Orlov
  19. DEMUR, a regional semi-structural model of the Ural Macroregion By Oleg Kryzhanovsky; Alexander Zykov
  20. Inflation Targeting and Developing countries’ Performance: Evidence from Firm-Level Data By Bao-We-Wal BAMBE; Jean Louis COMBES; Kabinet KABA; Alexandru MINEA
  21. LINVER: The Linear Version of FRB/US By Flint Brayton; David L. Reifschneider
  22. Effective Fiscal-Monetary Interactions in Severe Recessions By Mr. Raphael A Espinoza; Jesper Lindé; Mr. Jiaqian Chen; Zoltan Jakab; Carlos Goncalves; Tryggvi Gudmundsson; Martina Hengge
  23. An analysis of objective inflation expectations and inflation risk premia By Sara Cecchetti; Adriana Grasso; Marcello Pericoli
  24. The Heterogeneous Impact of Inflation on Households’ Balance Sheets By Miguel Cardoso; Clodomiro Ferreira; José Miguel Leiva; Galo Nuño; Álvaro Ortiz; Tomasa Rodrigo
  25. Augmented credit-to-GDP gap as a more reliable indicator for macroprudential policy decision-making By Tihana Škrinjarić
  26. Macrofinancial Stress Testing on Australian Banks By Nicholas Garvin; Samuel Kurian; Mike Major; David Norman
  27. Nr. 3 (2022): A macroprudential perspective on cyber risk By Helga Koo; Remco van der Molen; Robert Vermeulen; Ralph Verhoeks; Alessandro Pollastri

  1. By: Nils Brouwer; Jakob de Haan
    Abstract: We use a random controlled trial among Dutch households to analyze whether communication about monetary policy instruments impacts inflation expectations and trust in the ECB. All participants in the survey receive information about the ECB's goal, but only a subset also receives information about how the ECB tries to achieve this. Our results suggest that individuals who are informed about policy instruments have inflation expectations closer to the ECB's target inflation than individuals who only receive information about the ECB's objective. Our evidence also indicates that communication about the ECB's instruments does not impact average trust in the ECB.
    Keywords: central bank; communication; general public; trust; RCT
    JEL: D12 D84 E52 E58
    Date: 2021–03
  2. By: Dirk Broeders; Paul Wessels
    Abstract: In contrast to commercial banks, there are no rules or clear guidelines for central banks’ capital adequacy. Although central banks cannot default as long as they have the right to issue legal tender, capital adequacy is important to be a credible, independent monetary authority over a medium-term horizon. Central banks face several challenges in determining their capital adequacy. First, the amount of capital only plays an auxiliary role in central banks’ effectiveness. Second, central banks face “latent risks†in addition to the regular calculable financial risks. These latent risks are difficult to quantify because they stem from contingent policy measures such as quantitative easing and lending of last resort. Latent risks are related to GDP and the size of the financial sector in the economy. We argue that a central bank’s target level of capital (1) can be calibrated with a confidence level that is lower than that used for commercial banks and (2) is proportional to for instance GDP as a proxy for the latent risks. We propose a set of guidelines to arrive at such a central bank capital policy. Capital adequacy will get significant attention over the comming years as many central banks have to draw on their buffers following rising interest rates in response to higher inflation.
    Date: 2022–07
  3. By: Luigi Bonatti,; Roberto Tamborini
    Abstract: As a consequence of the Ukraine war, in the aftermath of the COVID-19 pandemic, monetary policy in the euro area is severely challenged by the convergent threats to price, economic, and financial stability. After examining them, we argue that the burden of the euro area stability cannotbeleftentirelyontheshouldersofthecentralbank.Thesuccessful synergic coordination of monetary policy with central and national fiscal policies inaugurated in response to the pandemic should be strengthened. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 20 June 2022.
    Date: 2022
  4. By: Mr. Maximilien Queyranne; Romain Lafarguette; Kubi Johnson
    Abstract: This paper investigates inflation risks for 12 Middle East and Central Asia countries, with an equal share of commodities exporters and importers. The empirical strategy leverages the recent developments in the estimation of macroeconomic risks and uses a semi-parametric approach that balances well flexibility and robustness for density projections. The paper uncovers interesting features of inflation dynamics in the region, including the role of backward versus forward-looking drivers, non-linearities, and heterogeneous and delayed exchange rate pass-through. The results have important implications for the conduct of monetary policy and central bank communication in the Middle East and Central Asia and emerging markets in general.
    Keywords: Emerging markets; inflation; inflation expectations; Phillips Curve; monetary policy; central bank communication; Middle East; North Africa; Central Asia
    Date: 2022–09–02
  5. By: Margaret M. Jacobson; Christian Matthes; Todd B. Walker
    Abstract: Using daily inflation data from the Billion Prices Project [Cavallo and Rigobon (2016)], we show how temporal aggregation biases estimates of monetary policy transmission. We argue that the information mismatch between private agents and the econometrician —the source of temporal aggregation bias —is equally important as the more studied mismatch between private agents and the central bank (the “Fed information effect”). We find that the adverse response of daily inflation to high-frequency monetary policy shocks is short-lived, if present at all, in impulse responses from both local projections and an unobserved components model of inflation dynamics. To reconcile how one can obtain a sizable adverse response with monthly or quarterly data when only a limited adverse response exists at a higher frequency, we appeal to a simple monetary policy model and show how temporal aggregation bias can exacerbate initial impulse response functions. Because our modeling results are generic and macroeconomic indicators are published with a lag, we argue that temporal aggregation bias will be a key feature of the nascent field of high-frequency macroeconomics.
    Keywords: Disaggregated inflation; Billion prices project; High-frequency macroeconomics; Monetary policy transmission; Temporal aggregation bias
    JEL: E00 E52 E31
    Date: 2022–08–16
  6. By: David Finck (University of Giessen); Mathias Hoffmann (Deutsche Bundesbank); Patrick Huertgen (Deutsche Bundesbank)
    Abstract: The open economy New Keynesian model with flexible exchange rates postulates that the real exchange rate appreciates in response to an asymmetric negative demand shock in a zero lower bound (ZLB) scenario and exacerbates the adverse macroeconomic effects. However, when monetary policy is able to accommodate the adverse effects of the negative demand shock via unconventional measures, the model can generate a real depreciation at the ZLB. This paper examines these counteracting exchange rate channels empirically. We estimate the effect of a negative asymmetric demand shock on the real exchange rate and inflation expectations as well as output and prices by employing state-dependent and sign-restricted local projection methods for the euro area vis-Ã -vis the United States, Canada, and Japan. We find that the real exchange rate depreciates when interest rates are not at the ZLB but also when they are. Furthermore, our empirical results show that the real exchange rate can absor considerable variations in output, confirming its shock-absorbing capacity before but also during the ZLB episode. The stabilizing role of the exchange rate is accompanied by a significant expansion of the ECBs balance sheet in the ZLB period, while it remained unaffected in the pre-ZLB period. Overall, our empirical results favor the open economy New Keynesian model with unconventional measures when interest rates are at the ZLB.
    Keywords: Zero Lower Bound, Exchange Rate, Local Projections, State-dependent Effects
    JEL: F31 E31 E37 C54
    Date: 2022
  7. By: Massimo Giuliodori; Jan Kakes; Dimitris Mokas
    Abstract: This paper studies the influence of central bank lending operations on the announcement effects of European banks’ seasoned equity offerings (SEOs). We find that larger participation in lending operations is associated with more negative cumulative abnormal returns following the announcement. This result supports the hypothesis that SEOs made by banks that rely more on central bank lending facilities show more negative signaling effects. However, these effects are short-lived and fade away after two trading days following the SEO announcement. Further, we find that offerings motivated by capital strengthening are more likely to signal overpriced equity.
    Keywords: Banks; Bank capital; Seasoned equity offerings; Unconventional monetary policy
    JEL: E52 E58 G14 G21
    Date: 2022–07
  8. By: Juhro, Solikin M.; Sahminan, Sahminan; Wijoseno, Atet; Waluyo, Jati; Bathaluddin, M. Barik
    Abstract: This paper discusses the core model of Bank Indonesia policy mix (BIPOLMIX), a macroeconomic modeling breakthrough designed for economic and financial projections and policy simulations. The BIPOLMIX model captures the integrated central bank policy responses, e.g. monetary, macroprudential, and payment system policies, and considers the role of fiscal policy. The strategy of developing the model is flexible, dynamic, and forward-looking to make the model relevant as the basis for Bank Indonesia policy transformation in coping with challenges in a rapidly changing environment. In this regard, the model takes into account various economic dynamics and policy instrument mix in optimizing the achievement of macroeconomic and financial system stability. Amid main issues related to the model parameter consistency, in line with theoretical and technical considerations, the modeling framework is believed to be useful as a pivotal reference by the central banks in EMEs in developing core models to support optimal policy responses.
    Keywords: Central Bank Policy Mix, Policy Modeling, Projections and Simulations, Bank Indonesia.
    JEL: C51 E37 E58
    Date: 2022–09
  9. By: Luca Benati
    Abstract: Building upon the insight that M1 velocity is the permanent component of nominal interest rates–see Benati (2020)–I propose a novel, and straightforward approach to estimating the natural rate of interest, which is conceptually related to Cochrane’s (1994a) proposal to estimate the permanent component of GNP by exploiting the informational content of consumption. Under monetary regimes (such as inflation-targeting) making inflation I(0), the easiest way to implement the proposed approach is to (i) project the monetary policy rate onto M1 velocity–thus obtaining an estimate of the nominal natural rate–and then (ii) subtract from this inflation’s sample average (or target), thus obtaining the real natural rate. More complex implementations based on structural VARs produce very similar estimates. Compared to existing approaches, the one proposed herein presents two key advantages: (1) under regimes making inflation I(0), M1 velocity is equal, up to a linear transformation, to the real natural rate, so that the natural rate is, in fact, observed; and (2) based on a high-frequency estimate of nominal GDP, the natural rate can be computed at the monthy or even weekly frequency. In the U.S., Euro area, and Canada the natural rate dropped sharply in the months following the collapse of Lehman Brothers. Likewise, the 1929 stock market crash was followed in the U.S. by a dramatic decrease in the natural rate.
    Keywords: Natural rate of interest; money velocity; structural VARs; unit roots; cointegration
    Date: 2022–08
  10. By: Tomás Carrera de Souza; Tom Hudepohl
    Abstract: In this paper we study the link between central bank asset purchases and the repo market, to examine the impact of the Eurosystem’s increased footprint in financial markets resulting from the response to the Covid-19 crisis. To do so, we exploit different highly granular data on government bond purchases and money market transactions. We find that both marginal purchases (flow effect) and aggregate holdings (stock effect) have a significant downward impact on repo rates. The stock effect is nonlinear, and is amplified when the central bank’s holdings are larger. Finally, we find that the Eurosystem’s Securities Lending Facility alleviates the downward pressure on repo rates for scarce bonds, but it does not fully compensate for the downward pressure created by purchases. This collateral scarcity may hamper a smooth functioning of repo and underlying bond markets.
    Keywords: Asset purchases; Unconventional monetary policy; Money Market; Repo Market; Specialness
    JEL: E52 E58 G10 G15
    Date: 2022–05
  11. By: Anna Bartocci (Bank of Italy); Alessandro Notarpietro (Bank of Italy); Massimiliano Pisani (Bank of Italy)
    Abstract: This paper evaluates the macroeconomic effects of increasing taxes on fossil fuels (“carbon tax†) and subsidies for renewable energy and reducing labor income tax in the euro area, and the interaction of these effects with domestic monetary policy. The tax increase is announced, gradually implemented and fully anticipated by agents (thus it is conceptually different from a sudden and unexpected positive shock affecting the international prices of fossil fuels). The analysis makes use of a New Keynesian two-country model with an energy sector, calibrated to the euro area and the rest of the world. The main results are the following. First, an increase in the carbon tax generates recessionary effects. Second, higher subsidies for green energy and a lower labor tax can limit the macroeconomic cost of increasing the carbon tax. Third, if the monetary policy rate is at its effective lower bound, the fiscal policy mix generates short-run recessionary effects, which can be offset if the central bank, for monetary policy purposes, purchases long-term sovereign bonds in the secondary market, thus keeping long-term interest rates low.
    Keywords: environmental policy, energy policies, dynamic general equilibrium model, fiscal policy, monetary policy, euro area
    JEL: D58 E52 E62 Q43
    Date: 2022–07
  12. By: Shalva Mkhatrishvili; Valeriu Nalban; Philip Abradu-Otoo; Ivy Acquaye; Abubakar Addy; Nana Kwame Akosah; James Attuquaye; Simon Harvey; Zakari Mumuni
    Abstract: The paper describes the Quarterly Projection Model (QPM) that underlies the Bank of Ghana Forecasting and Policy Analysis System (FPAS). The New Keynesian semi-structural model incorporates the main features of the Ghanaian economy, transmission channels and policy framework, including an inflation targeting central bank and aggregate demand effects of fiscal policy. The shock propagation mechanisms embedded in the calibrated QPM demonstrate its theoretical consistency, while out-of-sample forecasting accuracy validates its empirical robustness. Another important part of the QPM is endogenous policy credibility, which may aggravate policy trade-offs in the model and make it more realistic for developing economies. Historical track record of real time policy analysis and medium-term forecasting conducted with the QPM – as a component of the broader FPAS analytical organization – establishes its critical role in supporting the Bank’s forward-looking monetary policy framework.
    Keywords: Ghana; Forecasting and Policy Analysis; Quarterly Projection Model; Monetary Policy; Transmission Mechanism
    Date: 2022–09–02
  13. By: Franco Fiordelisi (Universita' Roma 3 and University of Essex); Gabriele Lattanzio (Nazarbayev University, Graduate School of Business); Davide S. Mare (The World Bank and Edinburgh Business School)
    Abstract: We examine whether banks respond differently to the adoption of a supervisory guidance as compared to a similar regulatory action. By exploiting the staggered and distinct supervisory and regulatory implementation of the European Calendar Provision, we indeed document that while this reform achieved the intended overall goal of reducing European banks' nonperforming loans ratios, its effect materialized during the initial release of the ECB supervisory guidance, rather than following its adoption as a Pillar 1 regulation. That is, the subsequent formalization of this supervisory initiative within a regulatory framework achieved limited economic results, while eliminating any residual flexibility for the regulatory authority concerning the degree to which the calendar provisioning should be enforced.
    Keywords: Bank regulation, Cross-border financial institutions, Financial stability, non-performing loans
    JEL: G21 G28 G32
    Date: 2022–05
  14. By: Christoph Basten (University of Zurich; Swiss Finance Institute; CESifo (Center for Economic Studies and Ifo Institute)); Ragnar Juelsrud (Norges Bank)
    Abstract: Using administrative data on deposits and loans of every Norwegian with every Norwegian bank, we show that an existing deposit account makes a household more likely to hold deposits at the same bank later despite better alternatives and more likely to borrow there. Consistent with this, banks pay higher deposit rates to potential future borrowers. Then they charge existing depositors a premium on loans compared to other households, suggesting that cross-selling is driven by demand rather than supply complementarities. Finally, discounting future cross-selling profits motivates lower deposit spreads in times of lower policy rates and contributes to monetary policy transmission.
    Keywords: switching costs, customer lifetime value (clv), cross-selling, relationship banking, supply complementarities, demand complementarities, deposit pricing, deposit channel of monetary policy
    JEL: D14 D43 E52 E58 G12 G21 G51
    Date: 2022–08
  15. By: Georgios Alexopoulos (University of Peloponnese, Paris)
    Abstract: This paper studies the value of ECB?s announcement and the impact on Stock and Credit Default Swaps Market during 2008?2018.We examine the relationship between ECB announcements, and systematic risk and unsystematic risk of 29 European countries? financial markets through the CAPM regression. Those 29 countries divided into 3 clusters of liquid markets, accordingly the experienced stress during the sovereign debt crisis and their Liquidity Coverage Ratio (LCR). The results indicate that ECB?s announcements tend to show more impact on stock markets than CDS markets especially in 1st cluster of liquid market. Furthermore, these two types of financial markets in 29 European countries exhibit more significant market reaction to Financial Sector news and Money Market news while Financial Stability news and Monetary Policy bring more risk and volatility to 2 and 3 cluster of liquid markets. We found that there is a 3 clusters of liquid markets so that in turn reshapes an unequal distribution of systemic risk and help the spread of a financial crisis. The results also reveal financial markets of Finland, Sweden, Austria, Ireland, Spain and Turkey take on more risk and volatility than other sample countries when ECB announcements published.
    Keywords: European Central Bank, Investment, Monetary Policy, Announcements
    JEL: G21 O11 E17
    Date: 2022–07
  16. By: Margherita Bottero (Bank of Italy); Stefano schiaffi (Bank of Italy; Bank of Italy)
    Abstract: We study how firms’ cash balances affect the supply of bank credit and the transmission of monetary policy via the bank-lending channel in Italy using bank- and firm-level data. From a theoretical perspective, there is no agreement on whether, for a given level of credit demand, cash-rich companies enjoy better access to credit, as an abundance of cash may reveal both positive and negative information about the firm. According to our analysis, based on a sample of 430,000 Italian non-financial corporations over the period 2006-2018, banks view firm liquidity favourably since it is associated, on average, with cheaper bank funding and with a credit composition tilted towards term loans, at all maturities and non-collateralized. We also show that firms reallocate their liquidity in and out of their deposits following changes in the slope of the yield curve, which proxies the opportunity cost of cash. For this reason, changes in monetary policy that alter the slope of the term structure impact the cost of credit not only via the traditional channels but also indirectly, as they prompt a reallocation of firm liquidity that banks anticipate and price into the credit contracts they offer.
    Keywords: firm liquidity, bank financing, monetary policy transmission
    JEL: E51 E52
    Date: 2022–07
  17. By: Sebastian Doerr; Leonardo Gambacorta; Thomas Leach; Bertrand Legros; David Whyte
    Abstract: The rising number of cyber attacks in the financial sector poses a threat to financial stability and makes cyber risk a key concern for policy makers. This paper presents the results of a survey among members of the Global Cyber Resilience Group on cyber risk and its challenges for central banks. The survey reveals that central banks have notably increased their cyber security-related investments since 2020, giving technical security control and resiliency priority. Central banks see phishing and social engineering as the most common methods of attack, and the potential losses from a systemically relevant cyber attack are deemed to be large, especially if the target is a big tech providing critical cloud infrastructures. Generally, respondents judge the preparedness of the financial sector for cyber attacks to be inadequate. While central banks in most emerging market economies provide a framework for the collection of information on cyber attacks on financial institutions, less than half of those in advanced economies do. Cooperation among public authorities, especially in the international context, could improve central banks' ability to respond to cyber attacks.
    Keywords: cyber risk, central banks, financial institutions, cloud services, cyber regulation
    JEL: E5 E58 G20 G28
    Date: 2022–09
  18. By: Evgeny Postnikov (Bank of Russia, Russian Federation); Dmitry Orlov (Bank of Russia, Russian Federation)
    Abstract: The labour market is closely connected to inflation processes, and is therefore a key factor to consider in monetary policy decisions. Russian regions differ substantially in terms of employment, wages, migration flows and the age structure of their population. Therefore, the effects of regional changes in the labour market on prices may be different. Since the Central bank’s inflation targeting policy is pursued nationwide, it is important for a regulator to factor in regional heterogeneity when assessing the impact of changes in the labour market on inflation growth. This paper brings forward a composite indicator of the contribution of labour market changes to inflation increase – the Labour Market Indicator (LMI). To capture regional heterogeneity in terms of market labour indicators, regions are grouped into four clusters with different social, demographic and economic characteristics. We make the case that the impact of unemployment on inflation can be described as slight or moderate in Russia. The calculated quarterly LMI values are overall consistent with the actual effect of the labour market on inflation processes over the entire time horizon under study, which suggests that the estimates are reliable. The important benefit of the LMI is that it is possible to interpret and allows to assess the future impact of labour market on inflation one quarter ahead of available statistical data – which helps make better informed monetary policy decisions.
    Keywords: impact of the labour market on inflation, regional heterogeneity, clustering, principal component analysis, unemployment, wages, regression analysis.
    JEL: C32 C38 E24 E31
    Date: 2022–09
  19. By: Oleg Kryzhanovsky (Bank of Russia, Russian Federation); Alexander Zykov (Bank of Russia, Russian Federation)
    Abstract: This paper offers an introduction into a new macroeconomic model of the Ural Macroregion named DEMUR (the Dynamic Equilibrium Model of the Ural Region). DEMUR is a regional semi-structural model that includes some key characteristics of the Ural economy for analysing the implications of monetary policy measures and forecasting. DEMUR is built in the logic of neo-Keynesian models with real and nominal rigidity. It also takes into account the structure of a small open economy, external (relative to the region) monetary conditions and other factors that drive changes of the Ural economy. The model is estimated by Bayesian methods based on international OECD, EAI, FRED and FAO statistical data, federal and regional statistical data by Rosstat and the Bank of Russia for 2009 Q1–2020 Q4. While describing DEMUR’s properties, we demonstrate the model’s capabilities by decomposing historical and forecast data. The model enables the analysis of changes in economic indicators on both Russian and macroregional levels in response to domestic or external macroeconomic shocks, and quantifies the macroregion’s contribution to changes in countrywide indicators, making it a valuable tool for macroeconomic analysis.
    Keywords: gross regional product, forecasting models, QPM, quarterly projection models, semi-structural models, monetary policy models, inflation targeting.
    JEL: C11 C13 E30
    Date: 2021–11
  20. By: Bao-We-Wal BAMBE; Jean Louis COMBES; Kabinet KABA; Alexandru MINEA
    Keywords: , Inflation targeting , Manufacturing firm performance , Entropy balancing, Monetary policy credibility
    Date: 2022
  21. By: Flint Brayton; David L. Reifschneider
    Abstract: FRB/US, a large-scale, nonlinear macroeconomic model of the U.S., has been in use at the Federal Reserve Board for 25 years. For nearly as long, the FRB/US “project” has included a linear version of the model known as LINVER. A key reason that LINVER exists is the vast reduction in the computational costs that linearity confers when running experiments requiring large numbers of simulations under the assumption that expectations are model-consistent (MC). The public has been able to download FRB/US simulation code, documentation, and data from the Federal Reserve Board’s website since 2014. To further expand access to and understanding of the FRB/US project, a package devoted to LINVER is now available on the website. In this paper, we provide both a general introduction to LINVER and an overview of the contents and capabilities of its package. We review the ways that LINVER has been used in past research to study key policy issues; describe the package’s comprehensive set of programs for running simulations with MC expectations, with or without imposing the effective lower bound (ELB) on the federal funds rate and other nonlinear constraints; and illustrate how LINVER deterministic and stochastic simulations can be used to gauge the implications of the ELB for macroeconomic performance and to assess different strategies for mitigating its adverse effects.
    Keywords: Interest rates; Simulation; Econometric modeling; Monetary policy; Effective lower bound
    JEL: E52 E37 E58 E32
    Date: 2022–08–16
  22. By: Mr. Raphael A Espinoza; Jesper Lindé; Mr. Jiaqian Chen; Zoltan Jakab; Carlos Goncalves; Tryggvi Gudmundsson; Martina Hengge
    Abstract: The COVID-19 pandemic and the subsequent need for policy support have called the traditional separation between fiscal and monetary policies into question. Based on simulations of an open economy DSGE model calibrated to emerging and advance economies and case study evidence, the analysis shows when constraints are binding a more integrated approach of looking at policies can lead to a better policy mix and ultimately better macroeconomic outcomes under certain circumstances. Nonetheless, such an approach entails risks, necessitating a clear assessment of each country’s circumstances as well as safeguards to protect the credibility of the existing institutional framework.
    Date: 2022–09–02
  23. By: Sara Cecchetti (Bank of Italy); Adriana Grasso (European Central Bank); Marcello Pericoli (Bank of Italy)
    Abstract: We study euro-area risk-adjusted expected inflation and the inflation risk premium at different maturities, leveraging inflation swaps, inflation options and survey-based forecasts. We introduce a model that features time-varying long-term average inflation and time-varying inflation volatility and we anchor market-based risk-adjusted measures of expected inflation to survey-based inflation forecasts. The results show that medium-term risk-adjusted expected inflation was close to the ECB's aim from 2010 to mid-2014, has since fallen to a low in March 2020 and has risen significantly since the second half of 2021. The medium-term inflation risk premium was positive until 2014 and turned negative since 2015 despite a sharp rise at the end of 2021. The risk-adjusted probabilities of exceeding the ECB's inflation aim and of seeing deflation over the medium term have been low on average.
    Keywords: inflation density, inflation risk premium, objective probability
    JEL: C22 C58 G12 E31 E44
    Date: 2022–07
  24. By: Miguel Cardoso (BBVA Research); Clodomiro Ferreira (Banco de España); José Miguel Leiva (BBVA Research); Galo Nuño (Banco de España); Álvaro Ortiz (BBVA Research); Tomasa Rodrigo (BBVA Research)
    Abstract: We identify and study three key channels that shape how inflation affects wealth inequality: (i) the traditional Fisher channel through which inflation redistributes from lenders to borrowers; (ii) a nominal labour income channel through which inflation reduces the real value of sticky wages and benefits; and (iii) a relative consumption channel through which heterogeneous increases in the price of different goods affect people differently depending on their consumption baskets. We then quantify these channels for Spain in 2021 using public surveys on households’ wealth, income, and consumption, as well as a novel proprietary bank dataset that includes detailed information on clients’ assets and liabilities, credit and debit card payments, bills and labour related income. Results show that the Fisher and labour income channels are one order of magnitude larger than the relative consumption channel. Middle-aged individuals were roughly unaffected by inflation while older ones suffered the most its consequences.
    Keywords: inflation inequality, net nominal positions, nominal wage rigidities.
    JEL: E31 E21 D31
    Date: 2022–09
  25. By: Tihana Škrinjarić (Hrvatska narodna banka, Hrvatska)
    Abstract: This paper aims to evaluate the possibilities of augmenting the credit-to-GDP gap series with out-of-sample forecasts to obtain a more stable indicator of excessive credit growth. The credit-to-GDP gap is a standardized and harmonized indicator of the Basel III regulatory framework used to calibrate the Countercyclical Capital Buffer (CCyB). Thus, a good indicator should be valid, stable, and represent future financial cycle movements. This research focuses on reducing the end-point bias problem of the Hodrick-Prescott (HP) filter approach to estimating this indicator. This is appropriate for those authorities whose analysis shows that the HP approach best predicts the financial crisis. Several popular models of out-of-sample forecasting are tested on Croatian data to extend the filtered original series, and the results are compared based on multiple criteria. These include the stability of the indicator, not just the usual model forecasting capabilities. The autoregressive approach, alongside the random walk model, was the best-performing one. The results of this study can be used in real-time decision-making, as they are relatively simple to estimate and communicate. Such augmented gaps reduce the bias in the series after the financial cycle turns. Moreover, the paper suggests possible corrections to the credit-to-GDP gap so that the resulting indicators are less volatile over time with stable signals for the policy decision-maker.
    Keywords: credit-to-GDP gap, out of sample forecasts, augmented credit gap, countercyclical capital buffer, estimation uncertainty.
    JEL: E32 G01 G21 C22
    Date: 2022–09–13
  26. By: Nicholas Garvin (Reserve Bank of Australia); Samuel Kurian (Reserve Bank of Australia); Mike Major (Reserve Bank of Australia); David Norman (Reserve Bank of Australia)
    Abstract: Macrofinancial stress testing is a tool to help policymakers better understand the key systemic vulnerabilities in a financial system. The Reserve Bank of Australia's (RBA) macrofinancial bank stress testing model is an example of this, enabling the RBA to analyse potential financial risks to Australia's banking sector, such as those arising during the COVID-19 pandemic. The model projects how economic shocks may influence a bank's profitability, dividends, loan growth and capital position, primarily using decision rules and accounting identities that are uniformly applied to profit and balance sheet data for the nine largest banks operating in Australia. It is designed with a focus on understanding systemic vulnerabilities and a philosophy of prioritising transparency over complexity. The key advantages of this model are its ability to quickly produce estimates of the capital loss in response to various macroeconomic scenarios, model various forms of contagion across banks, and allow the modeller to undertake 'reverse' stress tests. The paper sets out the key features of this model, how it was used during the past two years and the areas in which further work is required.
    Keywords: banks; stress testing; Australia
    JEL: E02 F01 G21
    Date: 2022–09
  27. By: Helga Koo; Remco van der Molen; Robert Vermeulen; Ralph Verhoeks; Alessandro Pollastri
    Abstract: Cyber risk is an increasingly important source of risk, not just to individual financial institutions, but also to the financial system as whole. The number of cyber incidents has increased over the past years, and the incidents have become more costly. Several features of the financial system make it especially exposed to cyber risk. Even though many financial institutions have increased their cyber resilience, cyber incidents will keep occurring and have the potential to cause major damage to the financial sector. Therefore, it is important to also develop a macroprudential perspective on cyber risk.
    Date: 2022–06

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