nep-cba New Economics Papers
on Central Banking
Issue of 2023‒01‒02
twenty-one papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Assessing central bank commitment to inflation targeting: Evidence from financial market expectations in India By Vaishali Garga; Aeimit Lakdawala; Rajeswari Sengupta
  2. The effects of monetary policy across fiscal regimes By Roben Kloosterman; Dennis Bonam; Koen van der Veer
  3. The Banco de Portugal balance sheet expansion during the last two decades: a monetary policy perspective By Joana Sousa-Leite; Diana Correia; Cristina Coutinho; Carmen Camacho
  4. Influencing public trust in central banks: Identifying who is open to new information By Bernd Hayo; Pierre-Guillaume Méon
  5. Central Bank Communication about Climate Change By David M. Arseneau; Alejandro Drexler; Mitsuhiro Osada
  6. Undesired monetary policy effects in a bubbly economy By Giuseppe Ciccarone; Francesco Giuli
  7. Policy preference at central banks: Quantifying monetary policy signals using keyword topic models By Diaf, Sami
  8. Monetary policy in a two-country model with behavioral expectations By Michał Brzoza-Brzezina; Paweł Galiński; Krzysztof Makarski
  9. Climate Actions, Market Beliefs, and Monetary Policy By : Annicciarico, Barbara; : Di Dio, Fabio; : Dilusio, Francesca
  10. The rebalancing channel of QE: New evidence at the security level in the euro area By Tom Hudepohl
  11. The pass-through of the monetary policy rate into lending rates in Mexico By Alessandro Maravalle; Alberto González Pandiella
  12. Monetary Policy, Labor Force Participation, and Wage Rigidity By Hiroyuki Kubota; Ichiro Muto; Mototsugu Shintani
  13. Perception of the Balance of Payments and Monetary Policy in the Late 1960s: Focusing on the Bank of Japan's Viewpoint before and after the Monetary Policy Shift By Hidekatsu Kamio; Yasuko Morita
  14. The Role of Financial Structural Factors in Retail Rate Adjustment: Evidence from Sri Lanka By Fernando, Antonette
  15. NEUTRAL PERCENTAGE RATE: ANALYSIS AND EVALUATION FOR THE RUSSIAN ECONOMY By Elena Sinelnikova-Myruleva; Grebenkina Alina; Makeeva Natalia
  16. Demand Shocks, Hysteresis and Monetary Policy By Jae W. Sim
  17. Real interest rates, bank borrowing, and fragility By Ahnert, Toni; Anand, Kartik; König, Philipp Johann
  18. Money, E-money, and Consumer Welfare By Carli, Francesco; Uras, Burak
  19. The Term Funding Facility: Has It Encouraged Business Lending? By Sharon Lai; Kevin Lane; Laura Nunn
  20. Asset supply and liquidity transformation in HANK By Yu-Ting Chiang; Piotr Zoch
  21. Bond convenience curves and funding costs By Nissinen, Juuso; Sihvonen, Markus

  1. By: Vaishali Garga (Federal Reserve Bank of Boston); Aeimit Lakdawala (Wake Forest University); Rajeswari Sengupta (Indira Gandhi Institute of Development Research)
    Abstract: We propose a novel framework to gauge the credibility of central banks' commitment to an inflation-targeting regime. Our framework combines survey data on macroeconomic forecasts with high-frequency financial market data to understand how inflation targeting makes economic agents change their perception about central bank decisions. Specifically, using the Reserve Bank of India's adoption of inflation targeting in 2015 as a laboratory, we apply two different approaches to estimate a market-perceived monetary policy rule and analyze how it changed with the implementation of inflation targeting. Both approaches indicate that the market perceives a larger response to inflation in the monetary policy reaction function since the adoption of inflation targeting. This evidence suggests that the market viewed the shift to inflation targeting as a credible commitment by the Reserve Bank of India.
    Keywords: Macroeconomic forecasts, Financial markets, Credibility, Inflation Targeting, Inflation expectations
    JEL: E44 E47 E52 E58
    Date: 2022–10
  2. By: Roben Kloosterman; Dennis Bonam; Koen van der Veer
    Abstract: We estimate the effects of monetary policy shocks across contractionary and expansion- ary fiscal regimes in the euro area. An expansionary monetary policy shock leads to an increase in inflation and output growth, but only when it occurs in the expansionary fiscal regime. In a contractionary fiscal regime, the responses to a monetary easing are insignificant or even negative. Similarly, a monetary tightening only reduces inflation and output in the contractionary fiscal regime. These results are robust to several alternative model specifications and underline the importance of the fiscal stance for the monetary transmission mechanism.
    Keywords: regime-dependent effects of monetary policy; fiscal policy regimes, local projection methods
    JEL: E52 E62 E63
    Date: 2022–12
  3. By: Joana Sousa-Leite; Diana Correia; Cristina Coutinho; Carmen Camacho
    Abstract: This paper analyses the evolution dynamics of the Banco de Portugal balance sheet since the beginning of the Stage III of the EMU. Following the global financial crisis, the evolution of the Banco de Portugal balance sheet was initially driven by an increase in liabilities, namely in intra-Eurosystem liabilities related to TARGET and current accounts, reflecting the liquidity provided through monetary policy refinancing operations, which was either deposited in the central bank or transferred to euro area banks outside of Portugal. Since 2015, broader monetary policy decisions regarding the asset side of the balance sheet were designed to support economic growth and bring inflation back to the 2% target. Between 1999 and 2021, the Banco de Portugal balance sheet expansion was mostly driven by the asset purchase programmes and significant increases in central bank funding to banks and in intra-Eurosystem claims, the latter aggregate being explained by the inflow of banknotes related to the tourism activity in Portugal.
    JEL: E41 E44 E51 E52 E58
    Date: 2022
  4. By: Bernd Hayo (Philipps-Universitaet Marburg); Pierre-Guillaume Méon (Université libre de Bruxelles (U.L.B.))
    Abstract: Using a randomized controlled trial in a 2018 survey of a representative sample of the German population, we study whether providing information about the European Central Bank’s (ECB) inflation record in comparison to its inflation target affects people’s trust in the central bank. In the treatment, administered to half of the roughly 2000 respondents, a graph of the annual inflation rate in the euro area from 1999 to 2017 and the ECB’s 2% inflation target was shown to respondents. We find that the treatment has, on average, no significant effect on the level of trust respondents have in the ECB or on the distribution of survey answers. However, the treatment increases trust in the ECB among respondents who report no preference for any political party. Within this group, the effect is strongest among those who reported biased beliefs about the inflation rate but knew that price stability is the ECB’s objective and those who reported a low level of subjective and objective knowledge about monetary policy.
    Keywords: Central bank trust, European Central Bank, Central bank communication, Monetary policy, Germany, Household survey, RCT.
    JEL: E52 E58 Z1
    Date: 2022
  5. By: David M. Arseneau; Alejandro Drexler; Mitsuhiro Osada
    Abstract: This paper applies natural language processing to a large corpus of central bank speeches to identify those related to climate change. We analyze these speeches to better understand how central banks communicate about climate change. By all accounts, communication about climate change has accelerated sharply in recent years. The breadth of topics covered is wide, ranging from the impact of climate change on the economy to financial innovation, sustainable finance, monetary policy, and the central bank mandate. Financial stability concerns are touched upon, but macroprudential policy is rarely mentioned. Direct central bank action largely revolves around identifying and monitoring potential risks to the financial system. Finally, we find that central banks tend to use speculative language more frequently when talking about climate change relative to other topics.
    Keywords: Financial stability; Transparency; Central bank mandate; Green finance; Natural language processing; Central bank speeches
    JEL: E58 E61 Q54
    Date: 2022–05–27
  6. By: Giuseppe Ciccarone (Sapienza University of Rome); Francesco Giuli
    Abstract: Monetary policy can be responsible for asset price bubble episodes under specific monetary- financial conditions. We evaluate the effects of monetary policy shocks on asset price bubbles by estimating a Markov-switching Bayesian Vector Autoregression on US 1960-2019 data, where states fortheinteractionofassetpricesandmonetaryoutcomesaffecttherealizationofbubbles. WerationalizetheevidencewithaMarkov-switchingOverlappingGenerationsmodel,generating a bubblyandano-bubblyeconomywitharegime-specific monetary policy. By matching the empirical impulse responses,we find that the monetary-financial states of the economy can generate amplifiedinstabilityunderhighequitypremiaandassetpricebubble. In abubbly economy, a monetary tightening is ineffective in reducing stockprices, increasing real rates and inflating bubbles. Expectations to switch to a nobubbly scenario produce stabilizing effects.
    Keywords: monetary policy, assetpricebubble, Markov-switching, monetary-financial inter-action, policy credibility
    JEL: C32 D50 E42 E52 E65 G10
    Date: 2022–07
  7. By: Diaf, Sami
    Abstract: This work analyzes central banking information flow and proposes a novel strategy to estimate individual-level policy preferences, toward monetary policy objectives, by quantifying the narratives within its different communication channels for the case of the United States. While most of the literature related to central banking corpora used unsupervised topic models to quantify narrative signals, we propose a semi-supervised, keyword-based approach built upon groups of words linked to monetary objectives in order to have a coherent, dynamic estimation of topic prevalence, whose scores could determine individual policy preferences for inflation and unemployment rates. The corpus of Federal Reserve governors' speeches (1996-2020) identified three non-keyword topics matching financial stability, financial innovation and the banking regulation, whose dynamics follow the Chairman's tenure, considered as informative policy signals toward financial markets. Governors' preferences toward monetary policy objectives were better estimated using FOMC transcripts (1994-2016) whose narratives strictly match monetary policy practices and help ranking members on a partisanship scale, with a spectrum linked to the members' educational background. Though released with a five-year delay, the FOMC transcripts, as a proxy of internal communicaton, offer a better picture of the partisanship prevailing within monetary policy committees in the United States, that cannot be learned from Governors' addresses, but remain unable to capture non-conventional, but not less important topics.
    Date: 2022
  8. By: Michał Brzoza-Brzezina (Narodowy Bank Polski); Paweł Galiński (Narodowy Bank Polski); Krzysztof Makarski (Narodowy Bank Polski)
    Abstract: We study the working of monetary policy in an estimated two-country model with behavioral expectations(BE). We first show that the data favors this setting compared with the standard rational expectations assumption. Then we document several findings related to monetary policy in the open-economy framework. First, under BE the Taylor principle depends on the size of the economy - determinacy regions are larger for the small country. Second, both in the small and large economies, monetary policy is less powerful when agents are behavioral. Third, the sacrifice ratio faced by the central bank increases with agents becoming more behavioral (more in the small country). Fourth, BE help to partly solve the puzzles of excess foreign currency returns (UIP puzzle) and of international monetary independence.
    Keywords: behavioral agents, monetary policy, open-economy model
    JEL: E30 E43 E52 E70
    Date: 2022
  9. By: : Annicciarico, Barbara (Universita degli Studi di Roma Tor Vergata); : Di Dio, Fabio (European Commission); : Dilusio, Francesca (Bank of England)
    Abstract: This paper studies the role of expectations and monetary policy on the economy’s response to climate actions. We show that in a stochastic environment and without the standard assumption of perfect rationality of agents, there is more uncertainty regarding the path and the economic impact of a climate policy, with a potential threat to the ability of central banks to maintain price stability. Market beliefs and behavioural agents increase the trade-offs inherent to the chosen mitigation tool, with a carbon tax entailing more emissions uncertainty than in a rational expectations model and a cap-and-trade scheme implying a more pronounced pressure on allowances prices and inflation. The impact on price stability is worsened by delays in the implementation of stringent climate policies, by the lack of confidence in the ability of central banks to keep inflation under control, and by the adoption of monetary rules tied to expectations rather than current macroeconomic conditions. Central banks can implement successful stabilization policies that reduce the uncertainty surrounding the impact of climate actions and support the greening process while staying within their mandate.
    Keywords: Monetary policy; climate policy; expectations; inflation; market sentiments; business cycle
    JEL: D58 Q50 E32 E71
    Date: 2022–09
  10. By: Tom Hudepohl
    Abstract: This paper examines portfolio rebalancing at the security level during the ECB’s Asset Purchase Programme (APP). Search for yield via portfolio rebalancing is one of the possible channels through which Quantitative Easing (QE) may affect real economic activity. This paper shows that during QE, European investors significantly increased their relative holdings of debt denominated in emerging market currencies. In addition, a significant rebalancing has taken place within the euro area, as investors increased their relative holdings of debt issued by vulnerable European countries. This increase has been driven by investors located in peripheral countries, while investors in other countries were net sellers. QE thus has a heterogeneous impact on security holdings across euro area countries and sectors. These findings are relevant for policymakers to assess the (side-)effects of QE and the potential impact of monetary tightening.
    Keywords: Portfolio rebalancing; Quantitative Easing, Asset purchases; Unconventional monetary policy;Heterogeneity
    JEL: E52 E58 G10 G11 G15
    Date: 2022–12
  11. By: Alessandro Maravalle; Alberto González Pandiella
    Abstract: This paper estimates the pass-through of monetary policy rates into five lending rates in Mexico using auto regressive distributed lags models (ARDLs) and taking into account several financial market characteristics. Results show that the pass-through of monetary policy into the average short-term lending rate is full and fast, as it takes around 3 months to be fully transmitted. However, the pass-through is heterogeneous across credit markets, being especially weak in the mortgage and automotive credit markets. A higher market concentration in the credit sector is associated with a higher level of the corresponding lending rate. Other financial market characteristics, such as the measure of bank profitability and the ratio of capital to bank assets, are also found to affect the long-run level of one or more lending rates. Higher competition in credit markets and reducing asymmetric information would improve the transmission of monetary policy and contribute to reduce the level of lending rates.
    Keywords: bank lending rates, interest rate pass-through, monetary policy, transmission mechanism
    JEL: E4 E52 G21
    Date: 2022–12–08
  12. By: Hiroyuki Kubota (University of California, Los Angeles (E-mail:; Ichiro Muto (Associate Director-General, Institute for Monetary and Economic Studies (currently, General Manager, Aomori Branch), Bank of Japan (E-mail:; Mototsugu Shintani (The University of Tokyo (E-mail:
    Abstract: To understand the role of monetary policy in determining the labor force participation rate, we present empirical evidence for Japan and the US. The data suggests that labor force participation declines in Japan but increases in the US in response to a monetary tightening. To inspect the mechanism, we develop and estimate a New Keynesian model of endogenous labor force participation decisions incorporating wage rigidity. We find that the opposite response of labor force participation can be attributed to a difference in the degree of wage rigidity. Counterfactual analysis based on the estimated models shows that the large-scale monetary easing in recent years helped boost the labor force participation rate in Japan, while its effect was almost neutral in the US.
    Keywords: Labor force participation, Monetary policy, Unemployment, Wage rigidity
    JEL: E24 E32 E52 E58
    Date: 2022–11
  13. By: Hidekatsu Kamio (Hidekatsu Kamio: Deputy Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Yasuko Morita (Yasuko Morita: Formerly Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan)
    Abstract: In the latter half of the 1960s, Japan's trade balance broke away from its traditional pattern of worsening during economic upturns. The decision to tighten monetary policy, implemented in September 1969, was made in the midst of a continuing balance of payments surplus, unlike previous tightenings aimed at improving the positions in the balance of payments. Previous studies have assessed that this tightening further increased the balance of payments surplus and led to the Nixon Shock. They have pointed out the delay in policy makers' recognition of the fundamental changes in balance of payments trends and the need to change the exchange rate. Focusing on the perspective of the Bank of Japan ( hereafter BOJ) before and after this monetary tightening, this paper examines how the BOJ came to recognize trends in the balance of payments and the policy challenges of being a "surplus country," based on contemporaneous sources. In mid-1969, Japan was "for the first time in her history, experiencing the problems of surplus countries." During this period, the policy of restraining the growth of foreign exchange reserves had begun. However, foreign countries demanded more aggressive removal of import restrictions and the liberalization of capital exports on the premise that surpluses would be established. Domestically, this was perceived as the pursuit of responsibility of a surplus country. The BOJ tightened monetary policy with this responsibility in mind. At that time, the core of the responsibility of surplus countries for Japan was " getting out of the restrictive system," especially import liberalization and capital export liberalization. In this sense, the BOJ's awareness of the policy response at this point was not necessarily out of step with international standards.
    Keywords: Balance of payment, Monetary policy, Responsibility of a surplus country
    JEL: F68 N45
    Date: 2022–11
  14. By: Fernando, Antonette
    Abstract: This paper examines the interest rate channel of monetary policy transmission. It assesses the impact of banking structural factors on commercial bank pricing decisions and their pass-through in Sri Lanka. The empirical analysis uses aggregate monthly interest rates data from January 2008 to December 2018, a total of 132 observations. The findings suggest that the interest rate pass-through is significant overall, but incomplete. The credit quality, operational efficiency and excess liquidity play essential roles in explaining the adjustments of the bank lending and deposit rates. Non-performing loans increase the lending rate, and this result is robust to different combinations of the control variables. This suggests that banks with higher proportions of non-performing loans attempt to pass their credit losses on to customers. Further, bank inefficiency is passed on to customers in the form of lower deposit rates and excess liquidity in the banking system, both of which have a negative effect on the interest rate adjustments of both lending and deposit rates. A puzzling negative relationship is observed between the lending rate and operational inefficiency. The findings of this paper support the claim that banks in Sri Lanka take into consideration their structural factors as well as the monetary policy rates when setting the lending and deposit rates.
    Date: 2022–06–04
  15. By: Elena Sinelnikova-Myruleva (Russian Presidential Academy of National Economy and Public Administration); Grebenkina Alina (Russian Presidential Academy of National Economy and Public Administration); Makeeva Natalia (Russian Presidential Academy of National Economy and Public Administration)
    Abstract: The neutral interest rate is one of the basic components of a large number of macroeconomic and, in particular, monetary models. Central banks take estimates of the level of neutral interest rate into account when conducting monetary policy to determine its degree of rigidity / softness.
    Keywords: NEUTRAL PERCENTAGE RATE, camparative analysis
    Date: 2021–01
  16. By: Jae W. Sim
    Abstract: This paper builds a micro-founded general equilibrium model of hysteresis in which changing composition of firms with heterogeneous qualities in response to demand shocks alter the total factor productivity of the economy through a process of "creative destruction". Hysteresis fundamentally challenges existing consensus on stabilization policies: the complete stabilization of demand shocks becomes suboptimal as demand creates its own supply; fiscal multiplier can be substantially larger than 1; an opportunistic monetary policymaker, who adopts a lenient policy reaction to positive demand shocks, but provides decisive monetary stimulus in response to negative demand shocks, can bring large welfare gains.
    Keywords: Demand shocks; Monetary policy; Hysteresis
    JEL: E31 E32 E52 E58
    Date: 2022–11–29
  17. By: Ahnert, Toni; Anand, Kartik; König, Philipp Johann
    Abstract: How do real interest rates affect financial fragility? We study this issue in a model in which bank borrowing is subject to rollover risk. A bank’s optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by bank creditors. Changes in the interest rate affect the price and amount of borrowing, both of which influence bank fragility in opposite directions. Thus, the marginal impact of changes to the interest rate on bank fragility depends on the level of the interest rate. Finally, we derive testable implications that may guide future empirical work. JEL Classification: G01, G21, G28
    Keywords: bank borrowing, fragility, funding liquidity risk channel, global games, real interest rates, rollover risk
    Date: 2022–12
  18. By: Carli, Francesco; Uras, Burak (Tilburg University, Center For Economic Research)
    Keywords: E-money; M-Pesa; Risk-sharing; welfare; Monetary Policy
    Date: 2022
  19. By: Sharon Lai (Reserve Bank of Australia); Kevin Lane (Reserve Bank of Australia); Laura Nunn (Reserve Bank of Australia)
    Abstract: The Reserve Bank of Australia's Term Funding Facility (TFF) was announced in March 2020 as part of a package of policy measures to support the Australian economy. It achieved a key objective of providing banks with three-year low-cost funding and was available for drawdown until 30 June 2021. This paper examines the effectiveness of the TFF in increasing the supply of credit to businesses, which was another one of the objectives of the program. Using bank-level data and a difference-in-differences approach, we find no statistically significant evidence that the TFF increased credit supply to businesses. However, our confidence intervals are wide and there are significant identification challenges involved in disentangling the effects of the TFF from the effects of pandemic-related disruptions and other policy interventions on credit supply and demand. Nonetheless, the TFF provided an assured source of funding at a time of considerable stress in the financial system and lowered banks' funding costs, and any effects on business lending via these channels may not be fully reflected in our results.
    Keywords: term funding; banks; business lending; event study
    JEL: E52 E58 G20
    Date: 2022–12
  20. By: Yu-Ting Chiang; Piotr Zoch
    Abstract: We study how the financial sector affects fiscal and monetary policy in heterogeneous agent New Keynesian (HANK) economies. We show that, in a large class of models of financial intermediation, relevant features of the financial sector are summarized by the elasticities of a liquid asset supply function. The financial sector in these models affects aggregate responses only through its ability to perform liquidity transformation (i.e., issue liquid assets to finance illiquid capital). If liquid asset supply responds inelastically to returns on capital (low cross-price elasticities), disturbances in the liquid asset market generate large responses in aggregate demand through adjustments in capital prices. Assumptions about the financial sector are not innocuous quantitatively. In commonly used setups that imply different liquid asset supply elasticities, aggregate output responses to an unexpected deficit-financed government transfer can differ by a factor of three.
    Keywords: financial frictions; liquidity; monetary policy; fiscal policy; Heterogeneous-agent New Keynesian (HANK) model
    JEL: E2 E6 H3 H6
    Date: 2022–11–28
  21. By: Nissinen, Juuso; Sihvonen, Markus
    Abstract: A convenience yield represents a difference between yield on a safe bond and yield on a synthetic safe bond, constructed by combining a risky bond with a CDS contract. We explain the shapes of eurozone sovereign convenience curves using a model in which arbitrageurs face higher funding costs on bonds with credit risk and bond demand shocks induce funding risk. We provide novel causal evidence for our mechanism using variation in funding costs generated through exogenous haircut category changes. Changes in convenience yields represent a key transmission channel of unconventional monetary policy to bond yields.
    Keywords: Sovereign bond convenience yields,money markets,asset pricing with frictions,monetary policy
    JEL: G12 G15
    Date: 2022

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