nep-cba New Economics Papers
on Central Banking
Issue of 2022‒11‒14
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The role of central bank communication in inflation-targeting Eastern European emerging economies By Valerio Astuti; Alessio Ciarlone; Alberto Coco
  2. Assessing Australian Monetary Policy in the Twenty-First Century By Gross, Isaac; Leigh, Andrew
  3. Central Bank Mandates and Monetary Policy Stances: through the Lens of Federal Reserve Speeches By Bertsch, Christoph; Hull, Isaiah; Lumsdaine, Robin L.; Zhang, Xin
  4. Why Aging Induces Deflation and Secular Stagnation By R. Anton Braun; Daisuke Ikeda
  5. Talking about growth, the discourse of the European Central Bank, 1997-2021 By Eric Dehay
  6. CBDC and cash in the euro area: Crowding out or co-circulation? By Rösl, Gerhard; Seitz, Franz
  7. Signaling virtue or vulnerability? The changing impact of exchange rate regimes on government bond yields By Barta, Zsófia; Baccaro, Lucio; Johnston, Alison
  8. Asymmetric Macroeconomic Effects of QE and Excess Reserves in a Monetary Union By Neyer, Ulrike; Stempel, Daniel; Horst, Maximilian
  9. Who is Afraid of Eurobonds? By Francesco Bianchi; Leonardo Melosi; Anna Rogantini Picco
  10. Private bank deposits and macro/fiscal risk in the euro-area By Arghyrou, Michael G; Gadea, Maria-Dolores; Kontonikas, Alexandros
  11. The Curious Incidence of Monetary Policy Across the Income Distribution By Broer, Tobias; Kramer, John; Mitman, Kurt
  12. Perceived Monetary Policy Uncertainty By Beckmann, Joscha; Czudaj, Robert L.
  13. Does Central Bank Independence Increase Inequality? By Aklin,Michael; Kern,Andreas; Negre,Mario
  14. The Role of Expectations for Currency Crisis Dynamics - The Case of the Turkish Lira By Beckmann, Joscha; Czudaj, Robert L.
  15. Understanding the Strength of the Dollar By Zhengyang Jiang; Robert J. Richmond; Tony Zhang
  16. Walking a tightrope: financial regulation, climate change, and the transition to a low-carbon economy By Demekas, Dimitri; Grippa, Pierpaolo

  1. By: Valerio Astuti (Banca d'Italia); Alessio Ciarlone (Banca d'Italia); Alberto Coco (Banca d'Italia)
    Abstract: In this paper, we analyze whether central bank communication can be an additional tool to provide guidance on monetary policy, drive private agents’ inflation expectations and financial asset prices in the main countries of Central and Eastern Europe. By applying natural language processing techniques to monetary policy statements and minutes, we first derive a series of salient topics on which central bank communications focused over the last two decades, and then develop indices of tone to gauge their respective degrees of hawkishness (dovishness) about the economic outlook. By using these indices in an econometric set-up, we find that a more hawkish (dovish) tone – reflecting a more positive (negative) assessment of the economic outlook – anticipates a more restrictive (accommodative) monetary policy decision, raises (lowers) short-term inflation expectations of private sector agents, increases (reduces) market interest rates across different maturities, and drives share prices down (up). Overall, our analysis suggests that communication may be a complementary and effective monetary policy tool available to central banks in emerging economies.
    Keywords: central banks, communication, natural language processing, Taylor rule, inflation expectations, financial markets, CEE-3
    JEL: C22 C25 C45 E44 E52 E58
    Date: 2022–10
  2. By: Gross, Isaac (Monash University); Leigh, Andrew (Australian National University)
    Abstract: Using the Reserve Bank of Australia's MARTIN model we compare actual monetary policy decisions to a counterfactual in which the cash rate is set according to an optimal simple rule. We find that monetary policy played a crucial role in avoiding a potential recession in 2001 and mitigating the downturn in 2008-2009. By contrast we find that the cash rate was too high during 2016-2019, keeping inflation below the Reserve Bank's target band. Optimal monetary policy in 2016-2019 would have involved a substantially lower cash rate and would have produced significantly better employment outcomes.
    Keywords: optimal monetary policy, unemployment, output gap, inflation
    JEL: E47 E52 E58
    Date: 2022–09
  3. By: Bertsch, Christoph (Research Department, Central Bank of Sweden); Hull, Isaiah (Finance Department, BI Norwegian Business School); Lumsdaine, Robin L. (Kogod School of Business, American University; Erasmus University Rotterdam; National Bureau of Economic Research (NBER); Tinbergen Institute; Center for Financial Stability); Zhang, Xin (BIS Innovation Hub Nordic Centre)
    Abstract: When does the Federal Reserve deviate from its dual mandate of pursuing the economic goals of maximum employment and price stability and what are the consequences? We assemble the most comprehensive collection of Federal Reserve speeches to-date and apply state-of-the-art natural language processing methods to extract a variety of textual features from each paragraph of each speech. We find that the periodic emergence of non-dual mandate related discussions is an important determinant of time-variations in the historical conduct of monetary policy with implications for asset returns. The period from mid-1996 to late 2010 stands out as the time with the narrowest focus on balancing the dual mandate. Prior to the 1980s there was a outsized attention to employment and output growth considerations, while non dual-mandate discussions centered around financial stability considerations emerged after the Great Financial Crisis. Forward-looking financial stability concerns are a particularly important driver of a less accommodative monetary policy stance when Fed officials link these concerns to monetary policy, rather than changes in banking regulation. Conversely, discussions about current financial crises and monetary policy in the context of inflation-employment themes are associated with a more accommodative policy stance.
    Keywords: Natural Language Processing; Machine Learning; Central Bank Communication; Financial Stability; Zero Shot Classification; Extractive Question Answering; Semantic Textual Similarity
    JEL: C63 D84 E32 E70
    Date: 2022–10–01
  4. By: R. Anton Braun (Federal Reserve Bank of Atlanta (E-mail:; Daisuke Ikeda (Director, Financial System and Bank Examination Department, Bank of Japan (E-mail:
    Abstract: We provide a quantitative theory of deflation and secular stagnation. In our lifecycle framework an aging population puts persistent downward pressure on the price level, real interest rates, and output. A novel feature of our theory is that it also recognizes the reactions of government policy. The central bank responds to falling prices by reducing its policy nominal interest rate and the fiscal authority responds by allowing the public debt-GDP ratio to rise.
    Keywords: Aging, Deflation, Lifecycle, Monetary policy, Portfolio choice, Secular stagnation, Tobin effect
    JEL: E52 E62 G51 D15
    Date: 2022–10
  5. By: Eric Dehay (RIME-Lab - Recherche Interdisciplinaire en Management et Économie Lab - ULR 7396 - UA - Université d'Artois - Université de Lille)
    Abstract: The text proposes an analysis of the way the European Central Bank (ECB) considers the notion of economic growth or its limits and how the question of envi-ronmental risk has become an issue for it. For this purpose, an analysis of the speeches of the members of its board is carried out over the period 1997-2021. An automated statistical analysis of the corpus reveals the standard approach to growth adopted by the ECB. This is followed by a more qualitative reading of the discourse, which shows that the notions of sustainability and the climate crisis are becoming increasingly important in the rhetoric of the ECB, without leading to a radical revision of the way growth is conceived or to a questioning of its limits. In order to expand its discourse and action in the climate field, the ECB is rather pro-ceeding by superimposition, adding new ideas rather than replacing its initial paradigm. In doing so, it protects the legitimacy of its mandate and its epistemic credibility.
    Keywords: E58,textual analysis,growth,climate change,European central bank (ECB)
    Date: 2022
  6. By: Rösl, Gerhard; Seitz, Franz
    Abstract: Cash usage at the point-of-sale decreased perceptibly in the past years. This is mainly due to the ongoing trend towards digitalization, but there are also indications that consumers were somewhat pushed into cashless payments by government regulations and supply-side restrictions by commercial banks. Nonetheless, overall demand for euro cash remained strong and even increased relative to GDP since the financial crisis in 2008. In this process, however, we observe a supply-driven shift towards lower banknote denominations. Central banks all over the world are intensively thinking about the potential issue of a Central Bank Digital Currency as a substitute or complement to cash. Although the characteristics of a possible digital euro have become more perceptible, its fundamental design properties remain unknown. We propose a double pre-paid scheme combining central elements of TARGET Instant Payment Settlement and electronic money features enabling offline and online instant payments. The issuance of a digital euro would be neutral to total money supply as banks act only as intermediaries. Since anonymity is categorically discarded by the ECB and as cash has some special advantages from a consumer perspective, the digital euro will rather co-circulate with cash than replace it in transactions.
    Keywords: Cash,banknotes,money,CBDC
    JEL: E41 E51 E58
    Date: 2022
  7. By: Barta, Zsófia; Baccaro, Lucio; Johnston, Alison
    Abstract: Do exchange rate regimes affect the conditions under which developed countries borrow? This paper argues that they do, but their impact on yields depends on the prevailing macroeconomic context. When investors regard inflation as the most relevant risk to bond holdings, monetary union has a distinct advantage over floating and fixed exchange rates because of its credible in-built mechanism to control inflation. However, once default is seen as the most relevant risk, exchange rate rigidity becomes a liability due to its constraining effect on governments' ability to respond to adverse shocks. We test our argument with a moving window panel analysis for twenty-three OECD countries from 1980 to 2017. We find that before the late 2000s, inflation was penalized under floating and (to a lesser extent) fixed exchange rate regimes, but not in countries in monetary union. Since the 2010s, inflation carries no penalty under any exchange rate regime. Variables linked to default risk (debt and entitlement spending) did not affect yields under any exchange rate arrangements until the mid-2000s. Afterwards, countries in monetary union (and to a lesser extent in fixed exchange rate regimes) were significantly penalized for public debt and entitlement spending, whereas countries with floating regimes were not. Our results speak to the literatures on governments' institutional commitments and "room to move.
    Keywords: bond yields,euro,exchange rate regimes,financial markets,international political economy,Anleiherenditen,Euro,Finanzmärkte,internationale politische Ökonomie,Wechselkurssysteme
    Date: 2022
  8. By: Neyer, Ulrike; Stempel, Daniel; Horst, Maximilian
    JEL: E51 E52 E58 F41 F45
    Date: 2022
  9. By: Francesco Bianchi; Leonardo Melosi; Anna Rogantini Picco
    Abstract: The growing asymmetry in the size of fiscal imbalances poses a serious challenge to the macroeconomic stability of the Euro Area (EA). We show that following a contractionary shock, the current monetary and fiscal framework weakens economic growth even in low-debt countries because of the zero lower bound (ZLB) constraint. At the same time, the current framework also exposes the EA to the risk of fiscal stagflation if one country were to refuse to implement the necessary fiscal consolidations. We study a new framework that allows EA policymakers to separate the need for short-run macroeconomic stabilization from the issue of long-run fiscal sustainability. Following a contractionary shock, the central bank tolerates the increase in inflation needed to stabilize the amount of Eurobonds issued in response to a large EA recession. National governments remain responsible to back their country-level debt by fiscal adjustments. The policy acts as an automatic stabilizer that benefits both high-debt and low-debt countries, generating a moderate increase in inflation that mitigates the recession and allows the central bank to move away from the ZLB. At the same time, the proposed policy lowers the risk of fiscal stagflation because it endows EA countries with effective stabilization policies.
    Keywords: Monetary and Fiscal Policy Coordination; Monetary Union; Eurobonds; Zero Lower Bound; Government Debt
    JEL: E50 E62 E30
    Date: 2022–10–03
  10. By: Arghyrou, Michael G; Gadea, Maria-Dolores; Kontonikas, Alexandros
    Abstract: We use a panel of ten euro area member states to examine the link between macro/fiscal risk and private bank deposits relative to Germany. Our main findings are summarised as follows: First, the relationship between relative deposits and macro/fiscal risk factors is not stable over time. Second, the significant time variation characterizing this relationship is driven by aggregate EMU-wide macro/fiscal risk conditions. Third, relative deposits in periphery EMU countries are generally more responsive to macro/fiscal risk. Fourth, the ECB’s unconventional monetary policy moderated the effect of the global financial and European debt crises on the relationship between relative deposits and macro/fiscal risk. Our empirical findings can inform the ongoing policy debate regarding the completion of the European Banking Union.
    Keywords: Private bank deposits, macro/fiscal risk, euro area, TVP panel
    Date: 2022–10–19
  11. By: Broer, Tobias (Paris School of Economics, IIES, Stockholm University, and CEPR); Kramer, John (IIES, Stockholm University); Mitman, Kurt (IIES, Stockholm University, CEPR and IZA)
    Abstract: We use high-frequency administrative data from Germany to study the effects of monetary policy on income and employment across the earnings distribution. Earnings growth at the bottom of the distribution is substantially more elastic to policy shocks. This unequal incidence is driven by differences in the response of employment risk across the distribution: job loss is more countercyclical for lower-earnings households. Viewed through the lens of a standard incomplete-markets model, the heterogeneous incidence substantially amplifies the equilibrium response of aggregate consumption to shocks.
    Keywords: Inequality; Monetary Policy; Heterogeneous agents
    JEL: D31 E52 J64
    Date: 2022–08–01
  12. By: Beckmann, Joscha; Czudaj, Robert L.
    Abstract: This paper examines whether media attention affects the macroeconomic effects of monetary policy uncertainty. We combine survey data from Consensus Economics and data on media attention from MarketPsych to distinguish between uncertainty and perceived uncertainty among the public. We assess the corresponding nonlinear effects on stock returns, the growth of industrial production, and inflation. Our results confirm that monetary policy uncertainty tends to have negative effects on production growth and stock returns. In particular for industrial production, such effects tend to be stronger in case of higher media coverage which acts as a propagation mechanism.
    Keywords: Expectations, Media, Monetary policy, Survey data, Uncertainty
    JEL: E43 E47 E52
    Date: 2022–10–13
  13. By: Aklin,Michael; Kern,Andreas; Negre,Mario
    Abstract: Since the 1980s, income inequality has increased substantially in several countries. Yet the political logic that triggered rising inequality in some places but not in others remains poorly understood. This paper builds a theory that links central bank independence to these dynamics. It posits the existence of three mechanisms that tie central bank independence to inequality. First, central bank independence indirectly constrains fiscal policy and weakens a government's ability to engage in redistribution. Second, central bank independence incentivizes governments to deregulate financial markets, which generates a boom in asset values. These assets are predominantly in the hands of wealthier segments of the population. Third, to contain inflationary pressures, governments actively promote policies that weaken the bargaining power of workers. Together, these policies strengthen secular trends towards higher inequality according to standard indicators. Empirically, the analysis finds a strong relation between central bank independence and inequality, as well as support for each of the mechanisms. From a policy perspective, our findings contribute to knowledge on the undesirable side effects of central bank independence.
    Keywords: Labor Markets,Rural Labor Markets,Macroeconomic Management,Poverty Reduction Strategies,Consumption,Fiscal&Monetary Policy,Financial Structures
    Date: 2021–01–21
  14. By: Beckmann, Joscha; Czudaj, Robert L.
    Abstract: This paper examines whether and how expectations have contributed to the turbulent path of the Turkish lira since 2008. We derive uncertainty measures surrounding GDP growth, inflation, the interest rate, and exchange rates based on survey data from Consensus Economics. Our results illustrate that forecasts have affected realized exchange rates and stock market returns via increased uncertainty. We also show that expectations regarding monetary policy have changed throughout the sample period. In line with a gradual adjustment of expectations professionals have accounted for the violation of the Taylor rule.
    Keywords: Disagreement, Expectations, Foreign exchange, Survey data, Taylor rule, Turkish lira, Uncertainty
    JEL: F31 F41
    Date: 2022–10–13
  15. By: Zhengyang Jiang; Robert J. Richmond; Tony Zhang
    Abstract: We link the sustained appreciation of the U.S. dollar from 2011 to 2019 to international capital flows driven by primitive economic factors. We show that increases in foreign investors’ net savings, increases in U.S. monetary policy rates relative to the rest of the world, and shifts in investor demand for U.S. financial assets contributed approximately equally to the dollar’s appreciation. We then quantify the impact of potential future demand shifts for U.S. assets on the value of the dollar.
    JEL: F31 G15
    Date: 2022–10
  16. By: Demekas, Dimitri; Grippa, Pierpaolo
    Abstract: As with the global financial crisis, there are once again demands on central banks and financial regulators to take on new responsibilities, this time for supporting the transition to a low-carbon economy. Regulators can indeed facilitate the reorientation of financial flows necessary for the transition. But they may find themselves walking a tightrope, having to balance exaggerated expectations against limited capabilities and political economy constraints. Their diagnostic and policy toolkits are still in their infancy. Expanding their legal mandates to take on these new, essentially political, responsibilities should be done through the political process and be accompanied by strengthened governance and accountability arrangements. Taking on these new responsibilities can also have potential pitfalls and unintended consequences on financial markets. Ultimately, central banks and financial regulators cannot deliver a low-carbon economy by themselves and should not risk being caught again in the role of ‘the only game in town’.
    Keywords: Financial stability; financial regulation; climate change; climate mitigation policy; low-carbon econmy; energy transition; OUP deal
    JEL: F3 G3 J1
    Date: 2022–09–14

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