nep-cba New Economics Papers
on Central Banking
Issue of 2022‒12‒12
nineteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Optimal Monetary Policy UnderHeterogeneous Beliefs By David Finck
  2. Optimal GDP-indexed Bonds By Sandra Daudignon; Oreste Tristani
  3. Mortgage credit and house prices: evidence to inform macroprudential policy By Arigoni, Filippo; McCann, Fergal; Yao, Fang
  4. FOMC Minutes : As a Source of Central Bank Communication Surprise By Kansoy, Fatih
  5. Considerations regarding the use of the discount window to support economic activity through a funding for lending program By Mark A. Carlson; Rebecca Zarutskie
  6. Borrowing Constraints in Emerging Markets By Santiago Camara; Maximo Sangiacomo
  7. Financial Development and Monetary Policy Transmission By María Fernanda Meneses-González; Angélica María Lizarazo-Cuellar; Diego Fernando Cuesta-Mora; Daniel Osorio-Rodríguez
  8. The FOMC's Committee on the Directive: Behind Volcker's New Operating Procedures By Nicholas A. Burk; David H. Small
  9. Banks’ Leverage in Foreign Exchange Derivatives in Times of Crises: A Tale of Two Countries By Iader Giraldo
  10. How abundant are reserves? Evidence from the wholesale payment system By Gara Afonso; Darrell Duffie; Lorenzo Rigon; Hyun Song Shin
  11. Climate Change and Double Materiality in a Micro- and Macroprudential Context By Kevin J. Stiroh
  12. Formation of Optimal Interbank Lending Networks under Liquidity Shocks By Daniel E. Rigobon; Ronnie Sircar
  14. Loan-to-income limits and mortgage lending outcomes By Gaffney, Edward
  15. Evaluating heterogeneous effects of housing-sector-specific macroprudential policy tools on Belgian house price growth By Lara Coulier; Selien De Schryder
  16. Analysts versus the Random Walk in Financial Forecasting: Evidence from the Czech National Bank’s Financial Market Inflation Expectations Survey By Kladívko, Kamil; Österholm, Pär
  17. A dissonant violin in the international orchestra? Discount rate policy in Italy (1894-1913) By Paolo Di Martino; Fabio C. Bagliano
  18. Multiple Structural Breaks in Interactive Effects Panel Data and the Impact of Quantitative Easing on Bank Lending By Jan Ditzen; Yiannis Karavias; Joakim Westerlund
  19. Inflation Persistence in Europe: The Effects of the Covid-19 Pandemic and of the Russia-Ukraine War By Guglielmo Maria Caporale; Juan Infante; Luis A. Gil-Alana; Raquel Ayestaran

  1. By: David Finck (University of Giessen)
    Abstract: We use a New Keynesian model that features rational and non-rational households. Assuming that both the fraction of rational households and the expectations formation process are uncertain from the perspective of the central bank, we derive robust optimal discretionary monetary policy in a simple min-max framework where the central bank plays a zero-sum game versus a fictitious, malevolent evil agent. We show that the central bank is able to improve welfare if it accounts for uncertainty while the model is being distorted. Even if the central bank accounts for the worst possible outcomes while the model is being undistorted, the central bank can still reduce the welfare loss by implementing a more aggressive targeting rule that favorably affects the inflation-output stabilization trade-off.
    Keywords: Heterogeneous Expectations, Robust Monetary Policy, Policy Implementation, Uncertainty
    JEL: E52 D84
    Date: 2022
  2. By: Sandra Daudignon; Oreste Tristani (-)
    Abstract: Empirical analyses starting from Laubach and Williams (2003) find that the natural rate of interest is not constant in the long-run. This paper studies the optimal response to stochastic changes of the long-run natural rate in a suitably modified version of the new Keynesian model. We show that, because of the zero lower bound (ZLB) on nominal interest rates, movements towards zero of the long-run natural rate cause an increasingly large downward bias in expectations. To offset this bias, the central bank should aim to keep the real interest rate systematically below the long-run natural rate, as long as policy is not constrained by the ZLB. The neutral rate – the level of the policy rate consistent with stable inflation and the natural rate at its long-run level – will be lower than the long-run natural rate. This is the case both under optimal policy, and under a price level targeting rule. In the latter case, the neutral rate is equal to zero as soon as the long-run natural rate falls below 1%.
    Keywords: nonlinear optimal policy, zero lower bound, commitment, liquidity trap, New Keynesian, natural rate of interest
    JEL: C63 E31 E52
    Date: 2022–11
  3. By: Arigoni, Filippo (Central Bank of Ireland); McCann, Fergal (Central Bank of Ireland); Yao, Fang (Central Bank of Ireland)
    Abstract: The link between mortgage credit and the housing market is central to the objectives of macroprudential policy. In this Note we describe the role that macroprudential policy plays in guarding against the emergence of an unsustainable relationship between credit and house prices, and introduce two models available to the Central Bank of Ireland to assess the likely effects of changes in the calibration of LTI or LTV limits on the aggregate house price to income ratio. Relative to a baseline projection, the recalibration of the mortgage measures for 2023 onward is estimated to increase the aggregate HPI by between 2.8 and 4 per cent over a three year horizon.
    Date: 2022–10
  4. By: Kansoy, Fatih (University of Warwick)
    Abstract: This paper examines whether and to what extent publications of the Federal Open Market Committee (FOMC) minutes contain significant information for the expectation of future monetary policy in the US. We construct measure of new surprise series with intradaily data for the Fed futures contracts and the responses of stock markets, fixed income markets and exchange rates to these surprises during 2004–2017. We find that the release of FOMC minutes affects the market volatility and financial asset prices respond significantly to FOMC minutes announcements. Finally, volatility and the volume of reactions increase during the zero lower bound. Specifically, this research finds that the release of FOMC minutes induces higher than normal volatility and shows that financial markets respond quickly and significantly to the release of FOMC minutes.
    Keywords: Central Bank Communication ; FOMC Minutes ; Monetary Policy Shocks JEL Codes: C1 ; D83 ; E5.
    Date: 2022
  5. By: Mark A. Carlson; Rebecca Zarutskie
    Abstract: This paper considers the use of the Federal Reserve's ability to provide loans to depository institutions under its discount window lending authority in support of achieving its monetary policy objectives through a funding for lending program. Broadly, a funding for lending program could be structured as one in which the Federal Reserve makes ample low-cost funding available to banks or a program in which the Federal Reserve only provides low-cost funding conditional on the banks meeting certain lending targets. We provide a general description of how a funding for lending program could be structured along each of these lines and review important considerations, costs, and benefits of any such program. We also review the literature regarding various lending programs implemented previously in the United States by a variety of agencies and abroad by foreign central banks that shed light on the potential effectiveness of funding for lending programs.
    Keywords: Funding for lending; Discount window; Federal Reserve; Monetary policy tools
    JEL: E58 E60 G21
    Date: 2022–10
  6. By: Santiago Camara; Maximo Sangiacomo
    Abstract: Borrowing constraints are a key component of modern international macroeconomic models. The analysis of Emerging Markets (EM) economies generally assumes collateral borrowing constraints, i.e., firms access to debt is constrained by the value of their collateralized assets. Using credit registry data from Argentina for the period 1998-2020 we show that less than 15% of firms debt is based on the value of collateralized assets, with the remaining 85% based on firms cash flows. Exploiting central bank regulations over banks capital requirements and credit policies we argue that the most prevalent borrowing constraints is defined in terms of the ratio of their interest payments to a measure of their present and past cash flows, akin to the interest coverage borrowing constraint studied by the corporate finance literature. Lastly, we argue that EMs exhibit a greater share of interest sensitive borrowing constraints than the US and other Advanced Economies. From a structural point of view, we show that in an otherwise standard small open economy DSGE model, an interest coverage borrowing constraints leads to significantly stronger amplification of foreign interest rate shocks compared to the standard collateral constraint. This greater amplification provides a solution to the Spillover Puzzle of US monetary policy rates by which EMs experience greater negative effects than Advanced Economies after a US interest rate hike. In terms of policy implications, this greater amplification leads to managed exchange rate policy being more costly in the presence of an interest coverage constraint, given their greater interest rate sensitivity, compared to the standard collateral borrowing constraint.
    Date: 2022–11
  7. By: María Fernanda Meneses-González; Angélica María Lizarazo-Cuellar; Diego Fernando Cuesta-Mora; Daniel Osorio-Rodríguez
    Abstract: This paper estimates the effect of financial development on the transmission of monetary policy. To do so, the paper employs a panel data set containing financial development indicators, policy rates, lending rates, and deposit rates for 43 countries for the period 2000-2019 and applies the empirical strategy of BrandaoMarques et al. (2020): firstly, monetary policy shocks are estimated using a Taylor-rule specification that relates changes in the policy rate to inflation, the output gap and other observables that are likely to influence monetary policy decisions; secondly, the residuals of this estimation (policy shocks) are used in a specification that relates lending or deposit rates to, among others, policy shocks and the interaction between policy shocks and measures of financial development. The coefficient on this interaction term captures the effect of financial development on the relationship between policy shocks and lending or deposit rates. The main findings of the paper are twofold: on the one hand, financial development does strengthen the monetary policy transmission channel to deposit rates; that is, changes in the policy rate in economies with more financial development induce larger changes (in the same direction) in deposit rates than is the case in economies with less financial development. This result is particularly driven by the effect of the development of financial institutions on policy transmission – the effect of financial markets development turns out to be smaller in magnitude. On the other hand, financial development does not strengthen the transmission of monetary policy to lending rates. This is consistent with a credit channel which weakens in the face of financial development in a context where banks cannot easily substitute short-term funding sources. These results highlight the relevance of financial development for the functioning of monetary policy across countries, and possibly imply the necessity of a more active role of monetary authorities in fostering financial development. **** Este trabajo estima el efecto del desarrollo financiero en la transmisión de la política monetaria. Con este objetivo, el documento utiliza una base de datos que contiene indicadores de desarrollo financiero, tasas de política monetaria, tasas de interés de créditos y depósitos para 43 países para el período 2000-2019 y aplica una estrategia empírica propuesta por Brandao-Marques et al. (2020): en primer lugar, se estiman choques de política monetaria por país utilizando una aproximación a la regla de Taylor que relaciona los cambios en la tasa de política con la tasa de inflación, la brecha del producto y otras variables observables que probablemente influyan en las decisiones de política monetaria; en segundo lugar, los residuos de esta estimación (choques de política) se utilizan en una especificación de un modelo panel que relaciona las tasas activas o pasivas con, entre otros, choques de política y la interacción entre choques de política y medidas de desarrollo financiero. El coeficiente de este término de interacción capta el efecto del desarrollo financiero en la relación entre los choques de política monetaria y las tasas activas o pasivas. Los principales hallazgos del documento son dos: por un lado, el desarrollo financiero fortalece el canal de transmisión de la política monetaria a las tasas de los depósitos; es decir, cambios en la tasa de política en economías con mayor desarrollo financiero inducen cambios mayores (en la misma dirección) en las tasas de depósitos que en el caso de las economías con menor desarrollo financiero. Este resultado está particularmente impulsado por el efecto del desarrollo de las instituciones financieras en la transmisión, ya que el efecto del desarrollo de los mercados financieros resulta ser de menor magnitud. Por otro lado, los resultados obtenidos sugieren que el desarrollo financiero no fortalece la transmisión de la política monetaria a las tasas activas. Esto es consistente con un canal de crédito que se debilita ante el desarrollo financiero en un contexto donde los bancos no pueden sustituir fácilmente las fuentes de financiamiento de corto plazo. Estos resultados resaltan la relevancia del desarrollo financiero para el funcionamiento de la política monetaria y posiblemente implican la necesidad de un papel más activo de las autoridades monetarias en el fomento del desarrollo financiero.
    Keywords: Financial development, monetary policy transmission, monetary policy shocks, desarrollo financiero, transmisión de política monetaria, choques de política monetaria
    JEL: G10 G18 G20 G28 E44 E52 E58
    Date: 2022–11
  8. By: Nicholas A. Burk; David H. Small
    Abstract: On October 6, 1979, Chairman Volcker announced that the Federal Reserve was embarking on a new, forceful, and ultimately successful campaign to lower the rampant inflation of that time. At the center of this campaign were new operating procedures for conducting monetary policy—procedures that focused daily open market operations on controlling the quantity of monetary reserves and the quantity of nonborrowed reserves in particular. This was a dramatic shift from the prior focus on targeting the federal funds rate. These new operating procedures were preceded by well over a decade of work that was directed by the Federal Open Market Committee (FOMC) and was carried out by its Committee on the Directive (COD). Prior to 1979, the COD had recommended operating procedures based on controlling nonborrowed reserves but subsequently rejected them. It was the Volcker Fed that accepted and implemented these reserves-based operating procedures, and it did so with the goal of targeting the monetary aggregates to have restrained and stable growth rates.
    Keywords: Federal Reserve; Great inflation; Monetary policy; Volcker
    JEL: E52 E58
    Date: 2022–09–30
  9. By: Iader Giraldo
    Abstract: Before the outbreak of the Global Financial Crisis, on May 6, 2007, the Colombian central bank imposed a cap on the Gross Leverage Position in Foreign Exchange Derivatives of financial intermediaries. It was the only country in the world in implementing this prudential policy. By leveraging insights from synthetic control literature we construct counterfactual scenarios and show that this policy intervention, while costly in financial stability terms in the pre-GFC period, was effective in reducing Colombia’s financial stability risks during the crisis. A trade-off between “calm†and “turbulent†periods emerges from our results, which should be taken into account when deciding on the right policy tools to use before a crisis breaks out.
    Keywords: PBAsynthetic-controlmacroprudential policy
    JEL: E58 E63 F38
    Date: 2022–11–14
  10. By: Gara Afonso; Darrell Duffie; Lorenzo Rigon; Hyun Song Shin
    Abstract: Before the era of large central bank balance sheets, banks relied on incoming payments to fund outgoing payments in order to conserve scarce liquidity. Even in the era of large central bank balance sheets, rather than funding payments with abundant reserve balances, we show that outgoing payments remain highly sensitive to incoming payments. By providing a window on liquidity constraints revealed by payment behavior, our results shed light on thresholds for the adequacy of reserve balances. Our findings are timely, given the ongoing shrinking of central bank balance sheets around the world in response to inflation.
    Keywords: real-time gross settlement (RTGS) systems, quantitative tightening, balance sheet management, reserve balances
    JEL: E42 E44 E52 E58 G21
    Date: 2022–11
  11. By: Kevin J. Stiroh
    Abstract: This paper presents a stylized framework of bank risk-taking to help clarify the concept of "double materiality," the idea that supervisory authorities should consider both the risks that banks face from climate change and the impact of a bank’s actions on climate change. The paper shows that the concept of double materiality can be coherently embedded in a microprudential framework, but the practical implications could be quite similar to the implications of a single materiality perspective. The importance of a double materiality perspective becomes larger when one considers macroprudential objectives driven by financial sector externalities. The framework illustrates the critical importance of being clear on the supervisory mandate and objectives when assessing policy alternatives.
    Keywords: Bank risk; Risk management; Climate change
    JEL: G21
    Date: 2022–10–13
  12. By: Daniel E. Rigobon; Ronnie Sircar
    Abstract: We formulate a model of the banking system in which banks control both their supply of liquidity, through cash holdings, and their exposures to risky interbank loans. The value of interbank loans jumps when banks suffer liquidity shortages, which can be caused by the arrival of large enough liquidity shocks. In two distinct settings, we compute the unique optimal allocations of capital. In the first, banks seek only to maximize their own utility -- in a decentralized manner. Second, a central planner aims to maximize the sum of all banks' utilities. Both of the resulting financial networks exhibit a `core-periphery' structure. However, the optimal allocations differ -- decentralized banks are more susceptible to liquidity shortages, while the planner ensures that banks with more debt hold greater liquidity. We characterize the behavior of the planner's optimal allocation as the size of the system grows. Surprisingly, the `price of anarchy' is of constant order. Finally, we derive capitalization requirements that cause the decentralized system to achieve the planner's level of risk. In doing so, we find that systemically important banks must face the greatest losses when they suffer liquidity crises -- ensuring that they are incentivized to avoid such crises.
    Date: 2022–11
  13. By: , Le Thanh Tung
    Abstract: Tis study investigates the mixed impact of fscal-monetary policies on economic growth in Vietnam, an emerging economy in the Asia-Pacifc region. Te Vector autoregressive method (VAR), a quantitative technique, is employed on a quarterly database collected in 2004–2018. Te cointegration test indicates a long-term cointegration relationship between these macroeconomic policies and the growth of gross output. Te variance decomposition and impulse response function conclude that the impacts of these policies on economic growth are quite weak and faint. However, our results indicate that monetary policy is more signifcant than fscal policy in supporting economic growth. Te results imply that these economic policies may give priority to other macroeconomic objectives instead of promoting economic growth in the studied period. Hence, policymakers need to have more solutions to improve the efciency of these policies in Vietnam in the future.
    Date: 2022–09–04
  14. By: Gaffney, Edward (Central Bank of Ireland)
    Abstract: In this Note, I describe a model of mortgage home loan lending in Ireland, focusing on estimates of the loan-to-income (LTI) ratio distribution of new lending under different macroprudential policy calibrations. The model can be used to estimate responses by borrowers and lenders to the calibration of the Central Bank of Ireland’s mortgage measures, which control shares of lending extended at high loan-to-income ratios to owner-occupiers. It covers three responses to an increase in the limits: leveraging among borrowers willing and able to access larger credit amounts, a plausible change in residential property prices in response to credit availability, and the possibility that new borrowers participate in the market. Under the revised calibration of the mortgage measures, and assuming that broader credit conditions remain comparable to the early 2020s, raising the first-time buyer LTI limit from 3.5 to 4 would increase average LTI ratios from 2.95 to 3.20 in the medium term.
    Date: 2022–10
  15. By: Lara Coulier (: Department of Economics, Ghent University); Selien De Schryder (Department of Economics, Ghent University)
    Abstract: This paper analyzes whether housing-related macroprudential policy has heterogeneous effects on house price growth in local housing markets. More specifically, we employ an extensive dataset of Belgian municipalities containing a multitude of drivers of local house price dynamics and examine the potential heterogeneity of housing-related macroprudential policy changes driven by local characteristics related to financial constrained and high-risk borrowers, the degree of local housing market activity, and changes in local household indebtedness. We find more dampening effects of the common macroprudential policy tightenings on local house price growth for municipalities characterized by low-income and young citizens, which furthermore increase in hot housing markets. Our findings shed more light on the geographical heterogeneity of national macroprudential policy changes, which indicate the possibility to stabilize local housing market booms.
    Keywords: macroprudential policy, local housing markets, heterogeneity, dynamic panel data, quantile regressions
    JEL: C22 C23 E58 O18 R3
    Date: 2022–10
  16. By: Kladívko, Kamil (Örebro University School of Business); Österholm, Pär (Örebro University School of Business)
    Abstract: In this paper, we analyse how financial market analysts’ expectations in the Czech National Bank’s Financial Market Inflation Expectations survey perform relative to the random-walk forecast when it comes to predicting five financial variables. Using data from 2001 to 2022, our results indicate that the analysts are able to signifi-cantly outperform the random-walk forecast for the repo rate and Prague Interbank Offered Rate at the one-month forecasting horizon. For the five-year and ten-year interest rate swap rate, the random walk significantly outperforms the analysts at both the one-month and one-year forecasting horizons. For the CZE/EUR ex-change rate, no statistically significant differences in forecast precision were found.
    Keywords: Survey data; Out-of-sample forecasts; Exchange rates; Interest rates
    JEL: E47 G17
    Date: 2022–11–25
  17. By: Paolo Di Martino; Fabio C. Bagliano
    Abstract: Based on a new series and applying econometric techniques, this paper investigates the discount rate policy implemented by the main Italian bank of issue of the time, the Banca d’Italia. We focus on two interrelated aspects of the problem. Firstly, anchoring our analysis to the Bank’s annual reports, we enquiry into the general determinants of its discount rate variations. Secondly, we study the reaction of the Italian rate to exogenous changes in leading international official rates. We show that discount rate variations responded to short-term fluctuations of official rates in the UK and France but, simultaneously, to deviations from long-term equilibrium relations involving two pairs of variables. On the one hand, a relationship between the Italian discount rate and the French open market rate; on the other hand, a link between the Bank’s reserve ratio and its exposure to the national credit market. We also show that reactions to variations in foreign official rates were of a very limited magnitude. This “sterilisation†policy came with little repercussions in terms of exchange rate fluctuations or loss of international reserves, somehow in contrast with the results of the recent literature.
    Keywords: Bank of Italy, discount rate policy, international gold standard, sterilization
    Date: 2022
  18. By: Jan Ditzen (Free University of Bozen-Bolzano); Yiannis Karavias (University of Birmingham); Joakim Westerlund (Lund University; Deakin University)
    Abstract: Economists are concerned about the many recent disruptive events such as the 2007-2008 global financial crisis and the 2020 COVID-19 outbreak, and their likely effect on economic relationships. The fear is that the relationships might have changed, which has implications for both estimation and policymaking. Motivated by this last observation, the present paper develops a new toolbox for multiple structural break detection in panel data models with interactive effects. The toolbox includes several tests for the presence of structural breaks, a break date estimator, and a break date confidence interval. The new toolbox is applied to a large panel data set covering 3,557 US banks between 2005 and 2021, a period characterized by a number of massive quantitative easing programs to lessen the impact of the global financial crisis and the COVID-19 pandemic. The question we ask is: Have these programs been successful in spurring bank lending in the US economy? The short answer turns out to be: ``No''.
    Date: 2022–11
  19. By: Guglielmo Maria Caporale; Juan Infante; Luis A. Gil-Alana; Raquel Ayestaran
    Abstract: This note analyses the possible effects of the Covid-19 pandemic and of the Russia-Ukraine war on the degree of inflation persistence in both the euro zone and the European Union as a whole (EU27). For this purpose a fractional integration model is estimated, first using the full sample and then recursively. Although the recursive analysis provides clear evidence of a significant increase in inflation persistence (especially in the case of the EU27, for which in addition to jumps an upward trend is clearly identifiable), the full-sample results imply long-lasting but only temporary effects of the two shocks being examined. These findings suggest that the required policy response to both shocks should also have a temporary nature.
    Keywords: inflation persistence, fractional integration, recursive estimation, Covid-19 pandemic, Russia-Ukraine war
    JEL: C22 E31
    Date: 2022

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