nep-cba New Economics Papers
on Central Banking
Issue of 2023‒01‒23
sixteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Looking Beyond the Fed: Do Central Banks Cause Information Effects? By Christopher D. Cotton
  2. Time-varying credibility, anchoring and the Fed's inflation target By Diegel, Max
  3. Optimal Monetary Policy with and without Debt By Boris Chafwehé; Rigas Oikonomou; Romanos Priftis; Lukas Vogel
  4. International Spillovers of Tighter Monetary Policy By Dario Caldara; Francesco Ferrante; Albert Queraltó
  5. Central Banks as Dollar Lenders of Last Resort: Implications for Regulation and Reserve Holdings By Mitali Das; Gita Gopinath; Taehoon Kim; Jeremy C. Stein
  6. Social Capital and Monetary Policy By Rustam Jamilov
  7. How sensitive is the economy to large interest rate increases? Evidence from the taper tantrum By Nitish R. Sinha; Michael Smolyansky
  8. A basic two-sector new Keynesian DSGE model of the Indian economy By Kumar, Anshul
  9. Supranational supervision By Haselmann, Rainer; Singla, Shikhar; Vig, Vikrant
  10. Capital regulation, market-making, and liquidity By Haselmann, Rainer; Kick, Thomas; Singla, Shikhar; Vig, Vikrant
  11. Limited Energy Supply, Sunspots, and Monetary Policy By Nils Gornemann; Sebastian Hildebrand; Keith Kuester
  12. International banking regulation and Tier 1 capital ratios. On the robustness of the critical average risk weight framework By Renaud Beaupain; Yann Braouezec
  13. The political economy of financial regulation By Haselmann, Rainer; Sarkar, Arkodipta; Singla, Shikhar; Vig, Vikrant
  14. Estimating the Effects of Monetary Policy in Australia Using Sign-restricted Structural Vector Autoregressions By Matthew Read
  15. The Global Pandemic, Laboratory of the Cashless Economy? By Jeremy Srouji; Dominique Torre
  16. Debt Revenue and the Sustainability of Public Debt By Ricardo Reis

  1. By: Christopher D. Cotton
    Abstract: The importance of central bank information effects is the subject of an ongoing debate. Most work in this area focuses on the limited number of monetary policy events at the Federal Reserve. I assess the degree to which nine other central banks cause information effects. This analysis yields a much larger panel of primarily novel events. Following a surprise monetary tightening, economic forecasts improve in line with information effects. However, I find this outcome is driven by the predictability of monetary policy surprises and not information effects. My results support the view that central bank information effects may be overstated.
    Keywords: information effect; forecasts; monetary policy surprise; central bank
    JEL: E43 E52 E58
    Date: 2022–09–01
  2. By: Diegel, Max
    Abstract: This paper analyzes the time-varying credibility of the Fed's inflation target in an empirical macro model with asymmetric information, where the public has to learn about the actual inflation target from the Fed's interest rate policy. To capture the evolving communication strategy of the Fed, I allow the learning rule and the structural shock variances to change across monetary policy regimes. I find that imperfect credibility is pronounced during the Volcker Disinflation and to a lesser extend in the aftermath of the 2008 Financial Crisis. The announcement of the 2% target in 2012 did not affect the learning rule strongly but reduced the variance of transitory monetary policy shocks. The results caution against equating long-term inflation expectations of professionals with the perceived inflation target.
    Keywords: signal extraction problem, credibility, inflation target, unobserved components, VAR
    JEL: C11 C32 D83 D82 E31 E52
    Date: 2022
  3. By: Boris Chafwehé (European Commission (Joint Research Center) and IRES (UCLouvain)); Rigas Oikonomou (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Romanos Priftis (European Central Bank); Lukas Vogel (European Commission (ECFIN))
    Abstract: We derive optimal monetary policy rules when government debt may be a constraint for the monetary authority. We focus on an environment where fiscal policy is exogenous, setting taxes according to a rule that specifies the tax rate as a function of lagged debt. In the case where taxes do not adjust sufficiently to ensure the solvency of debt, then the monetary authority is burdened by debt sustainability. Under this scenario, optimal monetary policy is a ‘passive money rule’, setting the interest rate to weakly respond to inflation. We characterize analytically the optimal inflation coefficients under alternative specifications of the central bank loss function, using a simple Fisherian model, but also the canonical New Keynesian model. We show that the maturity structure of debt is a key variable behind optimal policy. When debt maturity is calibrated to US data, our model predicts that a simple inflation targeting rule where the inflation coefficient is 1 − 1 Maturity is a good approximation of the optimal policy. Lastly, our framework can also nest the case where fiscal policy adjusts taxes to satisfy the intertemporal debt constraint. In this scenario optimal monetary policy is an active policy rule. We contrast the properties of active and passive policies, using the analytical optimal policy rules derived from this framework of monetary/fiscal interactions.
    Keywords: Fiscal/monetary policy interactions, Fiscal theory of the price level, Ramsey policy
    JEL: E31 E52 E58 E62 C11
    Date: 2022–12–08
  4. By: Dario Caldara; Francesco Ferrante; Albert Queraltó
    Abstract: Central banks around the world are tightening monetary policy in response to a global surge in inflation not seen since the 1970s. This synchronization of global interest rate hikes and further increases expected by markets, illustrated in figure 1, have raised concerns about adverse international spillovers of tighter monetary policy.
    Date: 2022–12–22
  5. By: Mitali Das; Gita Gopinath; Taehoon Kim; Jeremy C. Stein
    Abstract: This paper explores how non-U.S. central banks behave when firms in their economies engage in currency mismatch, borrowing more heavily in dollars than justified by their operating exposures. We begin by documenting that, in a panel of 53 countries, central bank holdings of dollar reserves are significantly correlated with the dollar-denominated bank borrowing of their non-financial corporate sectors, controlling for a number of known covariates of reserve accumulation. We then build a model in which the central bank can deal with private-sector mismatch, and the associated risk of a domestic financial crisis, in two ways: (i) by imposing ex ante financial regulations such as bank capital requirements; or (ii) by building a stockpile of dollar reserves that allow it to serve as an ex post dollar lender of last resort. The model highlights a novel externality: individual central banks may tend to over-accumulate dollar reserves, relative to what a global planner would choose. This is because individual central banks do not internalize that their hoarding of reserves exacerbates a global scarcity of dollar-denominated safe assets, which lowers dollar interest rates and encourages firms to increase the currency mismatch of their liabilities. Relative to the decentralized outcome, a global planner may prefer stricter financial regulation (e.g., higher bank capital requirements) and reduced holdings of dollar reserves.
    JEL: E42 F4 G15
    Date: 2022–12
  6. By: Rustam Jamilov (University of Oxford)
    Abstract: The U.S. have experienced a significant decline in generalized trust over the past three decades. Has this secular trend impacted central banking? Empirically, we document that states with high levels of institutional and interpersonal trust are robustly more responsive to monetary policy shocks. Theoretically, we embed a circle of trust block into the New Keynesian framework in continuous time. The calibrated model predicts that monetary policy has become 20% less effective due to the decline in trust. Our findings firm up the social capital channel of monetary non-neutrality and warn that crises of trust could lead to crises of policy inefficacy.
    Keywords: Monetary policy, trust, social capital
    JEL: E5 E7 Z1
    Date: 2022–11
  7. By: Nitish R. Sinha; Michael Smolyansky
    Abstract: The “taper tantrum” of 2013 represents one of the largest monetary policy shocks since the 1980s. During this episode, long-term interest rates spiked 100 basis points—a move unintentionally induced by policymakers. However, this had no observable negative effect on the overall U.S. economy. Output, employment, and other important variables, all performed either in line with or better than consensus forecasts, often improving considerably relative to their earlier trends. We conclude that, from low levels, a 100 basis point increase in long-term interest rates is probably too small to affect overall economic activity and discuss the implications for monetary policy.
    Keywords: monetary policy; federal reserve; taper tantrum; quantitative easing
    JEL: E43 E44 E52 E58
    Date: 2022–12
  8. By: Kumar, Anshul
    Abstract: Indian economy is going through underlying changes in post-pandemic recovery process. Effect of policies, monetary or fiscal, on macroeconomy needs a thorough analysis in these recessionary times. In this context, this study develops a closed-economy DSGE model to see the impact of monetary policy on the Indian economy. The model includes price rigidities, and parameters are calibrated using the data on the Indian economy. The model includes two sectors - production and consumption, and an inflation-targeting regime following the Taylor rule. The model is simulated for a positive productivity shock and an expansionary monetary policy shock. Results show that a positive productivity shock improves economic activity, and an expansionary monetary policy shock increases output for the short term only.
    Keywords: DSGE models; New-Keynesian; monetary policy; general equilibrium; Indian economy; calibration
    JEL: C32 E32 E37 E5 E52
    Date: 2023–01–02
  9. By: Haselmann, Rainer; Singla, Shikhar; Vig, Vikrant
    Abstract: We exploit the establishment of a supranational supervisor in Europe (the Single Supervisory Mechanism) to learn how the organizational design of supervisory institutions impacts the enforcement of financial regulation. Banks under supranational supervision are required to increase regulatory capital for exposures to the same firm compared to banks under the local supervisor. Local supervisors provide preferential treatment to larger institutes. The central supervisor removes such biases, which results in an overall standardized behavior. While the central supervisor treats banks more equally, we document a loss in information in banks' risk models associated with central supervision. The tighter supervision of larger banks results in a shift of particularly risky lending activities to smaller banks. We document lower sales and employment for firms receiving most of their funding from banks that receive a tighter supervisory treatment. Overall, the central supervisor treats banks more equally but has less information about them than the local supervisor.
    Keywords: Financial Regulation, Financial Supervision, Banking Union
    JEL: G21 G28
    Date: 2022
  10. By: Haselmann, Rainer; Kick, Thomas; Singla, Shikhar; Vig, Vikrant
    Abstract: We employ a proprietary transaction-level dataset in Germany to examine how capital requirements affect the liquidity of corporate bonds. Using the 2011 European Banking Authority capital exercise that mandated certain banks to increase regulatory capital, we find that affected banks reduce their inventory holdings, pre-arrange more trades, and have smaller average trade size. While non-bank affiliated dealers increase their market-making activity, they are unable to bridge this gap - aggregate liquidity declines. Our results are stronger for banks with a higher capital shortfall, for noninvestment grade bonds, and for bonds where the affected banks were the dominant market-maker.
    Keywords: market-making, capital regulation, bond market liquidity
    JEL: G01 G21 G28
    Date: 2022
  11. By: Nils Gornemann (Board of Governors of the Federal Reserve System); Sebastian Hildebrand (University of Bonn); Keith Kuester (University of Bonn)
    Abstract: A common assumption in macroeconomics is that energy prices are determined in a world-wide, rather frictionless market. This no longer seems an adequate description for the situation that much of Europe currently faces. Rather, one reading is that shortages exist in the quantity of energy available. Such limits to the supply of energy mean that the local price of energy is affected by domestic economic activity. In a simple open-economy New Keynesian setting, the paper shows conditions under which energy shortages can raise the risk of self-fulfilling fluctuations. A firmer focus of the central bank on input prices (or on headline consumer prices) removes such risks.
    Keywords: Energy crisis, macroeconomic instability, sunspots, monetary policy, heterogeneous households
    JEL: E31 E32 E52 F41 Q43
    Date: 2022–12
  12. By: Renaud Beaupain (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France); Yann Braouezec (IESEG School of Management, Univ. Lille, CNRS, UMR 9221 - LEM - Lille Economie Management, F-59000 Lille, France)
    Abstract: Under Basel III, the new international banking regulation, banks must maintain two Tier 1 capital ratios that treat risky assets dierently. The Basel Committee uses the critical average risk weight (CARW) framework, developed by the Bank of England to determine which ratio is the binding constraint. This methodology, which implicitly assumes that each asset is subject to a uniform shock, consists in comparing the implied average risk weight of a bank to a regulatory critical threshold. Using a stress test approach, we examine whether, and under which conditions, the CARW framework identies the correct binding capital ratio. We nd important errors, that are attributable to incorrect data but surprisingly not to the CARW framework. We nally generalize the methodology used by the Basel Committee and show how our stress-test approach can be used to determine which ratio is binding when only a (single class of) asset(s) is shocked.
    Keywords: : International banking regulation, Leverage ratio, Risk-based capital ratio, Critical average risk weight framework, Stress-test framework
    Date: 2022–11
  13. By: Haselmann, Rainer; Sarkar, Arkodipta; Singla, Shikhar; Vig, Vikrant
    Abstract: Increased interdependencies across countries have led to calls for greater harmonization of regulations to prevent local shock from spilling over to other countries. Using the rulemaking process of the Basel Committee on Banking Supervision (BCBS), this paper studies the process through which harmonization is achieved. Through leaked voting records, we document that the probability of a regulator opposing an initiative increases if their domestic national champion (NC) opposes the new rule, particularly when the proposed rule disproportionately affects them. Next, we show that smaller banks, even when they collectively have a higher share in the domestic market, do not have any impact on regulators' stand - suggesting that regulators' support for NCs is not guided by their national interest. Further, we find the effect is driven by regulators who had prior experience working in large banks. Finally, we show this unanimous decision-making process results in significant watering down of proposed rules. Overall, the results highlight the limits of harmonization of international financial regulation.
    Keywords: Political Economy, Financial Regulation, Textual Analysis
    JEL: P43 G28 G21
    Date: 2022
  14. By: Matthew Read (Reserve Bank of Australia)
    Abstract: Existing estimates of the macroeconomic effects of Australian monetary policy tend to be based on strong, potentially contentious, assumptions. I estimate these effects under weaker assumptions. Specifically, I estimate a structural vector autoregression identified using a variety of sign restrictions, including restrictions on impulse responses to a monetary policy shock, the monetary policy reaction function, and the relationship between the monetary policy shock and a proxy for this shock. I use an approach to Bayesian inference that accounts for the problem of posterior sensitivity to the choice of prior that arises in this setting, which turns out to be important. Some sets of identifying restrictions are not particularly informative about the effects of monetary policy. However, combining the restrictions allows us to draw some useful inferences. There is robust evidence that an increase in the cash rate lowers output and consumer prices at horizons beyond a year or so. The results are consistent with the macroeconomic effects of a 100 basis point increase in the cash rate lying towards the upper end of the range of existing estimates.
    Keywords: impulse responses; monetary policy; proxies; robust Bayesian inference; sign restrictions
    JEL: C32 E52
    Date: 2022–12
  15. By: Jeremy Srouji (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur, ISS - International Institute of Social Studies (ISS), Erasmus University Rotterdam); Dominique Torre (GREDEG - Groupe de Recherche en Droit, Economie et Gestion - UNS - Université Nice Sophia Antipolis (1965 - 2019) - COMUE UCA - COMUE Université Côte d'Azur (2015-2019) - CNRS - Centre National de la Recherche Scientifique - UCA - Université Côte d'Azur)
    Abstract: The COVID-19 pandemic has had a profound impact on payment systems and preferences around the world, reducing the use of cash in favor of digital payment instruments and accelerating the discussion around the need for a central bank digital currency. This article presents the digital payments and cashless agenda before and after the pandemic, focusing on how the changing payments landscape has influenced the priorities and decisions of regulators, banks and other financial intermediaries, with regards to the future shape of payment systems. It finds that while the pandemic demonstrated the benefits associated with building an advanced, competitive and integrated digital payments ecosystem , it has also brought to the forefront more fragmentation than convergence between payment systems in different regions of the world.
    Keywords: central bank digital currency (CBDC), digital payments, mobile money, cashless, payment systems, NFC, e-wallets
    Date: 2022–11–26
  16. By: Ricardo Reis (London School of Economics (LSE); Centre for Macroeconomics (CFM))
    Abstract: While public debt has risen in the last two decades, the return that it offers to investors has fallen, especially relative to the return on private investment. This creates a revenue for the government as the supplier of the special services offered by public bonds, which include storage of value, safety, liquidity, and reprieve from repression. The present value of this debt revenue is large relative to the stock of public debt, keeping it sustainable even as the present value of primary balances is zero or negative. It gives rise to different policy tradeoffs than the conventional analysis of primary balances and makes different recommendation on the effects of austerity, the optimal amount of debt, or the spillovers between monetary and fiscal policy.
    Keywords: debt sustainability, fiscal policy, debt revenue, marginal product of capital
    JEL: E62 E43 H63
    Date: 2022–09

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