nep-cba New Economics Papers
on Central Banking
Issue of 2023‒01‒16
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. On the macroeconomic effects of reinvestments in asset purchase programmes By Gerke, Rafael; Kienzler, Daniel; Scheer, Alexander
  2. Macro-financial stability frameworks: experience and challenges By Claudio Borio; Ilhyock Shim; Hyun Song Shin
  3. Robust real rate rules By Holden, Tom D.
  4. Unemployment in the Euro Area and Unconventional Monetary Policy Surprises By Oliver Hülsewig; Horst Rottmann
  5. Banks’ Balance-Sheet Costs, Monetary Policy, and the ON RRP By Gara Afonso; Marco Cipriani; Gabriele La Spada
  6. Inequality-Constrained Monetary Policy in a Financialized Economy By Fierro, Luca Eduardo; Giri, Federico; Russo, Alberto
  7. Measuring Global Interest Rate Comovements with Implications for Monetary Policy Interdependence By Renée Fry-McKibbin; Kate McKinnon; Vance L Martin
  8. The Consequences of Low Interest Rates for the Australian Banking Sector By Anthony Brassil
  9. Interest Rate Uncertainty and Macroeconomics in Turkey By Pelin Öge Güney
  10. Macroeconomic uncertainty and bank lending By Vegard H. Larsen; Ragnar E. Juelsrud
  11. Bank credit risk and macro-prudential policies: role of counter-cyclical capital buffer By Benbouzid, Nadia; Kumar, Abhishek; Mallick, Sushanta K.; Sousa, Ricardo M.; Stojanovic, Aleksandar
  12. A Simple Theory-Based Estimate of the Real Natural Rate of Interest in Open Economies By Alex Ilek; Guy Segal
  13. The global financial cycle and macroeconomic tail risks By Beutel, Johannes; Emter, Lorenz; Metiu, Norbert; Prieto, Esteban; Schüler, Yves
  14. Difficult issues in financial regulation for financial stability By Ozili, Peterson K
  15. FX Intervention to Stabilize or Manipulate the Exchange Rate? Inference from Profitability By Damiano Sandri
  16. Gazing at r*: A Hysteresis Perspective By Paul Beaudry; Katsiaryna Kartashova; Césaire A Meh

  1. By: Gerke, Rafael; Kienzler, Daniel; Scheer, Alexander
    Abstract: A feature of recent monetary policy asset purchase programmes is the reinvestment policy: the central bank announces to keep the overall volume of assets on its balance sheet constant for some time. In this paper, we systematically assess the macroeconomic effects of such reinvestment policies. Conceptually, monetary policy can achieve a given macroeconomic stimulus by substituting higher overall volumes (more net purchases) with longer reinvestments. Quantitatively, we find that omitting reinvestments in a programme that embeds key features of the Eurosystem's pandemic emergency purchase programme reduces the effect on inflation by roughly one third. Stochastic simulations reveal that reinvestment policies can be applied to mitigate the constraints of upper purchase limits. Introducing bounded rationality attenuates the effects of reinvestment policies.
    Keywords: Reinvestment,Stock effect,State-dependent asset purchases,Cognitive discounting,Bayesian estimation
    JEL: D78 E31 E44 E52 E58
    Date: 2022
  2. By: Claudio Borio; Ilhyock Shim; Hyun Song Shin
    Abstract: Since the 2008–9 Great Financial Crisis, major advanced economies (AEs) have used monetary and macroprudential policies to achieve macroeconomic and financial stability. Emerging market economies (EMEs) have, in addition, combined interest rate tools with FX intervention, macroprudential policy and, sometimes, capital flow management measures (CFMs) to address the challenges from capital flow and exchange rate volatility. This paper provides an overview of the use of monetary, macroprudential and exchange rate policies, sometimes alongside CFMs, both in AEs and EMEs. It also assesses the extent to which the use of these policies constitutes a holistic macro-financial stability framework (MFSF). We reach three conclusions. First, combining tools has succeeded in improving policy trade-offs, notably by mitigating the risks to domestic stability arising from external influences. Second, a holistic MFSF is still a work in progress. Finally, more efforts need to be made to better understand the channels of international spillovers and spillbacks.
    Keywords: capital flow, exchange rate policy, macro-financial stability framework, macroprudential measure, monetary policy
    JEL: E44 E52 F38 G28
    Date: 2022–12
  3. By: Holden, Tom D.
    Abstract: Central banks wish to avoid self-fulfilling fluctuations. Monetary rules with a unit response to real rates achieve this under the weakest possible assumptions about the behaviour of households and firms. They are robust to household heterogeneity, hand-to-mouth consumers, non-rational household/firm expectations, active fiscal policy, missing transversality conditions and to any form of intertemporal or nominal-real links. They are easy to employ in practice, using inflation protected bonds to infer real rates. With a time-varying inflation target, they can implement arbitrary inflation dynamics, including optimal policy. They work thanks to the key role played by the Fisher equation in monetary transmission.
    Keywords: robust monetary rules,determinacy,Taylor principle,inflation dynamics,monetary transmission mechanism
    JEL: E52 E43 E31
    Date: 2022
  4. By: Oliver Hülsewig; Horst Rottmann
    Abstract: We examine the impact of the European Central Bank’s monetary policy on the euro area labor markets over the period 2010-2018. Using Jordà’s (2005) local projection method, we find that unemployment rates decline in response to expansionary monetary policy surprises that can be related to unconventional policy measures. At the same time, hours worked rise. In the periphery countries, the reduction in unemployment rates is relatively pronounced, while in the core countries it is only minor. Thus, labor markets in the euro area were impacted differently by unconventional monetary policy measures.
    Keywords: Euro area, unconventional monetary policy, labor markets, local projections
    JEL: E24 E52 E58 C23
    Date: 2022
  5. By: Gara Afonso; Marco Cipriani; Gabriele La Spada
    Abstract: In June 2022, the Federal Reserve started reducing the size of its balance sheet, which had expanded to just under $9 trillion in response to the COVID-19 pandemic. However, whereas banks’ reserves at the Federal Reserve have decreased, the investment of money market funds (MMFs) at the Federal Reserve’s overnight reverse repo (ON RRP) facility has continued to increase, reaching $2.4 trillion in September 2022. In this paper, we causally identify the drivers of ON RRP take-up through a diff-in-diff approach. By exploiting a temporary change in the computation of banks’ Supplementary Leverage Ratio (SLR) implemented in 2020-21, we show that banks’ balance sheet costs incentivize them to push deposits toward MMFs and to reduce their overnight borrowing from MMFs, leading to an increase in MMF investment at the ON RRP. Furthermore, we show that monetary policy tightening, and Treasury bill scarcity are two additional factors contributing to the recent increase in ON RRP usage.
    Keywords: balance sheet constraints; banks; leverage ratio; monetary policy; money market funds; overnight reverse repo (ON RRP)
    JEL: G10 G21 E41 E51 E58
    Date: 2022–12–01
  6. By: Fierro, Luca Eduardo; Giri, Federico; Russo, Alberto
    Abstract: We study how income inequality affects monetary policy through the inequality-household debt channel. We design a minimal macro Agent-Based model that replicates several stylized facts, including two novel ones: falling aggregate saving rate and decreasing bankruptcies during the household's debt boom phase. When inequality meets financial liberalization, a leaning against-the-wind strategy can preserve financial stability at the cost of high unemployment, whereas an accommodative strategy can dampen the fall of aggregate demand at the cost of larger leverage. We conclude that inequality may constrain the central bank, even when it is not explicitly targeted.
    Keywords: Inequality; Financial Fragility; Monetary Policy; Agent-Based Model
    JEL: E21 E25 E31 E52 G01
    Date: 2022–12–01
  7. By: Renée Fry-McKibbin; Kate McKinnon; Vance L Martin
    Abstract: A general measure of the strength of U.S. and local interest rate comovement is developed to identify changes in monetary policy interdependence between January 1999 and May 2020. Entropy theory captures comovements through second-order comoments and higher-order comoments of coskewness, cokurtosis and covolatility. The sample contains monthly short-term shadow rates, with local rates for Australia, Canada, Europe, Japan, New Zealand, Switzerland, and the U.K. Monetary policy overall became more interdependent during the Global Financial Crisis but progressively more independent after adopting unconventional monetary policy by central banks. Measures using second-order comoments do not entirely capture changes in interest rate interdependence.
    Keywords: entropy; generalised exponential family; higher-order comoment; decomposition; independence testing; zero-lower bound
    Date: 2022–06
  8. By: Anthony Brassil (Reserve Bank of Australia)
    Abstract: There is a vast international literature exploring the consequences of low interest rates for various banking sectors. In this paper, I explore how this international literature relates to the Australian banking sector, which operates differently to other jurisdictions. In the face of low rates, the profitability of Australian banks has likely been less adversely affected than what the international literature would predict, but the flip side to this is that the pass-through of monetary policy to lending rates may have been more muted. I then use a recent advance in macrofinancial modelling to explore whether pass-through in Australia could turn negative – the so called 'reversal rate' – and find that the features of the Australian banking system mean a reversal rate is highly unlikely to exist in Australia.
    Keywords: banking; interest rates; monetary policy
    JEL: E43 E52 G21
    Date: 2022–12
  9. By: Pelin Öge Güney (Hacettepe University)
    Abstract: Monetary policy plays a central role in stabilizing macroeconomic fluctuations. In addition to monetary policy, uncertainty in monetary policy associated with uncertainty in interest rates is an important determinant of economic decisions. In this paper, we analyze the effect of interest rate uncertainties for different maturities on industrial production, inflation, unemployment, and exchange rate for Turkey using the VAR model. Since the dominant position of the US economy in global financial markets implies uncertainty about how the monetary policy of the US (MPU) may impact foreign economies, we also discuss the impact of MPU uncertainty on the variables of interest. Although the effect varies across the different maturities of the yield, our findings suggest that interest rate uncertainty reduces the growth of industrial production, increases unemployment, and depreciates the exchange rate. Additionally, inflation increases in response to interest rate uncertainty shocks. Finally, while a shock in MPU uncertainty tends to significantly increase unemployment, it decreases the growth of production.
    Date: 2022–08–20
  10. By: Vegard H. Larsen; Ragnar E. Juelsrud
    Abstract: We investigate the impact of macro-related uncertainty on bank lending in Norway. We show that an increase in general macroeconomic uncertainty reduces bank lending. Importantly, however, we show that this effect is largely driven by monetary policy uncertainty, suggesting that uncertainty about the monetary policy stance is key for understanding why macro-related uncertainty impacts bank lending.
    Keywords: Macroeconomic uncertainty, Textual analysis, Bank lending
    Date: 2022–11
  11. By: Benbouzid, Nadia; Kumar, Abhishek; Mallick, Sushanta K.; Sousa, Ricardo M.; Stojanovic, Aleksandar
    Abstract: This paper investigates the impact of macro-prudential policy (proxied by the counter-cyclical capital buffer (CCyB)) on bank credit risk during uncertain times, as banking sector stability is crucial in promoting financial intermediation. Using a unique daily data set consisting of 4939 credit default swaps (CDS) of 70 banks from 25 countries over the period 2010–2019, we find that CCyB tightening decreases bank-level CDS spreads, while CCyB loosening increases CDS spreads. This heterogeneous effect of CCyB arises due to its asymmetric effect on the capital ratio (i.e., the equity-to-total assets ratio) of banks. Tightening CCyB significantly increases capital, whereas loosening CCyB does not impact capital. Thus, the risks that emanate from the banking sector during periods of heightened uncertainty and financial distress can be significantly dampened when CCyB regulation is enabled. Consequently, macro-prudential policies for banks to hold higher levels of capital during good times are justified to contain financial market risks during downturns.
    Keywords: Bank CDS; Macro-prudential policy; Bank-level characteristics; Macroeconomic environment; Uncertainty
    JEL: G15
    Date: 2022–12–01
  12. By: Alex Ilek (Bank of Israel); Guy Segal (Bank of Israel)
    Abstract: We propose a simple methodology to estimate the short-term natural rate of interest (NRI) in small open economies. Following Clarida et al. (2002), the NRI depends on the expected growth of (1) domestic potential output and (2) output abroad. We use observable expectations within an estimated central bank's policy rules in Israel, Sweden, and Canada to derive NRI estimates. Our estimates possess strong common dynamics: they fall during crises and rise during booms. Our estimates also imply that monetary policy has been accommodative since the global financial crisis.
    Date: 2022–01
  13. By: Beutel, Johannes; Emter, Lorenz; Metiu, Norbert; Prieto, Esteban; Schüler, Yves
    Abstract: We study the link between the global financial cycle and macroeconomic tail risks using quantile vector autoregressions. Contractionary shocks to financial conditions and monetary policy in the United States cause elevated downside risks to growth around the world. By tightening financial conditions globally, these shocks affect the left tail of the conditional output growth distribution more strongly than the center of the distribution. This effect is particularly pronounced for countries with less flexible exchange rate arrangements, higher foreign currency exposures, and higher levels of private sector leverage, suggesting that exchange rate policies and macroprudential policies can mitigate downside risks to growth.
    Keywords: Financial shocks,Monetary policy,Global financial cycle,Growth-at-Risk,International spillovers,Quantile VAR
    JEL: C32 E23 E32 E44 F44
    Date: 2022
  14. By: Ozili, Peterson K
    Abstract: This article explores some of the difficult issues in financial regulation for financial stability. Noting the lack of prior academic work in the topic, this article presents a discussion of some difficult issues in financial regulation for financial stability. Some of the difficult issues include: the difficulty in breaking too-big-to-fail financial institutions into small insignificant parts; the difficulty in regulating executive compensation in the financial sector without limiting the ability of financial institutions to attract and reward executive talent; the difficulty in instilling strict financial regulation and supervision without limiting the ability of financial institutions to exploit emerging profitable opportunities; the difficulty in ensuring that financial institutions increase lending during a recession or in bad times; the rarity of having a female CEO and Chair in a major financial institution; the difficulty in making central banks independent from the influence of the federal government; the difficulty in making financial institutions become relevant in the ever-changing digital technology environment; and the difficulty in preventing financial institutions from taking excessive risks when strict regulations are loosened under a light-touch regulatory regime. The implication of the findings is that financial regulation for financial stability is not an easy task. There will be issues that financial regulation can address, and there will be issues that financial regulation cannot address. Acknowledging that such difficulties exist on the path to financial stability is the first step to addressing these issues.
    Keywords: financial regulation, financial stability, bank supervision, crisis, central bank, banks, financial institutions, financial innovations, banking and finance.
    JEL: G21 G28
    Date: 2022
  15. By: Damiano Sandri
    Abstract: We analyze the profitability of FX swaps used by the central bank of Brazil to shed light on the rationale for FX intervention. We find that swaps are profitable from an ex-ante perspective, suggesting that FX intervention is used to stabilize the exchange rate against temporary excessive fluctuations relative to UIP conditions. Consistent with this interpretation, we document that the direction and size of FX intervention respond to UIP deviations. We also find that FX intervention respond more aggressively to UIP deviations when there is less uncertainty about the future level of the exchange rate and when the exchange rate is overvalued.
    Keywords: FX intervention, profitability, exchange rate
    JEL: E58 F31
    Date: 2022–12
  16. By: Paul Beaudry; Katsiaryna Kartashova; Césaire A Meh
    Abstract: Despite current high inflation and a monetary tightening cycle, the market's evaluation of long-term real interest rates remains very low in most advanced countries. This is consistent with the view that neither monetary policy nor inflation shocks — which are both nominal phenomena — are likely to effect long-run real interest rates. This paper presents both theory and evidence that put into question this simple dichotomy between real and nominal phenomena due to asset accumulation behavior that favours the emergence of more than one steady state value of real interest rates (r*) and thereby creates hysteresis. Our main building block is household saving decisions that incorporate both inter-temporal substitution and retirement forces. When households trade off these two saving motives, we show how this can give rise to C-shaped asset demands and the possibility of more than one steady state equilibrium real interest rate. Since many macroeconomic models predict that long-run asset demands are increasing in interest rates, as opposed to C-shaped, we provide evidence from household balance sheets that runs counter to the former and favours the latter. A central contribution of the paper is to show that when r* is not unique due to C-shaped asset demands, monetary policy can greatly influence long-run real interest rate outcomes. In particular, we show that an aggressive inflation targeting regime can make a high-real-rate outcome fragile to small negative inflation shocks and favour the convergence to a low (possibly negative) real-rate environment. However, we also show that either a large positive inflation shock or a large increase in public debt can bring back an equilibrium with high real rates, which could surprise the market in the current environment.
    Keywords: real interest rates; wealth-to-income ratio; saving rates; inter-temporal substitution; retirement motives; C-shaped long-run asset demand; inflation; general equilibrium
    Date: 2022–06

This nep-cba issue is ©2023 by Sergey E. Pekarski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
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