nep-cba New Economics Papers
on Central Banking
Issue of 2022‒12‒19
thirteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Stance and Favorableness of Monetary Policy in the Media: The Case of Viet Nam By Thang, Doan Ngoc; Anh, Pham Thi Hoang; Long, Trinh; Dong, Do Phy; Dat, Luong Van
  2. How Do the Financial Markets Respond to Emerging Economies’ Asset Purchase Program? Evidence from the COVID-19 Crisis By Prabheesh, K. P.; Kumar, Sanjiv
  3. Euro area monetary policy and TARGET balances: a trilogy By Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin
  4. Central Bank Information Effects in Japan : The Role of Uncertainty Channel By Matsumoto, Ryo; Morita, Hiroshi; Ono, Taiki
  5. Navigating the housing channel of monetary policy across euro area regions By Battistini, Niccolò; Falagiarda, Matteo; Hackmann, Angelina; Roma, Moreno
  6. Should Central Banks Have an Inequality Objective? By Roberto Chang
  7. Stablecoins and Their Risks to Financial Stability By Cameron MacDonald; Laura Zhao
  8. Regulatory Requirements of Banks and Arbitrage in the Post-Crisis Federal Funds Market By Rod Garratt; Sofia Priazhkina
  9. Spillovers from US Monetary Shocks: Role of Policy Drivers and Cyclical Conditions By Arbatli-Saxegaard, Elif; Furceri, Davide; Gonzalez Dominguez, Pablo; Ostry, Jonathan; Peiris, Shanaka
  10. The Policy Mix in a Monetary Union: Who Bears the Burden of Asymmetric Shocks’ Stabilisation? By Christos Mavrodimitrakis
  11. Euro area inflation and a new measure of core inflation By Claudio Morana
  12. COVID-19 and Public Support for the Euro By Roth, Felix; Jonung, Lars; Most, Aisada
  13. LTV regulation and housing bubbles By Claire Océane Chevallier; Sarah El Joueidi

  1. By: Thang, Doan Ngoc (Asian Development Bank Institute); Anh, Pham Thi Hoang (Asian Development Bank Institute); Long, Trinh (Asian Development Bank Institute); Dong, Do Phy (Asian Development Bank Institute); Dat, Luong Van (Asian Development Bank Institute)
    Abstract: We analyze the effects of monetary stance on the media’s favorable (or otherwise) attitude to the State Bank of Viet Nam’s (SBV) monetary policy using monthly data from 2011 to 2021. Monetary stance is a multivariate index based on the growth rates of money supply and domestic credit. A large set of articles published in five Viet Nam daily newspapers is utilized to construct a view of the media’s favorableness to the monetary policy. Our main findings are that a change in monetary stance from easing to neutral/tightening, or from neutral to tightening is greatly appreciated by the media. This effect is negatively moderated by the volatility of the stock exchange index. Our findings are robust for alternative measures of media’s favorableness, monetary policy variables, and when controlling the endogeneity problem. These findings have important policy implications for implementing SBV’s monetary policy.
    Keywords: monetary policy; monetary stance; media coverage; media favorableness; communication
    JEL: E52 E58
    Date: 2022–06
  2. By: Prabheesh, K. P. (Asian Development Bank Institute); Kumar, Sanjiv (Asian Development Bank Institute)
    Abstract: We examine the impacts of unconventional monetary policy on the exchange rate, stock market, and bond market during the COVID-19 economic crisis in an emerging economy. We focus particularly on the asset purchase program conducted by the Central Bank of India. The Central Bank announced an asset purchase program four times during the pandemic. By applying the EGARCH methodology, we find that (1) the asset purchase program effectively reduced the yield rate in the bond market and its volatility; (2) the first two announcements did not exert any impact on the financial market, but the third and fourth announcements helped to compress the yield and its volatility; (3) the program helped to restrain the exchange rate depreciation and volatility in the foreign exchange market; and (4) the impact of the announcements on stock returns, however, was weak.
    Keywords: unconventional monetary policy; bond market; exchange rate; stock market; EGARCH
    JEL: E44 E52 E58 E65
    Date: 2022–05
  3. By: Eisenschmidt, Jens; Kedan, Danielle; Schmitz, Martin
    Abstract: The growth in TARGET balances after 2009 has given rise to intense academic and public debate. Our paper offers a systematic exposition of the necessary conditions for TARGET balances to emerge and provides a clear link to monetary policy. We show that large TARGET balances can only arise with excess liquidity. The interpretation of TARGET balances therefore depends on the monetary policy context in which excess liquidity is created. We distinguish three phases of TARGET balances growth and propose some easy-to-derive metrics for policy makers and academics to assess developments in TARGET balances. We develop a comprehensive econometric framework to account for relevant factors driving TARGET balances in the different phases. We find that while financial market stress and economic imbalances were the drivers of TARGET balances during the great financial and sovereign debt crises, the implementation of Eurosystem asset purchases was the driving force since March 2015. As excess liquidity is likely to persist on account of higher demand for central bank reserves compared to the pre-crisis period, TARGET balances have the potential to remain sizeable in the future. JEL Classification: E42, E58, F32
    Keywords: asset purchase programme, balance of payments, excess liquidity, TARGET2
    Date: 2022–11
  4. By: Matsumoto, Ryo; Morita, Hiroshi; Ono, Taiki
    Abstract: Central bank information effect have been analyzed in the recent literature on monetary policy. In this study, we apply the identification method by Jarocinski and Karadi (2020) to the Japanese data to empirically examine the macroeconomic effects of central bank information shock and pure monetary policy shock. These shocks are identified by combining of high-frequency identification and sign restriction. The empirical results support the presence of central bank information effects in Japan. Particularly, the central bank information shock accompanying monetary tightening decreases economic uncertainty and increases stock prices and output, suggesting that central bank’s optimistic outlook is conveyed through contractionary monetary actions. The results of the forecast error variance decomposition indicate that the central bank’s information effect may be spread through changes in uncertainty. Finally, the total effect of monetary policy and information shocks on the variables are much larger than that of the shocks identified by the conventional Cholesky decomposition. These findings are important for evaluating the true effects of monetary actions on the economy.
    Keywords: Monetary policy, Information effect, High-frequency data, VAR model
    JEL: C32 D83 E44 E52 G14
    Date: 2022–11
  5. By: Battistini, Niccolò; Falagiarda, Matteo; Hackmann, Angelina; Roma, Moreno
    Abstract: This paper assesses the role of the housing market in the transmission of conventional and unconventional monetary policy across euro area regions. By exploiting a novel regional dataset on housing-related variables, a structural panel VAR analysis shows that monetary policy propagates effectively to economic activity and house prices, albeit in a heterogeneous fashion across regions. Although the housing channel plays a minor role in the transmission of monetary policy to the economy on average, its importance increases in the case of unconventional monetary policy. We also explore the determinants of the diverse transmission of monetary policy to economic activity across regions, finding a larger impact in areas with lower labour income and more widespread homeownership. An expansionary monetary policy can thus be effective in mitigating regional inequality via its stimulus to the economy. JEL Classification: D31, E32, E44, E52, R31
    Keywords: business cycles, conventional and unconventional monetary policy, housing market, regional in-equality
    Date: 2022–11
  6. By: Roberto Chang
    Abstract: Should central banks care about inequality? To address this question, we extend a standard model of time inconsistency in monetary policy to allow for heterogeneity. As in the standard analysis, lack of policy commitment leads to a bias towards socially excessive inflation. But the novel result is that, in the presence of heterogeneity, the bias can be offset by assigning the central bank a mandate under which agents with higher nominal wealth are given a higher relative weight than under the social welfare function. In other words, society should choose a central banker that is less egalitarian than itself, a result reminiscent of Rogoff's "conservative central banker". Our analysis underscores that including a concern for redistribution in the central bank's mandate can enhance policy credibility, but the details can be unexpected and should reflect the role of the mandate in overcoming policy distortions.
    JEL: E6 F4
    Date: 2022–11
  7. By: Cameron MacDonald; Laura Zhao
    Abstract: The market for fiat-referenced cryptoassets, commonly known as stablecoins, has expanded rapidly in recent years alongside the growth of the cryptoasset ecosystem. In fact, the market capitalization of stablecoins increased by more than 30 times since the beginning of 2020. What risks could stablecoins pose to the financial system? We examine price stabilization mechanisms of stablecoins as well as the current and potential use cases of stablecoins. We then analyze the risks stemming from both. We argue that the price stabilization mechanisms of current stablecoins could lead to the risk of confidence runs, which can propagate to broader cryptoasset markets and the traditional financial sector. We also argue that stablecoins can contribute to risks to financial stability by facilitating the buildup of leverage and liquidity mismatches in decentralized finance. Such risks cannot be addressed by regulating the safety and soundness of stablecoins alone without adequately regulating broader activities in the crypto ecosystem. Finally, we explore the potential implications of the substitution of cash and bank deposits for stablecoins in payments and the financial system more broadly, particularly the current system of bank-intermediated credit and for monetary policy.
    Keywords: Digital currencies and fintech; Financial institutions; Financial markets; Financial stability; Financial system regulation and policies
    JEL: E44 E58 G23
    Date: 2022–11
  8. By: Rod Garratt; Sofia Priazhkina
    Abstract: This paper explains the nature of interest rates in the U.S. federal funds market after the 2007-09 financial crisis. We build a model of the over-the-counter lending market that incorporates new aspects of the financial system: abundance of liquidity, different regulatory standards for banks, and arbitrage opportunities created by limited access to the facility granting interest on excess reserves. The model determines the equilibrium federal funds rate as a function of the policy rates and explains the “leaky floor” phenomenon in which we observe federal funds rates that are strictly below the interest rate paid on reserves. Using the model, we explain the impact of raising government yields and tightening the Liquidity Coverage Ratio (LCR) and the Supplementary Leverage Ratio (SLR) requirements on the federal funds rates.
    Keywords: Central bank research; Economic models; Financial institutions; Financial markets; Financial stability; Financial system regulation and policies; Wholesale funding
    JEL: E42 E58 G28
    Date: 2022–11
  9. By: Arbatli-Saxegaard, Elif (Asian Development Bank Institute); Furceri, Davide (Asian Development Bank Institute); Gonzalez Dominguez, Pablo (Asian Development Bank Institute); Ostry, Jonathan (Asian Development Bank Institute); Peiris, Shanaka (Asian Development Bank Institute)
    Abstract: We provide new evidence on the spillover effects from United States (US) interest rate changes, focusing on factors that are pertinent to the current conjuncture: weak recovery prospects in emerging market and developing economies (EMDEs), and the confluence of macroeconomic shocks shaping the path of interest rates in the US. The drivers of US monetary policy matter for the nature of spillovers. With an SVAR-IV model used to identify structural monetary policy, demand, and supply shocks, we find that an increase in US interest rates driven by demand shocks engenders a positive spillover to economic activity in the near term, while an exogenous tightening of monetary policy would have a large negative spillover effect. Spillovers from US monetary policy shocks also depend on the state of the business cycle, exerting larger effects when growth is weak outside the US. Finally, tighter US monetary policy affects the left tail of the growth distribution disproportionately: the fat left tail highlights the salience of growth at risk.
    Keywords: US monetary policy; foreign spillovers
    JEL: C30 E50 F40
    Date: 2022–05
  10. By: Christos Mavrodimitrakis (Department of Economics, University of Reading)
    Abstract: We utilise a standard reduced-form neo-Keynesian model in a monetary union, in which the monetary authority and the fiscal authorities strategically interact, to explore who, under alternative institutional arrangements (strategic and fiscal regimes) and shocks’ configurations, bears the burden of asymmetric shocks’ stabilisation. We show that in the core/periphery fiscal regime, described by an asymmetry in the sequence of moves between the core and the peripheral member-states, asymmetric shocks pass through at the union level when there are strategically significant spill-over effects and the monetary policy’s and fiscal policy’s instruments are not perfect substitutes in the stabilisation process. The monetary authority reacts to asymmetric shocks, but does not succeed in fully offsetting them. The first best implies the coordination of fiscal policies. A second best might be achieved by the fiscal leadership strategic regime (a form of implicit coordination), when there are strong interconnections in the union, and/or inducing the fiscal authorities to use fiscal policy instruments that directly decrease inflation, such as taxes, production subsidies or public investment, when there is a strong cost channel of monetary policy.
    Keywords: monetary union, strategic interactions, policy mix, core/periphery set-up, asymmetric shocks
    JEL: E52 E61 E62 E63 F45
    Date: 2022–11–30
  11. By: Claudio Morana (Center for European Studies, University of Milano-Bicocca, Italy; Rimini Centre for Economic Analysis; CeRP, Collegio Carlo Alberto, Italy; CES, Harvard, USA)
    Abstract: This paper introduces a new decomposition of euro area headline inflation into core, cyclical and residual components. Our new core inflation measure, the structural core inflation rate, bears the interpretation of expected headline inflation, conditional to medium to long-term demand and supply-side developments. It shows smoothness and trending properties, economic content, and forecasting ability for headline inflation and other available core inflation measures routinely used at the ECB for internal or external communication. Hence, it carries additional helpful information for policy-making decisions. Concerning recent developments, all the inflation components contributed to its post-pandemic upsurge. Since mid-2021, core inflation has been on a downward trend, landing at about 3% in 2022. Cyclical and residual inflation -associated with idiosyncratic supply chains, energy markets, and geopolitical tensions- are currently the major threats to price stability. While some cyclical stabilization is ongoing, a stagflation scenario cum weakening overall financial conditions might be lurking ahead. A pressing issue for ECB monetary policy will be to face -mostly supply-side- inflationary pressure without triggering a financial crisis.
    Keywords: headline inflation, core inflation, Russia's war in Ukraine, COVID-19 pandemic, sovereign debt crisis, subprime financial crisis, dot-com bubble, euro area, ECB monetary policy, trend-cycle decomposition
    JEL: C22 C38 E32 F44 G01
    Date: 2022–12
  12. By: Roth, Felix; Jonung, Lars; Most, Aisada
    Abstract: The COVID-19 pandemic had disastrous effects on health and economic activity worldwide, including in the Euro Area. The application of mandatory lockdowns contributed to a sharp fall in production and a rise in unemployment, inducing an expansionary fiscal and monetary response. Using a uniquely large macro database, this paper examines the effects of the pandemic and the ensuing economic policies on public support for the common currency, the euro, as measured by the Eurobarometer survey. It finds that public support for the euro reached historically high levels in a majority of the 19 Euro Area member states in the midst of the pandemic. This finding suggests that the expansionary fiscal policies initiated at the EU level significantly contributed to this outcome, while the monetary measures taken by the European Central Bank did not have a similar effect.
    Keywords: COVID-19,lockdowns,support for the euro,unemployment,inflation,monetary policies,fiscal policies,EU
    JEL: C23 E24 E42 E52 E62 I18
    Date: 2022
  13. By: Claire Océane Chevallier (Université du Luxembourg (Extramural Research Fellow)); Sarah El Joueidi (American University of Beirut and Université du Luxembourg (Extramural Research Fellow))
    Abstract: This paper develops a dynamic general equilibrium model in innite ho- rizon, with an endogenous banking sector, market sensitive regulatory con- straints, and in which deterministic rational housing bubbles may emerge. We are interested in the conditions under which housing bubbles may emerge and their impact on the economy. We show that 1) when agents face a LTV regulation, two dierent equilibria may emerge and coexist: a bubbleless and a housing bubble equilibria; 2) housing bubbles increase banks' size; 3) when banks face operational costs, housing bubbles reduce welfare. In an extension of the model we introduce a stochastic banking bubble and show that the combination of two market sensitive macroprudential regu- lations, LTV and VaR regulations, allows housing and banking bubbles to arise simultaneously. Their interaction amplies banks' balance sheet size. The welfare impact is positive.
    Keywords: "Banking bubble; Dynamic general equilibrium; Housing bubbles; Innitely lived agents; Loan-to-Value; Market sensitive regulations."
    JEL: E44 E60 G1 G21 G21
    Date: 2022

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