nep-cba New Economics Papers
on Central Banking
Issue of 2023‒01‒09
28 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The Conditional Path of Central Bank Asset Purchases By Christophe Blot; Caroline Bozou; Jérôme Creel; Paul Hubert
  2. Optimal Robust Monetary Policy in a Small Open Economy By André Marine Charlotte; Medina Espidio Sebastián
  3. Monetary Policy, Inflation, and Crises: New Evidence from History and Administrative Data By Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Björn Richter
  4. Central Bank Digital Currencies, an Old Tale With a New Chapter By Michael D. Bordo; William Roberds
  5. A Theory of Dynamic Inflation Targets By Clayton, Christopher; Schaab, Andreas
  6. Delayed Overshooting Puzzle: Does Systematic Monetary Policy Matter? By Efrem Castelnuovo; Giovanni Pellegrino; Giacomo Ranzato
  7. Understanding Post-COVID Inflation Dynamics By Martin Harding; Jesper Lindé; Mathias Trabandt
  8. Quantifying the Costs and Benefits of Quantitative Easing By Andrew T. Levin; Brian L. Lu; William R. Nelson
  9. A Fiscal Theory of Trend Inflation By Francesco Bianchi; Renato Faccini; Leonardo Melosi
  10. Monetary Policy, Credit Constraints and SME Employment By Julien Champagne; Émilien Gouin-Bonenfant
  11. The macroeconomic implications of financialisation on the wealth distribution By Meijers, Huub; Muysken, Joan
  12. Bank bond holdings and bail-in regulatory changes: evidence from euro area security registers By Altavilla, Carlo; Fernandes, Cecilia Melo; Ongena, Steven; Scopelliti, Alessandro
  13. Monetary Communication Rules By Gáti, Laura; Handlan, Amy
  14. Does monetary policy impact CO2 Emissions? A GVAR analysis By Luccas Assis Attilio; Joao Ricardo Faria, Mauro Rodrigues
  15. Inflation Risks in Israel By Michael Gurkov; Osnat Zohar
  16. (Un)Conventional Monetary and Fiscal Policy By Jing Cynthia Wu; Yinxi Xie
  17. Is the Slope of the Euro Area Phillips Curve Steeper than It Seems? Heterogeneity and Identification By Johannes Schuffels; Clemens Kool; Lenard Lieb; Tom van Veen
  18. External Instrument SVAR Analysis for Noninvertible Shocks By Forni, Mario; Gambetti, Luca; Ricco, Giovanni
  19. Leaning against the global financial cycle By Ferrero, Andrea; Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
  20. From Central Counter to Local Living: Pass-Through of Monetary Policy to Mortgage Lending Rates in Districts By Jiri Gregor; Jan Janku; Martin Melecky
  21. Emotion in Euro Area Monetary Policy Communication and Bond Yields: The Draghi Era By Dimitrios Kanelis; Pierre L. Siklos
  22. Optimalinterestrategapsforflexibleinflationtargeting By Eric Schaling; Kgotso Morema
  23. PUMA cooperation between the Bank of Italy and the intermediaries for the production of statistical, supervisory and resolution reporting By Massimo Casa; Marco Carnevali; Silvia Giacinti; Roberto Sabatini
  24. An Exchange Rate History of the United Kingdom, 1945–1992 By Naef, Alain
  25. DSGE Nash: solving Nash Games in Macro Models With an application to optimal monetary policy under monopolistic commodity pricing By Massimo Ferrari Minesso; Maria Sole Pagliari
  26. Monetary Uncertainty as a Determinant of the Response of Stock Market to Macroeconomic News By Mykola Pinchuk
  27. Preferred Habitats and Timing in the World’s Safe Asset By Alexandra M. Tabova; Francis E. Warnock
  28. Effectiveness of Capital Controls: Gates versus Walls By Yang Zhou; Shigeto Kitano

  1. By: Christophe Blot; Caroline Bozou; Jérôme Creel; Paul Hubert
    Abstract: We investigate the financial market effects of central bank asset purchases by exploiting the unique setting provided by ECB’s PSPP and PEPP policies. These programs consist in purchases of identical assets. The PSPP aimed to reduce deflationary risks, while the PEPP was announced to alleviate sovereign risks. We assess the effects of both policies on these two intermediate objectives. We find that the PSPP positively affects inflation swaps whereas the PEPP negatively impacts sovereign spreads. We explore the reasons for these differentiated effects. Making the rationale of a policy clear and credible influences its transmission to asset prices.
    Keywords: Monetary Policy, Asset Prices, Central Bank Communication, Central Bank Reaction Function, Intermediate Objectives
    JEL: G12 E52 E58
    Date: 2022
  2. By: André Marine Charlotte; Medina Espidio Sebastián
    Abstract: We study an optimal robust monetary policy for a small open economy. The robust control approach assumes that economic agents cannot assign probabilities to a set of plausible models and rather focuses on the worst possible misspecification from a benchmark model. Our findings suggest that, first, conducting a global robust optimal monetary policy is limited as deviations from the benchmark model lead to multiple equilibria. Second, when the central bank considers uncertainty only in the IS Curve or in the UIP, the space of unique solutions is expanded. In fact, the central bank reacts more aggressively to demand and real exchange rate shocks when it is robust to misspecifications in the IS curve only. Finally, our results suggest that the global robust optimal monetary policy is limited due to inflation persistency and the low exchange rate pass-through. The importance of anchoring inflation expectations is highlighted.
    Keywords: Robust control;optimal monetary policy;model uncertainty;small open economy
    JEL: C62 D83 D84 E52 E58
    Date: 2022–12
  3. By: Gabriel Jiménez; Dmitry Kuvshinov; José-Luis Peydró; Björn Richter
    Abstract: We show that U-shaped monetary policy rate dynamics are strongly associated with financial crisis risk. This finding holds both in long-run cross-country macro data covering many crises and monetary policy cycles, and in detailed micro, administrative data covering the post-1995 period in Spain. In the macro data, we find that pre-crisis monetary policy follows a U shape, with policy rates first cut and then increased over the 7 years before the onset of the crisis. This U shape holds across a wide variety of crisis definitions, short-term rate measures, and becomes stronger after World War 2. Differently, even though inflation and real rates show some of these dynamics before a crisis, these results are much less robust. The patterns are also much weaker when it comes to long-term rates and non-crisis recessions. We show that monetary policy rate hikes (both raw, and instrumented using the trilemma IV of Jordà et al, 2020) increase crisis risk, but, different to previous studies, we show that this effect is driven by rate hikes which were preceded by a series of cuts. To understand why U-shaped monetary policy is linked to crises, we show that the initial loosening of policy is followed by high growth in credit and asset prices, putting the economy into a vulnerable financial "red zone''. After the subsequent monetary tightening these vulnerabilities materialize, leading to larger-than-usual declines in credit, asset prices, and real activity. To dig into the underlying mechanisms, we use administrative data on the universe of bank loans and defaults during the 1990s and 2000s boom-bust cycles in Spain. Consistently, we find that U-shaped monetary policy increases the probability of ex-post loan defaults, but effects are much stronger for ex-ante riskier firms and for banks with weaker balance sheets. Overall, our paper shows that monetary policy dynamics have important implications for financial stability.
    Keywords: monetary policy, financial stability, financial crises, credit, asset prices, banks, macro-finance
    JEL: E51 E52 E44 G01 G21 G12
    Date: 2022–12
  4. By: Michael D. Bordo; William Roberds
    Abstract: We consider the debut of a new monetary instrument, central bank digital currencies (CBDCs). Drawing on examples from monetary history, we argue that a successful monetary transformation must combine microeconomic efficiency with macroeconomic credibility. A paradoxical feature of these transformations is that success in the micro dimension can encourage macro failure. Overcoming this paradox may require politically uncomfortable compromises. We propose that such compromises will be necessary for the success of CBDCs.
    JEL: E42 E58 N10
    Date: 2022–12
  5. By: Clayton, Christopher; Schaab, Andreas
    Abstract: Should central banks’ inflation targets remain set in stone? We study a dynamic mechanism design problem between a government (principal) and a central bank (agent). The central bank has persistent private information about structural shocks. Firms learn the state from the central bank’s reports and form inflation expectations accordingly. A dynamic inflation target implements the full-information commitment allocation: the central bank is delegated the authority to adjust its own target as long as it does so one period in advance. Both the level and flexibility of the dynamic inflation target respond to persistent shocks. Target flexibility is set to correct the time consistency problem, while the target level provides the correct incentives for target adjustments. An informational divine coincidence arises: the central bank’s incentives to misreport its persistent private information to manipulate firm and government beliefs exactly offset each other under the mechanism. We apply our theory to study lower bound spells, a declining natural interest rate, and a flattening Phillips curve. We leverage our framework to study longer-horizon time consistency problems and speak to practical policy questions of inflation target design.
    Keywords: inflation targeting; persistent private information; dynamic mechanism design; monetary policy; time consistency; dynamic inflation targets; informational divine coincidence
    JEL: E52 D82
    Date: 2022–12–12
  6. By: Efrem Castelnuovo (University of Padova, CESifo, and CAMA); Giovanni Pellegrino (Aarhus University); Giacomo Ranzato (University of Padova)
    Abstract: We propose a novel identification strategy based on a combination of sign, zero, and policy coefficient restrictions to identify the exchange rate response to a US monetary policy shock. Our strategy crucially hinges upon imposing a sign on the policy response to exchange rate fluctuations, i.e., monetary policy tightens after a depreciation of the US dollar. We support this restriction with narrative evidence as well as empirical evidence from the extant literature. We find an unexpected increase in the policy rate to generate an immediate appreciation followed by a persistent depreciation. This evidence is consistent with the overshooting hypothesis. Importantly, we show that our identification strategy implies robust impulse responses across samples characterized by different monetary policy conducts. Differently, restrictions imposed only on impulse responses return evidence that is subsample specific and associate Volcker’s regime with a delayed overshooting.
    Keywords: delayed overshooting, vector autoregressions, monetary policy rule, exchange rate dynamics, Volcker policy regime
    JEL: C32 E44 E52 F31 F41
    Date: 2022–06
  7. By: Martin Harding; Jesper Lindé; Mathias Trabandt
    Abstract: We propose a macroeconomic model with a nonlinear Phillips curve that has a flat slope when inflationary pressures are subdued and steepens when inflationary pressures are elevated. The nonlinear Phillips curve in our model arises due to a quasi-kinked demand schedule for goods produced by firms. Our model can jointly account for the modest decline in inflation during the Great Recession and the surge in inflation post-COVID-19. Because our model implies a stronger transmission of shocks when inflation is high, it generates conditional heteroskedasticity in inflation and inflation risk. Hence, our model can generate more sizable inflation surges due to cost-push and demand shocks than a standard linearized model. Finally, our model implies that central banks face a more severe trade-off between inflation and output stabilization when inflation is high.
    Keywords: Business fluctuations and cycles; Central bank research; Coronavirus disease (COVID-19); Economic models; Inflation and prices; Inflation: costs and benefits; Monetary policy; Monetary policy implementation
    JEL: E37 E44 E52
    Date: 2022–12
  8. By: Andrew T. Levin; Brian L. Lu; William R. Nelson
    Abstract: We conduct a systematic analysis of the costs and benefits of large-scale securities purchases, using the Federal Reserve’s QE4 program as a concrete example. This program was initiated at the onset of the pandemic in March 2020 and continued for two years, leading to a doubling of the Fed’s securities holdings to about $8.5 trillion as of March 2022. QE4 was initially aimed at mitigating strains in markets for Treasuries and agency mortgage-backed securities but was subsequently aimed more broadly at supporting market functioning and providing monetary stimulus. Nonetheless, QE4 did not have any notable benefits in reducing term premiums. Moreover, since the securities purchases were financed by expanding the Fed’s short-term liabilities, QE4 amplified the interest rate risk associated with the publicly-held debt of the consolidated federal government. Our simulation analysis indicates that QE4 is likely to reduce the Federal Reserve’s remittances to the U.S. Treasury by about $760 billion over the next ten years.
    JEL: E42 E52 E58 E63
    Date: 2022–12
  9. By: Francesco Bianchi; Renato Faccini; Leonardo Melosi
    Abstract: We develop a new class of general equilibrium models with partially unfunded debt to propose a fiscal theory of trend inflation. In response to business cycle shocks, the monetary authority controls inflation, and the fiscal authority stabilizes debt. However, the central bank accommodates unfunded fiscal shocks, causing persistent movements in inflation, output, and real interest rates. In an estimated quantitative model, fiscal trend inflation accounts for the bulk of inflation dynamics. As external validation, we show that the model predicts the post-pandemic increase in inflation. Unfunded fiscal shocks sustain the recovery and cause an increase in trend inflation that counteracts deflationary non-policy shocks.
    JEL: E30 E50 E62
    Date: 2022–12
  10. By: Julien Champagne; Émilien Gouin-Bonenfant
    Abstract: Do financial constraints amplify or dampen the transmission of monetary policy to the real economy? To answer this question, we propose a simple empirical strategy that combines (i) firm-level employment and balance sheet data, (ii) identified monetary policy shocks and (iii) survey data on financing activities. The key novelty of our approach is a new proxy for the likelihood of being credit constrained, which is constructed using survey data on realized outcomes of financing requests. Leveraging cross-sectional heterogeneity in the proxy and the sensitivity of employment to monetary policy shocks, we find that credit constraints amplify the transmission of monetary policy. In the aggregate, credit constraints account for roughly a third of the employment response. Our findings are consistent with a strong financial accelerator, whereby accommodative monetary policy has the indirect effect of improving the ability of firms to obtain credit.
    Keywords: Credit and credit aggregates; Econometric and statistical methods; Firm dynamics; Labour markets; Monetary policy
    JEL: E2 E3 E4 E43 E5 E52 G3
    Date: 2022–12
  11. By: Meijers, Huub (RS: GSBE MORSE, RS: GSBE other - not theme-related research, Macro, International & Labour Economics, RS: UNU-MERIT Theme 1); Muysken, Joan (RS: GSBE other - not theme-related research, Macro, International & Labour Economics, RS: GSBE - MACIMIDE)
    Abstract: Deregulation and globalization since the early 1990s caused a boom in the current global financial cycle, which cumulated in the financial crisis in 2007. Austerity fiscal policies after the financial crisis induced Central Banks all over the world to intervene by stimulating ‘unconventional’ monetary policies. In earlier papers, we developed several stock flow consistent models for an open Euro Area economy to investigate various aspects of the impact of these developments, with special attention to the role of the Central Bank with low interest policy and quantitative easing. We analysed the influence on mortgage growth and house prices, the growing amount of funded pension savings held abroad and the destabilising impact of low interest rates on pension claims, and the phenomenon that firms more and more use their savings for share buy-backs and (speculative) investments abroad – see Muysken and Meijers (2022) for an overview. However, we did not pay explicit attention to the distributional consequences these developments might have. The social and economic impact of the COVID crisis since early 2020 stimulated the awareness in the literature and the policy debate that the increase in house prices and asset prices invigorated wealth inequality. These developments create social tensions and therefore can have severe economic consequences. In the present paper, we bring all our earlier models together in one stock-flow consistent model, which we estimate and simulate for the Netherlands. The model is based on a stock-flow consistent set of macroeconomic data, which we collected for the Netherlands. In line with our previous research we argue that these phenomena can be captured very well by a stock flow consistent model in the tradition of Godley and Lavoie, which we estimate and simulate for the Netherlands. From simulations with our model we show that both housing price bubbles and asset price bubbles occur due to low interest rates and riskier bank behaviour, induced by a central bank policy of Quantitative Easing. The intended aim of this central bank policy – enhancing economic growth – is not reached, because the monetary stimulus is absorbed by the financial sector. Moreover, a presumably unintended consequence of Quantitative Easing in the Netherlands is an increase in wealth inequality.
    JEL: E44 B50 E60 G21 G32 F40
    Date: 2022–10–26
  12. By: Altavilla, Carlo; Fernandes, Cecilia Melo; Ongena, Steven; Scopelliti, Alessandro
    Abstract: We assess the impact on bank bond holdings of regulatory changes in the requirements for bail-inable liabilities designed to facilitate an orderly resolution process, while reducing taxpayers-funded bailouts. Analyzing confidential data on securities holdings by banks, we document that the introduction of the minimum requirements for eligible liabilities (MREL) induced banks to increase their holdings of eligible bank bonds, especially if issued by other banks. The requirement for own funds and eligible liabilities (TLAC) instead raised the incentives for non-issuing banks to invest in eligible subordinated debt issued by global systemically important banks. Finally, we find evidence of increased within-country bank interconnectedness and concentration risks in the banking sector that might potentially introduce frictions in bail-in implementations. JEL Classification: G01, G21, G28
    Keywords: bail-inable debt, bank bonds, MREL, regulatory changes, TLAC
    Date: 2022–12
  13. By: Gáti, Laura; Handlan, Amy
    Abstract: Is there a systematic mapping between the Federal Reserve’s expectations of macro variables and the words it uses to talk about the economy? We propose a simple framework that allows us to estimate communication rules in the United States based on text analysis with regularized regressions. We find strong evidence for systematic communication rules that vary over time, with changes in the rule often being associated with changes in the economic environment or with the introduction of a new Fed chair. In the case of the fed funds rate, we also estimate the market’s perception of the Fed’s communication rule and use it to investigate how much of the disagreement between the market and the Fed come from disagreement about the communication rule. JEL Classification: E52, E58, C49
    Keywords: communication, expectations, monetary policy, NLP, text analysis
    Date: 2022–12
  14. By: Luccas Assis Attilio; Joao Ricardo Faria, Mauro Rodrigues
    Abstract: This paper studies the relationship between monetary policy and CO2 emissions. Our contribution is twofold: (i) we present a stylized dynamic AD-AS model with Global Value Chains (GVC) and carbon emissions to illustrate this relationship, (ii) we estimate the effect of monetary policy on emissions using the GVAR methodology, which explicitly considers the interconnection between regions instead of treating them as isolated economies. We focus on CO2 emissions in four regions: U.S., U.K., Japan and the Eurozone, but we use data from 8 other countries to characterize the international economy. Our results show that a monetary contraction in a country is associated with lower domestic emissions both in the short- and the long-run. Although we do not find evidence of cross-region effects concerning monetary policy, variance decomposition suggests that external factors are relevant to understanding each region's fluctuations in emissions.
    Keywords: Pollution; monetary policy; international linkages
    JEL: E52 E43 Q50
    Date: 2022–12–13
  15. By: Michael Gurkov (Bank of Israel); Osnat Zohar (Bank of Israel)
    Abstract: We examine how inflation risks in Israel evolved over time. We find that until 2013, inflation uncertainty was stable, and risks were moderately skewed downwards. However, since 2014, uncertainty decreased, and downside risks to inflation became much more dominant. The model attributes these developments to the decline in the inflation environment, as it is captured by realized inflation and long-term expectations, and to changes in oil prices. However, we cannot rule out that the monetary rate approaching the effective lower bound also contributed to these changes.
    Keywords: inflation at risk, density forecasts, quantile regressions, effective lower bound.
    JEL: E31 E37 E58
    Date: 2022–12
  16. By: Jing Cynthia Wu; Yinxi Xie
    Abstract: We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not. Ricardian equivalence breaks: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments, the policy rate together with QE or fiscal transfers, can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion.
    JEL: E5 E62 E63
    Date: 2022–12
  17. By: Johannes Schuffels; Clemens Kool; Lenard Lieb; Tom van Veen
    Abstract: Heterogeneity in Phillips Curve slopes among members of a monetary union can lead to downward biases to estimates of the union-wide slope in reduced form regressions. The intuition is that in a monetary union with heterogeneous regional Phillips Curve slopes, the central bank, aiming at stabilizing demand shocks, will react stronger to shocks in regions with steep slopes compared to shocks in regions with flat slopes. Using a simple New-Keynesian model of a monetary union that omitting controls for this heterogeneity, we show that reduced form estimates of the union-wide slope suffer from a substantial bias towards zero. Empirically, we show that controlling for slope heterogeneity in Euro Area data increases reduced form estimates of the slope in the period since 2009.
    Keywords: Phillips curve, heterogeneity, monetary meeting
    JEL: E24 E31 E58
    Date: 2022
  18. By: Forni, Mario (University of Modena and Reggio Emilia, CEPR and RECent); Gambetti, Luca (University of Barcelona, BSE, University of Turin & CCA); Ricco, Giovanni (University of Warwick, OFCE-SciencesPo, and CEPR)
    Abstract: We propose a novel external-instrument SVAR procedure to identify and estimate the impulse response functions, regardless of the shock being invertible or recoverable. When the shock is recoverable, we also show how to estimate the unit variance shock and the ‘absolute’ response functions. When the shock is invertible, the method collapses to the standard proxy-SVAR procedure. We show how to test for recoverability and invertibility. We apply our techniques to a monetary policy VAR. It turns out that, using standard specifications, the monetary policy shock is not invertible, but is recoverable. When using our procedure, results are plausible even in a parsimonious specification, not including financial variables. Monetary policy has significant and sizeable effects on prices. JEL Codes: C32 ; E32.
    Keywords: Proxy-SVAR ; SVAR-IV ; Impulse response functions ; Variance Decomposition ; Historical Decomposition ; Monetary Policy Shock
    Date: 2022
  19. By: Ferrero, Andrea; Habib, Maurizio Michael; Stracca, Livio; Venditti, Fabrizio
    Abstract: We study the role and the interaction of the quality of institutions and of counter-cyclical policies in leaning against the Global Financial Cycle (GFC) in Emerging Economies (EMEs). We show that heteroegeneity in institutional strength is a key determinant of the different effects of the GFC on EME domestic financial conditions. Institutional strength also shapes the response in terms of counter-cyclical policies to sudden changes in global financial conditions as well as the effectiveness of such policies. We illustrate in a simple stylised model that countries may in fact decide to undertake ex ante costly structural reforms that reduce their vulnerability to the GFC or react ex post to the financial s hock. However, we also find that the Covid-19 episode seems to deviate somewhat from the general pattern of EME reaction to shifts in the GFC. JEL Classification: F32, F38, E52, G28
    Keywords: capital controls, emerging markets, foreign-exchange intervention, Global Financial Cycle, institutions., macro-prudential policies, monetary policy
    Date: 2022–12
  20. By: Jiri Gregor; Jan Janku; Martin Melecky
    Abstract: This paper studies the pass-through from the market benchmark rate (proxied by the 5-year swap rate) to interest rates on all newly issued residential mortgage loans in the Czech Republic-an EU country. It tests for and explains the potential spatial heterogeneity in the pass-through to local mortgage rates highlighted by the literature for the US (Scharfstein & Sunderam, 2016). This spatial pass-through has not been studied in the context of the EU with its specific mortgage loan market structure. Using unique data on residential mortgages in the Czech Republic over 2016-2021, we show that the pass-through varies notably across districts and is significantly driven by local mortgage market concentration (bank market power) and the unemployment rate. We find a lower aggregate pass-through than previous studies (about 0.5). The most important pricing factors for residential mortgage loans appear to be the loan-to-value ratio, the net income of the borrower, the loan maturity, and the length of the fixed-rate period.
    Keywords: Banking market concentration, districts and regions, heterogeneity, interest rate pass-through, mortgage lending rates
    JEL: E43 G21 G51 R32
    Date: 2022–11
  21. By: Dimitrios Kanelis; Pierre L. Siklos
    Abstract: We combine modern methods from Speech Emotion Recognition and Natural Language Processing with high-frequency financial data to analyze how the vocal emotions and language of ECB President Mario Draghi affect the yield curve of major euro area economies. Vocal emotions significantly impact the yield curve. However, their impact varies in size and sign: positive signals raise German and French yields, while Italian yields react negatively, which is reflected in an increase in yield spreads. A by-product of our study is the construction and provision of a synchronized data set for voice and language.
    Keywords: Communication, ECB, Neural Networks, High-Frequency Data, Speech Emotion Recognition, Asset Prices
    JEL: E50 E58 G12 G14
    Date: 2022–12
  22. By: Eric Schaling; Kgotso Morema
    Abstract: Optimal interest rate gaps for flexible inflation targeting
    Date: 2022–12–13
  23. By: Massimo Casa (Bank of Italy); Marco Carnevali (Iccrea Banca); Silvia Giacinti (Bank of Italy); Roberto Sabatini (Bank of Italy)
    Abstract: The Bank of Italy collects a large amount of data — statistical, supervisory and resolution — from banks and other financial intermediaries in order to fulfil its institutional functions and meet the needs of other national and international authorities, in particular the ECB, the EBA and the SRB. Since the late 1980s, the Bank of Italy has been promoting intensive cooperation with the banking system through the PUMA procedure (Procedura Unificata Matrici Aziendali, Integrated Corporate Matrix Procedure), with the main objective of providing support to intermediaries in their reporting activities. The importance of this approach has been fully confirmed also in the context of the changes to the reporting framework that have been introduced over time at the European level. This paper aims to describe the characteristics of PUMA, discuss the main results achieved over the years, explain its role in inspiring similar initiatives undertaken at the European level, and investigate how this cooperation between the Bank of Italy and the financial system will remain central in the coming years. In an increasingly complex reporting system, PUMA has been instrumental in achieving an efficient balance between the need to support reporting agents, while pursuing objectives of data quality and cost containment, and maintaining the responsibilities for the production of the reporting flows with the reporting entities.
    Keywords: regulatory reporting, banking reporting, data model, data quality, information management, statistical production, information system, data dictionary, statistical integration
    JEL: C81 G21 M15
    Date: 2022–11
  24. By: Naef, Alain
    Abstract: How did the Bank of England manage sterling crises? This book steps into the shoes of the Bank's foreign exchange dealers to show how foreign exchange intervention worked in practice. The author reviews the history of sterling over half a century, using new archives, data and unseen photographs. This book traces the sterling crises from the end of the War to Black Wednesday in 1992. The resulting analysis shows that a secondary reserve currency such as sterling plays an important role in the stability of the international system. The author goes on to explore the lessons the Bretton Woods system on managed exchange rates has for contemporary policy makers in the context of Brexit. This is a crucial reference for scholars in economics and history examining past and current prospects for the international financial system.
    Date: 2022–12–02
  25. By: Massimo Ferrari Minesso; Maria Sole Pagliari
    Abstract: This paper presents DSGE Nash, a toolkit to solve for pure strategy Nash equilibria of global games in general equilibrium macroeconomic models. Although primarily designed to solve for Nash equilibria in DSGE models, the toolkit encompasses a broad range of options including solutions up to the third order, multiple players/strategies, the use of user-defined objective functions and the possibility of matching empirical moments and IRFs. When only one player is selected, the problem is re-framed as a standard optimal policy problem. We apply the algorithm to an open-economy model where a commodity importing country and a monopolistic commodity producer compete on the commodities market with barriers to entry. If the commodity price becomes relevant in production, the central bank in the commodity importing economy deviates from the first best policy to act strategically. In particular, the monetary authority tolerates relatively higher commodity price volatility to ease barriers to entry in commodity production and to limit the market power of the dominant exporter.
    Keywords: DSGE Model, Optimal Policies, Computational Economics
    JEL: C63 E32 E61
    Date: 2022
  26. By: Mykola Pinchuk
    Abstract: This paper examines the effect of macroeconomic news announcements (MNA) on the stock market. Stocks exhibit a strong positive response to major MNA: 1 standard deviation of MNA surprise causes 11-25 bps higher returns. This response is highly time-varying and is weaker during periods of high monetary uncertainty. I decompose this response into cash flow and risk-free rate channels. 1 standard deviation of good MNA surprise leads to plus 30 bps returns from the cash flow channel and minus 23 bps per 1\% of monetary uncertainty from the risk-free rate channel. Risk-free rate channel is time-varying and is stronger when monetary uncertainty is high. High levels of monetary uncertainty mask the strong positive response of stocks to MNA, which explains why past research failed to detect this relation.
    Date: 2022–12
  27. By: Alexandra M. Tabova; Francis E. Warnock
    Abstract: Investors' behavior in U.S. Treasuries - the world's safe asset - affects monetary policy transmission mechanisms, fiscal policy space, loan pricing, and international vulnerabilities. Yet it is not well understood for a simple reason: researchers, not having a clear picture of the Treasury portfolios of the largest participants in the market (foreigners and U.S. private investors), often infer behavior from aggregate statistics that can be less than pristine. We address this by building, from confidential security-level surveys, a comprehensive dataset on the size, flows, coupon payments, and returns of foreign and U.S. investors' Treasury portfolios. We find that investors do not view Treasuries as homogeneous but have preferred habitats that determine returns: U.S. private investors hold a long-duration Treasury portfolio that delivers high average annual returns with high volatility, while foreigners have shorter-duration lower-volatility portfolios. Further, when taking into account the timing and magnitude of purchases, the actual returns earned by foreigners are higher. We also find that while foreign governments have inelastic demand, private U.S. and foreign investors, behind the bulk of Treasury purchases over the past decade, have elastic demand, increasing purchases of Treasuries and the duration of their Treasury portfolios when non-U.S. sovereign yields are low or decrease relative to Treasury yields. Our results shed light on the question of who will buy Treasuries as the Fed reduces the size of its portfolio and suggest that it will more likely be private investors, whether U.S. or foreign, not foreign governments. Finally, our comprehensive security-level data also enable a critical assessment of publicly available data on foreigners' flows.
    JEL: F30 G11 G12
    Date: 2022–12
  28. By: Yang Zhou (Graduate School of Economics, Kobe University and Junir Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN); Shigeto Kitano (Research Institute for Economics and Business Administration(RIEB), Kobe University, JAPAN)
    Abstract: This study analyzes the effectiveness of capital controls on international debt flows using data of 81 economies, including both advanced and emerging economies, over the period from 1995 to 2019. The analysis using the total sample shows that, although they are in the expected directions, the impulse responses of capital controls are statistically insignificant. Making various distinctions among samples (such as advanced and emerging economies and pre- and post-crisis periods), we still find that most results are statistically insignificant. However, the canonical distinction between the "gate" and "wall" economies indicates that the effectiveness of capital controls is relevant for the "wall" emerging economies.
    Keywords: Capital flows; Capital controls; Local projection
    JEL: E69 F32 F38 F41
    Date: 2022–12

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NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.