nep-cba New Economics Papers
on Central Banking
Issue of 2022‒10‒17
twenty-six papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Looking Through Supply Shocks versus Controlling Inflation Expectations: Understanding the Central Bank Dilemma By Paul Beaudry; Thomas J. Carter; Amartya Lahiri
  2. The use of the Eurosystem’s monetary policy instruments and its monetary policy implementation framework in 2020 and 2021 By Corsi, Marco; Mudde, Yvo
  3. A tale of three crises: synergies between ECB tasks By Kok, Christoffer; Mongelli, Francesco Paolo; Hobelsberger, Karin
  4. Harnessing the benefit of state-contingent forward guidance By Vivian Chu; Yang Zhang
  5. On the anchoring of inflation expectations in the euro area By Stefano Neri; Guido Bulligan; Sara Cecchetti; Francesco Corsello; Andrea Papetti; Marianna Riggi; Concetta Rondinelli; Alex Tagliabracci
  6. Public and private liquidity during crises times: evidence from Emergency Liquidity Assistance (ELA) to Greek banks By Antonis Kotidis; Dimitris Malliaropulos; Elias Papaioannou
  7. Redistributive Policy Shocks And Monetary Policy With Heterogeneous Agents By Ojasvita Bahl; Chetan Ghate; Debdulal Mallick
  8. Expectations and the Neutrality of Interest Rates By John H. Cochrane
  9. Perceptions about Monetary Policy By Michael D. Bauer; Carolin Pflueger; Adi Sunderam
  10. Looking at the evolution of macroprudential policy stance: A growth-at-risk experiment with a semi-structural model By Budnik, Katarzyna; Panos, Jiri; Boucherie, Louis
  11. Two-tier system for remunerating excess reserve holdings By Boucinha, Miguel; Burlon, Lorenzo; Corsi, Marco; della Valle, Guido; Eisenschmidt, Jens; Pool, Sebastiaan; Schumacher, Julian; Vergote, Olivier; Marmara, Iwona
  12. Monetary Policy, Labor Income Redistribution and the Credit Channel: Evidence from Matched Employer-Employee and Credit Registers By Martina Jašová; Caterina Mendicino; Ettore Panetti; José-Luis Peydró; Dominik Supera
  13. A model of quantitative easing at the zero lower bound By Dürmeier, Stefan
  14. Getting the balance right: Crypto, stablecoin and CBDC By Wilko Bolt; Vera Lubbersen; Peter Wierts
  15. Reducing Dollarization in the Caucasus and Central Asia By Mr. Selim Cakir; Maria Atamanchuk; Nathalie Reyes; Mazin Al Riyami; Nia Sharashidze
  16. Effect of Macroprudential Policies on Sovereign Bond Markets: Evidence from the ASEAN-4 Countries By Joshua Aizenman; Gazi Salah. Uddin; Tianqi Luo; Ranadeva Jayasekera; Donghyun Park
  17. A sensitivities based CoVaR approach to assets commonality and its application to SSM banks By Del Vecchio, Leonardo; Giglio, Carla; Shaw, Frances; Spanò, Guido; Cappelletti, Giuseppe
  18. Corrective regulation with imperfect instruments By Dávila, Eduardo; Walther, Ansgar
  19. Borrower-Based Measures, House Prices and Household Debt By Francesco Caloia
  20. Is the EU money market fund regulation fit for purpose? Lessons from the COVID-19 turmoil By Capotă, Laura-Dona; Grill, Michael; Molestina Vivar, Luis; Schmitz, Niklas; Weistroffer, Christian
  21. Introduction to weather extremes and monetary policy By Pablo Garcia Sanchez
  22. A new optimum currency area index for the euro area By Kunovac, Davor; Palenzuela, Diego Rodriguez; Sun, Yiqiao
  23. Exchange Rate Synchronization for a set of Currencies from Different Monetary Areas By António Manuel Portugal Duarte; Nuno José Henriques Baetas da Silva
  24. The Reverse Revolving Door in the Supervision of European Banks By Stefano Colonnello; Michael Koetter; Alex Sclip; Konstantin Wagner
  25. Financial Stability Surveillance Tools: Evaluating the Performance of Stress Indices By Kaelo Mtwaepelo; Grivas Chiyaba
  26. Greening collateral frameworks By Dafermos, Yannis; Gabor, Daniela; Nikolaidi, Maria; van Lerven, Frank

  1. By: Paul Beaudry; Thomas J. Carter; Amartya Lahiri
    Abstract: Central banks in most advanced economies have reacted similarly to the increase in inflation that started in 2021. They initially looked through the rising inflation by leaving monetary policy relatively unchanged. Then, after inflation continued to increase, central banks pivoted by quickly tightening monetary policy. The pivot was explained, at least in part, as aiming to anchor drifting inflation expectations. Why might central banks want to look through supply-driven inflation sometimes and pivot away at other times? When does a change in monetary policy stance help anchor expectations? When is a strong monetary policy tightening compatible with a soft landing? In this paper we present a simple environment that helps clarify these issues by offering an optimal policy perspective on recent central bank behaviour. In particular, we examine optimal policy in an environment where there is a risk of wage-price spirals and where the central bank views wage- and price-setters as having bounded rationality. We show how this can provide a coherent explanation of many aspects of recent central bank behaviour.
    Keywords: Central bank research; Economic models; Inflation and prices; Monetary policy; Monetary policy and uncertainty; Monetary policy communications
    JEL: E12 E24 E31 E58 E65
    Date: 2022–09
  2. By: Corsi, Marco; Mudde, Yvo
    Abstract: The Eurosystem implements its monetary policy through a set of monetary policy instruments (MPIs) that are either part of the standard toolbox or are developed to deal with major economic and financial events with a potential adverse impact on price stability and/or the transmission of monetary policy. In the review period covered by this report (2020-2021), monetary policy action was dominated by the Eurosystem’s response to the negative economic effects of the outbreak of the COVID-19 pandemic. Through its action, the Eurosystem continued to expand its balance sheet, in particular by scaling up its outright asset purchases and easing the conditions of its targeted longer-term refinancing operations (TLTROs), complemented by temporary changes in the collateral framework. The accommodative monetary policy stance was preserved by maintaining the key ECB interest rates at record-low levels, reinforced by the ECB’s forward guidance on policy rates. This report provides a full overview of the Eurosystem’s monetary policy implementation over the years 2020 and 2021. JEL Classification: D02, E43, E58, E65, G01
    Keywords: central bank collateral framework, central bank counterparty framework, central bank liquidity management, monetary policy implementation, non-standard monetary policy measures
    Date: 2022–09
  3. By: Kok, Christoffer; Mongelli, Francesco Paolo; Hobelsberger, Karin
    Abstract: This paper provides a chronology of the main financial events over the last 15 years, spanning three main crises. The first is the global financial crisis in 2008-09, and the second is the euro area sovereign debt crisis in 2010-12. Both events heralded significant reforms of the EU’s governance and financial architecture. On the tail of these two crises, the ongoing COVID-19 crisis that started in early 2020 enables us to assess the working of the resulting financial framework. Two aspects stand out. The first is that the coronavirus crisis was, in its origin, exogenous from previous banking sector behaviours -which was not the case during the 2008-2012 period. The second aspect stems from the combined policy responses to the pandemic, which lacked in the 2008-2012 period. Against this background, the aim of this paper is twofold. The first is to highlight the sequence of regulatory and institutional changes, with a focus on the ECB and Eurosystem, vis-Ã -vis the unfolding events and against the background of broader financial reforms. The second aim of this paper is to investigate whether the sequence of financial reforms has improved the sector’s ability to deal with major macro-financial shocks at the EU/euro area level, reducing the sovereign-bank doom loop. We focus primarily on developments affecting the banking sector, while noting that during the same period major developments within the EU non-bank financial sector were observed. The COVID-19 crisis has been characterized by the positive interaction of rapid fiscal and monetary responses (macro polices), and joint financial and supervisory responses. In this new policy environment the message of the paper is that the sequence of financial reforms, including the acquisition of supervisory and financial stability tasks by the ECB, have been instrumental in facilitating the effective response to the COVID-19 crisis thus far, especially compared to the previous two crises. The increased resilience and resolvability of the EU banking sector has enabled it to withstand the large and unexpe JEL Classification: E42, E58, F36, G21
    Keywords: banking supervision, banking union, decision-making process., European Central Bank (ECB), financial stability, macroprudential policies, monetary policy, systemic risks
    Date: 2022–09
  4. By: Vivian Chu; Yang Zhang
    Abstract: A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.
    Keywords: Central bank research; Economic models; Monetary policy framework; Monetary policy transmission
    JEL: E E27 E37 E4 E58
    Date: 2022–09
  5. By: Stefano Neri (Bank of Italy); Guido Bulligan (Bank of Italy); Sara Cecchetti (Bank of Italy); Francesco Corsello (Bank of Italy); Andrea Papetti (Bank of Italy); Marianna Riggi (Bank of Italy); Concetta Rondinelli (Bank of Italy); Alex Tagliabracci (Bank of Italy)
    Abstract: This paper assesses the anchoring of long-term inflation expectations in the euro area, a key issue from a monetary policy perspective, using a range of measures of inflation expectations and methods. The overall reading of the evidence is that long-term inflation expectations in the euro area have rapidly returned to levels close to the new 2 per cent symmetric inflation target of the ECB announced in July 2021, in a context of elevated inflationary pressures linked to the recent surge in energy prices and persistent supply-side bottlenecks. Nonetheless, the risk of an upward de-anchoring of long-term inflation expectations deserves close and continuous monitoring. This risk has to be taken into account when assessing the appropriate pace of normalization of the ECB’s monetary policy stance, acknowledging that the inflation outlook is surrounded by high uncertainty, as signalled by all types of expectations.
    Keywords: inflation expectations, survey data, professional forecasters, consumers’ expectations, market based expectations
    JEL: E31 E52 C22 G12
    Date: 2022–09
  6. By: Antonis Kotidis (Board of Governors of the Federal Reserve System); Dimitris Malliaropulos (Bank of Greece and University of Piraeus); Elias Papaioannou (London Business School and CEPR)
    Abstract: In a surprise move during a crisis, the ECB excluded Greek Government Bonds from the set of eligible collateral in monetary policy operations. In turn, Greek banks turned to Emergency Liquidity Assistance (ELA) to meet their funding needs. ELA replenished losses from all funding sources, consistent with its role as LOLR. However, in anticipation to a switch to ELA, banks reduced their interbank and corporate lending as a result of its higher cost and conditionality. Although multi-lender firms compensated for the associated credit crunch, single-lender firms that were not able to establish new lending relationships experienced a reduction in their exports.
    Keywords: Central Bank Interventions; Lender of Last Resort (LOLR); Collateral Framework; Emergency Liquidity Assistance (ELA)
    JEL: E58 G21 G28
    Date: 2022–09
  7. By: Ojasvita Bahl; Chetan Ghate (Institute of Economic Growth, Delhi University, Delhi); Debdulal Mallick
    Abstract: Governments in EMDEs routinely intervene in agriculture markets to stabilize food prices in the wake of adverse shocks. Such interventions usually involve a large increase in the procurement and redistribution of food, which we call a redistributive policy shock. What is the impact of a redistributive policy shock on inflation and the distribution of consumption amongst rich and poor households? We build a tractable two-sector-two-agent NK DSGE model calibrated to the Indian economy. We show that for an inflation targeting central bank, consumer heterogeneity matters for whether monetary policy responses to a variety of shocks raises aggregate welfare or not.
    Keywords: TANK models, Inflation Targeting, Emerging Market and Developing Economies, Procurement and Redistribution, DSGE.
    JEL: E31 E32 E44 E52 E63
    Date: 2022–09–01
  8. By: John H. Cochrane
    Abstract: Lucas (1972) is the pathbreaking analysis of the neutrality and temporary non-neutrality of money. But our central banks set interest rate targets, and do not even pretend to control money supplies. How is inflation determined under an interest rate target? We finally have a complete theory of inflation under interest rate targets, that mirrors the long-run neutrality and frictionless limit of monetary theory: Inflation can be stable and determinate under interest rate targets, including a k percent rule, i.e. a peg. The zero bound era is confirmatory evidence. Uncomfortably, long-run neutrality means that higher interest rates eventually produce higher inflation, other things (and fiscal policy in particular) constant. With a Phillips curve, we have some non-neutrality as well: Higher nominal interest rates raise real rates and lower output. A good model in which higher interest rates temporarily lower inflation is a harder task. I exhibit one such model. It has the Lucas property that only unexpected interest rate rises can lower inflation. A better model, and empirical understanding, is as crucial to today's agenda as Lucas (1972) was in its day. Much of this is contentious. The issues are crucial for policy: Can the Fed contain inflation without dramatically raising interest rates? Given the state of knowledge, a bit of humility is in order.
    JEL: E4 E5
    Date: 2022–09
  9. By: Michael D. Bauer; Carolin Pflueger; Adi Sunderam
    Abstract: We estimate perceptions about the Fed's monetary policy rule from micro data on professional forecasters. The perceived rule varies significantly over time, with important consequences for monetary policy and bond markets. Over the monetary policy cycle, easings are perceived to be quick and surprising, while tightenings are perceived to be gradual and data-dependent. Consistent with the idea that forecasters learn about the policy rule from policy decisions, the perceived monetary policy rule responds to high-frequency monetary policy surprises. Variation in the perceived rule impacts financial markets, explaining changes in the sensitivity of interest rates to macroeconomic announcements and affecting risk premia on long-term Treasury bonds. It also helps explain forecast errors for the future federal funds rate. We interpret these findings through the lens of a model with forecaster heterogeneity and learning from observed policy decisions.
    JEL: E03 E4 E42 E44 G12
    Date: 2022–09
  10. By: Budnik, Katarzyna; Panos, Jiri; Boucherie, Louis
    Abstract: This paper proposes a methodology for measuring the macroprudential policy stance based on a distance-to-tail metric perspective. This approach employs a large-scale semi-structural model reflecting the dynamics of 91 significant euro area banks and 19 euro area economies and is presented through an assessment of the stance evolution for the aggregate euro area economy and for the individual euro area countries. Our results uncover mild tightening of the macroprudential policy stance before the end of 2019. This trend is abruptly interrupted at the onset of the Covid-19 pandemic but reappears at the end of 2020 before picking up again over the first half of 2021. Our assessment also reveals a marginal impact of the macro-financial policies applied, which is particularly notable throughout 2020. JEL Classification: E37, E58, G21, G28
    Keywords: distance-to-tail metric, growth-at-Risk, lending-at-Risk, macroprudential policy, macroprudential policy stance
    Date: 2022–09
  11. By: Boucinha, Miguel; Burlon, Lorenzo; Corsi, Marco; della Valle, Guido; Eisenschmidt, Jens; Pool, Sebastiaan; Schumacher, Julian; Vergote, Olivier; Marmara, Iwona
    Abstract: This paper reviews the experience of the ECB with the two-tier system for excess reserve remuneration that exempted a portion of banks’ excess liquidity (EL) holdings from the negative interest rate of the ECB’s deposit facility. JEL Classification: E41, E43, E52, E58, G11, G12
    Keywords: excess liquidity, exemption scheme, monetary policy transmission, negative interest rates, two-tier system
    Date: 2022–09
  12. By: Martina Jašová; Caterina Mendicino; Ettore Panetti; José-Luis Peydró; Dominik Supera
    Abstract: This paper documents the redistributive effects of monetary policy on labor market outcomes via the credit channel. For identification, we exploit matched administrative datasets in Portugal - employee-employer and credit registers - and monetary policy since the Eurozone creation in 1999. We find that softer monetary policy improves worker labor market outcomes (wages, hours worked and firm employment) more in small and young firms, which are more financially constrained. Within small and young firms, the wage effects accrue to incumbent workers, in line with the back-loaded wage mechanism. Consistent with the capital-skill complementarity mechanism, we document an increase in skill premium and show that financially constrained firms increase both physical and human capital investment by most. Our findings uncover a central role for both the firm-balance sheet and the bank lending channels of the monetary policy transmission to labor income inequality, with state-dependent effects that are substantially stronger during crisis times. Importantly, we do not find any redistributive effects for firms without bank credit.
    Keywords: monetary policy, labor income inequality, firm balance sheet channel, bank lending channel, capital-skill complementarity
    JEL: D22 D31 E52 G01 G21
    Date: 2022–04
  13. By: Dürmeier, Stefan
    Abstract: The research question relates to the quantitative impact of government bond purchases of the European Central Bank on inflation and other economic variables at the zero lower bound. At the core is a standard New Keynesian Dynamic Stochastic General Equilibrium model with several financial frictions. The model replicates the intended effect of Quantitative Easing regarding the drop in the government bond yield at the expense of a rise in public debt, and displays the crowding out effect on the balance sheet of the bank which spurs credit and output. Amid lower levels of wages and consumption, the overall quantitative effect is nevertheless not inflationary but deflationary. After a shock to the credit supply, Quantitative Easing is activated more if the zero lower bound on the policy rate is in place. Output after the first period, consumption as well as wages and inflation drop more in the case of the zero lower bound and Quantitative Easing does not make up for the loss. The same findings for the economic performance marked by these four variables are obtained for the analysis at the zero lower bound when a shock hits the exposure of financial intermediaries to public debt.
    Keywords: Quantitative Easing,Taylor Rule,Zero Lower Bound,Moral Hazard
    Date: 2022
  14. By: Wilko Bolt; Vera Lubbersen; Peter Wierts
    Abstract: The rise of new forms of private money is reviving a long-standing debate on the appropriate balance between private and public interests in money and payments. The main aim of this paper is to explore an integrated policy analysis of various digital assets that may function as money: bank deposits, non-backed crypto’s, stablecoins and Central Bank Digital Currency (CBDC). In our view, public and private money should coexist to get the best of both worlds: trust and innovation. Getting the balance right is however not an easy task. It requires a digital update of public money and effective regulation of crypto’s and stablecoins. We argue that convertibility between public and private money should be a leading principle both for the design of CBDC and for the regulation of stablecoins that could potentially be widely adopted as a means of payment.
    Keywords: digital payments, crypto’s, stablecoins, CBDC, regulation
    JEL: D4 E4 G2
    Date: 2022–01
  15. By: Mr. Selim Cakir; Maria Atamanchuk; Nathalie Reyes; Mazin Al Riyami; Nia Sharashidze
    Abstract: Declining but still high dollarization rates in the Caucasus and Central Asia (CCA) region affect macroeconomic stability, monetary policy transmission, and financial sector development. Although several studies have investigated the dynamics of dollarization in the CCA, the relative roles of macrofinancial policies and financial market development in the de-dollarization process have not yet been assessed empirically. This paper takes stock of de-dollarization efforts and explores the short-term drivers of financial de‐dollarization in the CCA region. It highlights that there remains significant scope to further reduce dollarization through continued progress in strengthening macroeconomic policy frameworks and in developing markets and institutions.
    Keywords: Dollarization; Foreign Currency; Foreign Exchange;FX; Monetary Policy; Central Asia; Caucasus; CCA.; deposit dollarization; De-dollarization policy; credit dollarization; dollarization to a shock; dollarization in the CCA region; Currencies; Credit; De-dollarization; Central Asia and the Caucasus; rates in the Caucasus and Central Asia; dollarization to issuance; Reserve requirements
    Date: 2022–07–29
  16. By: Joshua Aizenman; Gazi Salah. Uddin; Tianqi Luo; Ranadeva Jayasekera; Donghyun Park
    Abstract: This paper examines whether prudential policies help to reduce sovereign bond vulnerability to global spillover risk in ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand). We measure sovereign vulnerability within a risk connectedness network among sovereign bonds. The direct effect is that markets with tighter prudential policies have significantly smaller spillovers from the Treasury yield shocks of other regional and global economies. The sum of indirect and direct effects indicates that prudential policies reduce sovereign spillover risk in the long term. These findings suggest prudential policies have dual efficiency in sovereign risk regulation and Treasury internationalization.
    JEL: E52 E58 F42
    Date: 2022–09
  17. By: Del Vecchio, Leonardo; Giglio, Carla; Shaw, Frances; Spanò, Guido; Cappelletti, Giuseppe
    Abstract: One important source of systemic risk can arise from asset commonality among financial institutions. This indirect interconnection may occur when financial institutions invest in similar or correlated assets and is also described as overlapping portfolios. In this work, we propose a methodology to quantify systemic risk derived from asset commonality and we apply it to assess the degree of indirect interconnection of banks due to their financial holdings. Based on granular information of asset holdings of European significant banks, we compute the sensitivity based ∆ CoVaR which captures the potential sources of systemic risk originating from asset commonality. The novel indicator proves to be consistent with other indicators of systemic importance, yet it has a more transparent foundation in terms of the source of systemic risk, which can contribute to effective macroprudential supervision. JEL Classification: C58, E32, G01, G12, G18, G20, G32
    Keywords: CoVaR, Financial networks, Financial regulation, Overlapping portfolios, Systemic risk
    Date: 2022–09
  18. By: Dávila, Eduardo; Walther, Ansgar
    Abstract: This paper studies optimal second-best corrective regulation, when some agents/activities cannot be perfectly regulated. We show that policy elasticities and Pigouvian wedges are sufficient statistics to characterize the marginal welfare impact of regulatory policies in a large class of environments. We show that a subset of policy elasticities, leakage elasticities, determine optimal second-best policy, and characterize the marginal value of relaxing regulatory constraints. We apply our results to scenarios with unregulated agents/activities, uniform regulation across agents/activities, and costly regulation. We illustrate our results in applications to financial regulation with environmental externalities, shadow banking, behavioral distortions, asset substitution, and fire sales. JEL Classification: H23, Q58, G28, D62
    Keywords: corrective regulation, Pigouvian taxation, second-best policy
    Date: 2022–09
  19. By: Francesco Caloia
    Abstract: This paper investigates the direct effect on household debt of macroprudential borrowerbased measures, namely Loan to Income (LTI) and Loan to Value (LTV) limits. The analysis focuses on the Netherlands, in a period characterized by growing vulnerabilities from the housing market and changes in the macroprudential policy. Results show that a LTI limit targeting debt repayment capacity is only binding at the left tail of the income distribution. Instead, a progressive tightening of the LTV limit that did not impose any downpayment constraint doubled the share of LTV-constrained borrowers. Results also show the role of increasing house prices as additional binding constraints for household borrowing choices.
    Keywords: Borrower based measures; macroprudential policy; LTV; LTI; DSTI
    JEL: D14 G21
    Date: 2022–02
  20. By: Capotă, Laura-Dona; Grill, Michael; Molestina Vivar, Luis; Schmitz, Niklas; Weistroffer, Christian
    Abstract: The market turmoil in March 2020 highlighted key vulnerabilities in the EU money market fund (MMF) sector. This paper assesses the effectiveness of the EU's regulatory framework from a financial stability perspective, based on a panel analysis of EU MMFs at a daily frequency. First, we find that investment in private debt assets exposes MMFs to liquidity risk. Second, we find that low volatility net asset value (LVNAV) funds, which invest in non-public debt assets while offering a stable NAV, face higher redemptions than other fund types. The risk of breaching the regulatory NAV limit may have incentivised outflows among some LVNAV investors in March 2020. Third, MMFs with lower levels of liquidity buffers use their buffers less than other funds, suggesting low levels of buffer usability in stress periods. Our findings suggest fragility in the EU MMF sector and call for a strengthened regulatory framework of private debt MMFs. JEL Classification: G11, G15, G23, G28
    Keywords: COVID-19, financial fragility, money market funds, regulation
    Date: 2022–10
  21. By: Pablo Garcia Sanchez
    Abstract: I begin this note by reviewing the economic effects of past weather shocks. I explore the empirical literature and present three case studies: the fall of the Roman Empire, the French Revolution of 1848, and Kansas in the 1880s. The second part of the note discusses how more frequent and severe weather extremes could risk price stability, and offers some thoughts on the modelling of weather shocks, a crucial step in designing good monetary policy. My main message is this: even in wealthy economies, weather events will affect central banks’ ability to achieve their primary goal - keeping prices in check.
    Keywords: Extreme Weather Events, Climate Change
    JEL: A10 Q01
    Date: 2022–08
  22. By: Kunovac, Davor; Palenzuela, Diego Rodriguez; Sun, Yiqiao
    Abstract: We propose a new and time-varying optimum currency area (OCA) index for the euro area in assessing the evolution of the OCA properties of the monetary union from an international business cycle perspective. It is derived from the relative importance of symmetric vs. asymmetric shocks that result from a sign and zero restricted open-economy structural vector autoregression (VAR) model. We argue that the euro area is more appropriate through the lens of empirical OCA properties when the relative importance of common symmetric shocks is high, but, at the same time, is not overly dispersed across euro area member countries. We find that symmetric shocks have been the dominant drivers of business cycles across euro area countries. Our OCA index, nevertheless, shows that cyclical convergence among euro area members is not a steady process as it tends to be disrupted by crises, especially those not primarily triggered by common external shocks. In the aftermath of a crisis the OCA index embarks on a recovery trajectory catching up with its pre-crisis level. Our OCA index is slow-moving and a good reflection of changing underlying economic structures across the euro area and, therefore, informative about the ability of monetary policy to stabilise the euro area economy in the medium run. JEL Classification: F33, F44, E42
    Keywords: economic convergence, optimum currency area, symmetric and asymmetric shocks
    Date: 2022–09
  23. By: António Manuel Portugal Duarte (University of Coimbra, Centre for Business and Economics Research, CeBER and Faculty of Economics); Nuno José Henriques Baetas da Silva (Ph.D. Student at Faculty of Economics, University of Coimbra)
    Abstract: The degree of co-movement between currencies remains an important subject for interna- tional trade and monetary integration across countries. However, the economic literature has given limited answers about the directional relationships among currencies, and whether they have a leader or a driver. Using the Hodrick-Prescott lter and the wavelet methodology, this paper analyzes exchange rate synchronization for a set of twelve currencies belonging to dierent monetary areas covering the period between January 1980 and July 2020. The empirical results reveal that: i) the U.S. dollar still plays an essential role as a foreign exchange anchor; ii) the euro shows an out-of-phase relationship with the vast majority of currencies, including with the other European currencies; iii) the British pound seems to have departed signicantly from the European single currency; iv) the Brazilian real leads the Chinese yuan for most of the sample, and both currencies record great dissimilarities with the other currencies; v) in the absence of short-term foreign exchange market frictions, average bilateral distances between currencies are smaller, and vi) during the international nancial crisis, exchange rates became more synchro- nized
    Keywords: Exchange rate, co-movements, Hodrick-Prescott lter, wavelets, synchronization.
    JEL: E31 F41 F42 C51
    Date: 2022–03
  24. By: Stefano Colonnello (Department of Economics, University Of Venice CÃ Foscari; Halle Institute For Economic Research (IWH), Italy); Michael Koetter (Halle Institute for Economic Research (IWH); Otto-von-Guericke University Magdeburg; Deutsche Bundesbank, Germany); Alex Sclip (University of Verona, Italy); Konstantin Wagner (Halle Institute for Economic Research (IWH))
    Abstract: We show that the presence of executive directors with prior experience in the finance industry is pervasive on the boards of European national banking supervisors. Up to one executive out of three has previously held positions in the industry she supervises (or in closely connected ones). Appointments of such executives impact more favorably bank valuations than those of executives without a finance background. The proximity to supervised banks rather than superior financial expertise or intrinsic skills appears to drive the positive differential effect of finance-related executives. Finally, the presence of former finance professionals in the board of banking authorities associates with lower regulatory capital and faster growth of banks,pointing to a more lenient supervisory style.
    Keywords: Revolving Doors, Banking Supervision, Conflicts of Interest
    JEL: G14 G21 G28
    Date: 2022
  25. By: Kaelo Mtwaepelo (Department of Economics, University of Reading); Grivas Chiyaba (Department of Economics, University of Reading, and Central Bank of the UAE, Abu Dhabi)
    Abstract: In this study, we aim to address the emerging debate about whether financial stress indices (FSIs) constructed using advanced methods such as the dynamic factor model and the principal component analysis method, perform better than those aggregated using simple averages, for the case of South Africa. To do so, we construct three FSIs using: the equal-variance weighting method (EVM), the principal component analysis method (PCA) and the dynamic factor model (FAM). We compare the performance of the indices for the period 2009-2020, using four criteria: quantile regressions, ordered probit model, local projections and the autoregressive integrated moving average (ARIMA) forecasting model. The results suggest that FSIs aggregated using the dynamic factor model and the principal component analysis method have a significant comparative advantage in predicting a financial crisis and capturing the vulnerability of the South African financial system to external monetary policy shocks. This suggests that the aggregation method and weighting system involved in constructing a financial stress index affects its performance in monitoring financial stability.
    Keywords: financial stress index, forecasts, local projections, ordered probit model, quantile regression
    JEL: B26 C22 C43 C53 E44 E47
    Date: 2022–08–24
  26. By: Dafermos, Yannis; Gabor, Daniela; Nikolaidi, Maria; van Lerven, Frank
    Abstract: Central bank collateral frameworks play a powerful role in contemporary market-based financial systems, affecting demand for financial assets and access to finance. However, existing collateral frameworks suffer from a carbon bias: they create disproportionately better financing conditions for carbon-intensive activities. This paper highlights the need to green the collateral frameworks and explores how central banks can incorporate environmental criteria into these frameworks.
    JEL: F3 G3
    Date: 2022–08–08

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