nep-cba New Economics Papers
on Central Banking
Issue of 2022‒10‒31
twenty papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Should we care about ECB inflation expectations? By Roccazzella, Francesco; Candelon, Bertrand
  2. Ensuring adoption of central bank digital currencies – An easy task or a Gordian knot? By Zamora-Pérez, Alejandro; Coschignano, Eliana; Barreiro, Lorena
  3. The ECB press conference: a textual analysis By Pavelkova, Andrea
  4. 25 years of excess unemployment in advanced economies: Lessons for monetary policy By Joseph E. Gagnon; Madi Sarsenbayev
  5. The Macroeconomic Effects of Macroprudential Policy : Evidence from a Narrative Approach By Rojas Alvarado,Luis Diego; Vegh,Carlos; Vuletin,Guillermo Javier
  6. An analysis of central bank decision-making By Maria Demertzis; Catarina Martins; Nicola Viegi
  7. Reaction of the Philippine stock market to domestic monetary policy surprises: an event study approach By Maran, Raluca
  8. Trapped in the Trilemma: When Security Trumps Economics By Michael D. Bordo; Harold James
  9. Foreign currency exposure and the financial channel of exchange rates By Longaric, Pablo Anaya
  10. "Dynamic connectedness between credit and liquidity risks in EMU sovereign debt markets". By Marta Gómez-Puig; Mary Pieterse-Bloem; Simón Sosvilla-Rivero
  11. One size may not fit all: Financial fragmentation and European monetary policies By Marie‐hélène Gagnon; Céline Gimet
  12. Borrower-Based Macroprudential Measures and Credit Growth: How Biased is the Existing Literature? By Simona Malovana; Martin Hodula; Zuzana Gric; Josef Bajzik
  13. The short-term effects of changes in capital regulations in Poland By Mariusz Kapuściński
  14. With Abundant Reserves, Do Banks Adjust Reserve Balances to Accommodate Payment Flows? By Catherine Huang; Adam Copeland; Kailey Kraft
  15. Is Real Interest Rate a Monetary Phenomenon in Advanced Economies? Time-Varying Evidence from Over 700 Years of Data By Vasilios Plakandaras; Rangan Gupta; Mark E. Wohar
  16. The Economic Impact of COVID-19 around the World By Fernando M. Martin; Juan M. Sanchez; Olivia Wilkinson
  17. The impact of mortgage regulation on homeownership and household leverage: Evidence from Finland's LTV reform By Eerola, Essi; Lyytikäinen, Teemu; Ramboer, Sander
  18. Archetypes for a retail CBDC By Sriram Darbha
  19. Protecting depositors and saving money: Why deposit guarantee schemes in the EU should be able to support transfers of assets and liabilities when a bank fails By Eule, Joachim; Kastelein, Wieger; Sala, Edoardo
  20. Communicating Social Security Reform By Søren Leth-Petersen; Andrew Caplin; Eungik Lee; Johan Sæverud

  1. By: Roccazzella, Francesco; Candelon, Bertrand (Université catholique de Louvain, LIDAM/LFIN, Belgium)
    Abstract: We use optimal combination of forecasts to introduce a novel forecast encompass- ing test to evaluate time-series and institutional inflation projections in the euro area. Combination weights reveal which forecasts are the most informative. Although, ECB is the most informative forecaster on average, it does not encompass its competitors and its weight varies over time. Macro-financial conditions and monetary policy ac- tions explain this variability. The greater the uncertainty surrounding inflation and the difference between current and the 2% inflation target, the less informative ECB’s forecasts are. The more contractionary the monetary policy, the more informative they are. ECB’s declining weight and the relation with its determinants raise a warning flag: the potential loss of informativeness damages ECB’s leading role at anchoring inflation expectations and questions whether the goal of preserving financial stability is compatible with the inflation targeting objective.
    Keywords: Forecast combinations ; Forecast evaluation ; Inflation ; euro area ; ECB
    Date: 2022–06–15
  2. By: Zamora-Pérez, Alejandro; Coschignano, Eliana; Barreiro, Lorena
    Abstract: Central banks have been discussing the introduction of a retail central bank digital currency (rCBDC) for some time. However, potential obstacles to its adoption by consumers and retailers remain largely unexplored in the academic and policy literature. This paper surveys the key elements involved in the adoption of any new means of payment and discusses failed and ongoing initiatives with public digital money. It concludes that ensuring the desired level of adoption of rCBDCs may impose significant constraints on central bank design choices and policy goals. In fact, in some settings, central banks may find themselves on the horns of a dilemma in seeking to balance the needs to (i) preserve the central bank’s hierarchy of policy goals, (ii) increase the chances of adoption and use of rCBDCs by consumers and retailers, and (iii) avoid any adverse economic effects. JEL Classification: E42, E58, D12
    Keywords: central bank digital currency, demand for money, means of payment
    Date: 2022–10
  3. By: Pavelkova, Andrea
    Abstract: The aim of central bank communication is to provide information on monetary policy and the economic outlook in a timely manner to the public. While research on central bank communication and specifically the European Central Bank’s press conference has shown that it has the potential to move markets, in-depth textual analysis of key communication tools creates room for further analysis. Focusing on the press conferences of the ECB, this paper employs structural topic modelling (STM) and finds that topics within the introductory statement and the Q&A are significantly different, with a nearly equal split of topics unique to both parts. The split of topics suggests that the Q&A does not only provide clarification of what has been said in the introductory statement, but also allows journalists to enquire about the discussion within the Governing Council as well as the ECB’s stance on broader economic issues. JEL Classification: E50, E52, E58
    Keywords: central bank communication, ECB press conference, natural language processing, structural topic model, text analysis
    Date: 2022–10
  4. By: Joseph E. Gagnon (Peterson Institute for International Economics); Madi Sarsenbayev (Peterson Institute for International Economics)
    Abstract: For about 25 years before the COVID-19 pandemic, inflation was very low and stable in most advanced economies. A little noticed dark side of this impressive achievement is that unemployment rates were almost always higher than needed to keep inflation low. This widespread and persistent policy error arose because of a major flaw in standard macroeconomic models--the use of a linear Phillips curve. This flaw would have been far less costly if central banks had not chosen such a low target for inflation. This paper thus adds to the arguments in favor of a moderately higher inflation target. Even without a higher target, central banks need to use a broader range of economic models and should verify their estimates of the natural rate of unemployment by running the economy hot from time to time in order to see nascent inflationary pressure before throttling back.
    Keywords: Nonlinear Phillips curve, equilibrium rate of unemployment (U*), equilibrium real rate of interest (R*), inflation target, downward wage and price rigidity
    JEL: E24 E31 E52 E58
    Date: 2022–10
  5. By: Rojas Alvarado,Luis Diego; Vegh,Carlos; Vuletin,Guillermo Javier
    Abstract: This paper analyzes the macroeconomic effects of macroprudential policy—in the form of legalreserve requirements—in three Latin American countries (Argentina, Brazil, and Uruguay). To correctly identifyinnovations in changes in legal reserve requirements, a narrative approach—based on contemporaneous reports from theIMF and central banks in the spirit of Romer and Romer (2010)—is developed in which each change is classified intoendogenous or exogenous to the business cycle. This distinction is critical in understanding the macroeconomiceffects of reserve requirements. In particular, while output falls in response to exogenous increases in legal reserverequirements, it is not affected when using all changes and relying on traditional time-identifying strategies. Thisbias reflects the practical relevance of the misidentification of endogenous countercyclical changes inreserve requirements. The empirical frontier is also pushed along two important dimensions. First, in measuring legalreserve requirements, both the different types of legal reserve requirements in terms of maturity and currency ofdenomination as well as the structure of deposits are taken in account. Second, since in practice reserve requirementpolicy is tightly linked to monetary policy, the study jointly analyze the macroeconomic effects of changes incentral bank interest rates. To properly identify exogenous central bank interest rate shocks, the Romer and Romer(2004) strategy is used.
    Date: 2022–08–24
  6. By: Maria Demertzis; Catarina Martins; Nicola Viegi
    Abstract: Bank of England MPC celebrates 25 years and we use this occasion to compare its decision-making process to that of the ECB
    Date: 2022–07
  7. By: Maran, Raluca
    Abstract: This paper uses an event study analysis to assess how stock prices in the Philippines have reacted to domestic monetary-policy changes using data at a daily frequency from 2017 to 2022. A major contribution of this paper is the construction of a monetary-policy surprise measure for the Philippines, as the difference between the actual change in the monetary policy rate and the change anticipated by professional forecasters. My results are consistent with the literature, suggesting that unanticipated monetary policy changes exert a significant influence on stock prices in the Philippines. Overall, I find that an unexpected increase of 25 basis points in the monetary policy rate increases stock prices by about 1.09% on average. These results are robust to the inclusion of additional control variables in the baseline regression model, such as the implementation of restrictions to economic activity to curb the spread of the COVID-19 outbreak or revisions to macroeconomic forecasts released concomitantly with the monetary-policy rate announcement.
    Keywords: Event study; government policy responses; monetary policy surprise; Philippines; stock market returns.
    JEL: E52 G14
    Date: 2022–10–03
  8. By: Michael D. Bordo; Harold James
    Abstract: This paper describes the challenges of globalization in terms of the logic underpinning four distinct policy constraints or “trilemmas” and their interrelationship; in particular the disturbances that arise from capital flows and the difficulties of adjusting monetary policies to a global monetary environment. These trilemmas intersect and interlock. The trilemmas are: 1. The traditional Macroeconomic trilemma between capital mobility, fixed exchange rates and monetary autonomy; 2. The International relations trilemma between capital mobility, sovereignty and international order; 3. The Political economy trilemma between capital mobility, democracy and sovereignty; 4. The Financial stability trilemma between capital mobility, financial stability and independent national policies. The four trilemmas offer a way to analyze how domestic monetary, financial, economic and political systems are interconnected within the international system that opens up vulnerabilities. They can be described as the impossible policy choices at the heart of globalization.
    JEL: E52 E60 F30 F40 G28 N1
    Date: 2022–09
  9. By: Longaric, Pablo Anaya
    Abstract: Exchange rate movements affect the economy through changes in net exports, i.e. the trade channel, and through valuation changes in assets and liabilities denominated in foreign currencies, i.e. the financial channel. In this paper, I investigate the macroeconomic and financial effects of U.S. dollar (USD) exchange rate fluctuations in small open economies. Specifically, I examine how the financial channel affects the overall impact of exchange rate fluctuations and assess to what extent foreign currency exposure determines the financial channel’s strength. My empirical analysis indicates that, if foreign currency exposure is high, an appreciation of the domestic currency against the USD is expansionary and loosens financial conditions, which is consistent with the financial channel of exchange rates. Moreover, I estimate a small open economy New Keynesian model, in which a fraction of the domestic banks’ liabilities is denominated in USD. In line with the empirical results, the model shows that an appreciation against the USD can be expansionary depending on the strength of the financial channel, which is linked to the level of foreign currency exposure. Finally, the model indicates that the financial channel amplifies the effects of foreign monetary policy shocks. JEL Classification: E44, F31, F41
    Keywords: exchange rates, financial and trade channels, local projections - instrumental variable, open economy DSGE model
    Date: 2022–10
  10. By: Marta Gómez-Puig (Department of Economics and Riskcenter, Universitat de Barcelona. 08034 Barcelona, Spain.); Mary Pieterse-Bloem (Section Finance in Business Economics, Erasmus School of Economics, 3062 PA, Rotterdam, and Rabobank**, 3521 CB, Utrecht, the Netherlands. Phone: +316-5136 5132.); Simón Sosvilla-Rivero (Complutense Institute for Economic Analysis, Universidad Complutense de Madrid. 28223 Madrid, Spain.)
    Abstract: We examine the dynamic interconnection between sovereign credit and liquidity risks in ten euro area countries at the 5-year maturity with high-frequency data from MTS over the period January 2008-December 2018 using the extension of the TVP-VAR connectedness approach of Antonakakis et al. (2020). Our results indicate that for most periods net connectedness is from credit risk to liquidity risk, but this indicator is time-dependent, detecting some episodes where it goes from liquidity risk to credit risk. We set up an event study and find that the latter episodes can be related to several unconventional monetary policy measures of the ECB. Then, we examine the drivers of the connectedness indicator by means of a Probit model. Our results suggest that monetary policy shocks and economic policy uncertainty increase the probability of risk transmission from liquidity to credit, while global funding liquidity, tensions in financial markets and surprises in inflation and GDP are factors that reduce such probability.
    Keywords: Liquidity risk, Credit risk, Eurozone sovereign bonds, MTS bond market, Dynamic connectedness, Time-varying parameters. JEL classification: C22, C53, G12, G14, G15.
    Date: 2022–10
  11. By: Marie‐hélène Gagnon (ULaval - Université Laval [Québec], CRREP - Centre de recherche sur les risques, les enjeux économiques, et les politiques publiques - ULaval - Université Laval [Québec]); Céline Gimet (Institut d'Études Politiques [IEP] - Aix-en-Provence, AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)
    Abstract: This article investigates the impact of European Central Bank policies on credits considering financial and banking fragmentation. Using European data from the past decade, we estimate SVAR models to analyze the regional impact of conventional and unconventional measures on price and volume indicators of fragmentation. The risk-taking channel is studied using GVAR models to document the national consequences of this fragmentation. We find that unconventional measures increase credit in peripheral countries. Monetary policies alleviate fragmentation, but mostly in terms of price dispersion rather than credit volume. Finally, unconventional measures imply a rebalancing of European bank assets in favor of foreign currency denominated-assets.
    Keywords: banking fragmentation,financial fragmentation,monetary policy,risk-taking channel
    Date: 2022
  12. By: Simona Malovana; Martin Hodula; Zuzana Gric; Josef Bajzik
    Abstract: The ever-increasing use of borrower-based measures such as loan-to-value, debt-to-income, and debt service-to-income limits has created a demand to better understand the transmission and effectiveness of such policy. In this paper, we collect more than 700 estimates from 34 studies on the effect of borrower-based measures on bank loan provision. A birds-eye view of our dataset points to significant fragmentation of the literature in terms of the estimated coefficients. On average, the introduction or tightening of borrower-based measures reduces annual credit growth by 1.6 pp. Using a battery of empirical tests, we verify the presence of a strong publication bias, especially against positive and statistically non-significant estimates. The bias-corrected coefficient is about half the size of the uncorrected mean of the collected estimates but remains safely negative. Further, we explore the context in which researchers obtain such estimates and we find that differences in the literature are best explained by model specification, estimation method, and underlying data characteristics.
    Keywords: Bayesian model averaging, borrower-based measures, macroprudential policy, meta-analysis, publication bias
    JEL: C83 E58 G21 G28 G51
    Date: 2022–08
  13. By: Mariusz Kapuściński (Narodowy Bank Polski)
    Abstract: In this study I analyse the effects of the transition to higher actual regulatory capital ratios due to the tightening of capital regulations in Poland. In contrast to earlier studies for this economy, as a measure of capital regulations I directly use minimum regulatory capital ratios. I focus on the impact on bank lending and GDP. I apply Bayesian panel vector autoregressive models to bank-level data. I find that the tightening of capital regulations lowers bank lending and GDP for at least one out of two analysed minimum regulatory capital ratios. This implies that capital regulations are an effective prudential policy tool in Poland. I also illustrate, as the starting point for the choice of a research design, the threats of not distinguishing capital regulation shocks from capital shocks. Finally, I attempt to identify non-linearities in the effects of changes in capital regulations.
    Keywords: capital regulations, bank lending, Bayesian panel vector autoregressive models, panel data, macroprudential policy
    JEL: E69 E51 G21 C33 C11
    Date: 2022
  14. By: Catherine Huang; Adam Copeland; Kailey Kraft
    Abstract: As a result of the global financial crisis (GFC), the Federal Reserve switched from a regime of scarce reserves to one of abundant reserves. In this post, we explore how banks’ day-to-day management of reserve balances with respect to payment flows changed with this regime switch. We find that bank behavior did not change on average; under both regimes, banks increased their opening balances when they expected higher outgoing payments and, similarly, decreased these balances with expected higher incoming payments. There are substantial differences across banks, however. At the introduction of the abundant-reserves regime, small domestic banks no longer adjusted balances alongside changes in outgoing payments.
    Keywords: quantitative easing (QE); liquidity; reserves; payments; Federal Reserve; banks
    JEL: E52
    Date: 2022–10–12
  15. By: Vasilios Plakandaras (Department of Economics, Democritus University of Thrace, Komotini, 69100, Greece); Rangan Gupta (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa); Mark E. Wohar (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA)
    Abstract: In this paper we examine the effect of permanent inflation shocks on real interest rates, based on a structural Time-Varying Parameter Vector Autoregression (TVP-VAR) model that account for parameter instability. This is important since we use over 700 years of annual data that covers the entire economic history for France, Germany, Holland (the Netherlands), Italy, Japan, Spain, the United Kingdom (UK) and the United States (US), going as far back as 1310. Based on the responses of real interest rates to an inflation shock, the Fisherian hypothesis of a one-to-one movement of inflation to nominal interest rates can only be rejected episodically, in favour of a Mundell-Tobin effect of less than proportional increase in the nominal interest rate to an inflation shock. In other words, generally speaking, real interest rate in the long-run tends to be unaffected by inflation shocks, as derived from longest possible data samples of real interest rates and inflation for the advanced economies considered. Hence, the results in the existing literature based on post World War II samples, should be treated with caution due to the possibility of sample selection bias. Our findings, that real interest rates might not necessarily be a monetary phenomenon, have important policy implications in the current context of rising global inflation rates.
    Keywords: Inflation, Real interest rate, TVP-VAR
    JEL: C32 E31 E43
    Date: 2022–09
  16. By: Fernando M. Martin; Juan M. Sanchez; Olivia Wilkinson
    Abstract: For over two years, the world has been battling the health and economic consequences of the COVID-19 pandemic. This paper provides an account of the worldwide economic impact of the COVID-19 shock, measured by GDP growth, employment, government spending, monetary policy, and trade. We find that the COVID-19 shock severely impacted output growth and employment in 2020, particularly in middle-income countries. The government response, mainly consisting of increased expenditure, implied a rise in debt levels. Advanced countries, having easier access to credit markets, experienced the highest increase in indebtedness. All regions also relied on monetary policy to support the fiscal expansion. The specific circumstances surrounding the COVID-19 shock implied that the expansionary fiscal and monetary policies did not put upward pressure on prices until 2021. We also find that the adverse effects of the COVID-19 shock on output and prices have been significant and persistent, especially in emerging and developing countries.
    Keywords: COVID-19; government debt; fiscal policy; monetary policy; emerging markets; inflation; international trade; employment
    JEL: E52 E62 F34 F41 G15
    Date: 2022–09
  17. By: Eerola, Essi; Lyytikäinen, Teemu; Ramboer, Sander
    Abstract: This paper examines the impact of a limit on loan-to-value (LTV) ratios implemented in Finland in 2016. Focusing on households that buy an apartment for the first time, we evaluate how the regulation influenced household leverage and the decision to become a homeowner. Through bunching analysis, the reform is estimated to have reduced transitions into homeownership by 17% among borrowers potentially affected by the reform. This corresponds to an 8% reduction in the total amount of first-time apartment buyers. The reduction in transitions to homeownership is found to be driven by households with below median income, suggesting that the regulation may have important consequences for the distribution of wealth. An additional 8% of potentially affected households reduced their LTV ratios to below the limit. Differences-in-differences analysis, comparing those expected to have LTV ratios above the limit to those below the limit, indicates that the reduction in mortgage debt was accompanied by an increase in other debt.
    Keywords: macroprudential policy, mortgage regulation, loan-to-value ratio, household leverage, homeownership, housing demand, Local public finance and provision of public services, Social security, taxation and inequality, G28, G51, R21, R28, fi=Asuntopolitiikka|sv=Bostadspolitik|en=Housing policy|,
    Date: 2022
  18. By: Sriram Darbha
    Abstract: A variety of technology designs could support retail central bank digital currency (CBDC) systems. We develop five archetypes of CBDC systems, outline their characteristics and discuss their trade-offs. This work serves as a framework to analyze and compare different designs, independent of vendor, platform and implementation.
    Keywords: Central bank research; Digital currencies and fintech
    JEL: E E4 E42 E5 E51 O O3
    Date: 2022–10
  19. By: Eule, Joachim; Kastelein, Wieger; Sala, Edoardo
    Abstract: In this paper we show that allowing deposit guarantee schemes (DGSs) the option of supporting asset and liability transfers in the event of a bank’s insolvency provides important economic benefits. However, only 11 EU Member States have so far included such “alternative measures” in their DGSs’ toolkits. The number of Member States where alternative measures have been actively used is even more limited. Based on our findings, we argue that giving deposit guarantee schemes in the EU the option of using alternative measures would improve the efficiency and effectiveness of the EU banking crisis management framework. It would speed up the handling of smaller banks’ failures while reducing upfront outlays and final costs for deposit guarantee schemes. It would improve the protection of deposits, thereby safeguarding depositor confidence and overall financial stability. It would also allow access to finance to be better preserved and enhance the level playing field for banks and depositors in the EU. We also argue that, apart from the availability of the option in law, the least cost test and the creditor hierarchy determine the de facto availability and potential magnitude of alternative measures. Currently, however, both the least cost test and the creditor hierarchy limit the possibility of supporting asset and liability transfers and may therefore need to be reformed in order for economically efficient results to be achieved. JEL Classification: G01, G21, G28
    Keywords: Banking union, deposit guarantee schemes, depositor protection, EU bank crisis management framework, transfers of assets and liabilities
    Date: 2022–10
  20. By: Søren Leth-Petersen (Department of Economics and Center for Economic Behavior and Inequality (CEBI), University of Copenhagen and CEPR); Andrew Caplin (Department of Economics, New York University, NBER and Center for Economic Behavior and Inequality (CEBI)); Eungik Lee (Department of Economics, New York University); Johan Sæverud (Department of Economics and Center for Economic Behavior and Inequality (CEBI), University of Copenhagen)
    Abstract: Despite its centrality in monetary policy design, policy communication is not a focus in other important areas, such as social security reform. Might improved communication lower the widespread confusion about the future of social security that has been identified worldwide? To answer this question we implement a simple information treatment in Denmark which in 2006 replaced universal social security eligibility at age 65 with longevity-based eligibility. We measure probabilistic beliefs about eligibility age both with and without this treatment, which is strikingly simple: we actively communicate the longevity-based plan as currently available on the official Website. We find that treatment essentially removes anchoring in the past. Average beliefs of those who are treated are significantly different of those who are not, and align well with current policy plans. Our results implicate poor communication as a primary source of confusion and highlight the widespread need to treat communication strategies as integral to policy.
    Keywords: social security, belief updating, information treatment, policy uncertainty
    JEL: D8 H55 J26
    Date: 2022–10–03

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