nep-cba New Economics Papers
on Central Banking
Issue of 2023‒01‒30
fifteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Monetary Policy When the Central Bank Shapes Financial-Market Sentiment By Anil K Kashyap; Jeremy C. Stein
  2. Central bank asset purchases: Insights from quantitative easing auctions of government bonds By Laséen, Stefan
  3. One Monetary Policy and Two Bank Lending Standards: A Tale of Two Europes By Sangyup Choi; Kimoon Jeong; Jiseob Kim
  4. Summaries of Central Bank Policy Deliberations: A Canadian Context By Monica Jain; Walter Muiruri; Jonathan Witmer; Sharon Kozicki; Jeremy Harrison
  5. Resurgence of inflation: Assessing the role of Macroeconomic Policies By Hamid Raza; Thibault Laurentjoye; Mikael Randrup Byrialsen; Sebastian Valdecantos
  6. The Effects of Monetary Policy: Theory with Measured Expectations By Christopher Roth; Mirko Wiederholt; Johannes Wohlfart
  7. Optimal monetary and transfer policy in a liquidity trap By Stefano Maria Corbellini
  8. Mandatory Retention Rules and Bank Risk By Yuteng Cheng
  9. (Almost) Recursive Identification of Monetary Policy Shocks with Economic Parameter Restrictions By Jan Pablo Burgard; Matthias Neuenkirch; Dennis Umlandt
  10. Heterogeneous labor market response to monetary policy: small versus large firms By Aarti Singh; Jacek Suda; Anastasia Zervou
  11. Central Bank Digital Currencies: A Review of Operating Models and Design Issues By Bert Van Roosebeke; Ryan Defina
  12. Do Actions Speak Louder than Words? A Foreign Exchange Intervention Analysis By Freddy A. Pinzón-Puerto; Mauricio Villamizar-Villegas
  13. Uncertain Policy Regimes and Government Spending Effects By Ruoyun Mao; Wenyi Shen; Shu-Chun S. Yang
  14. Optimal Long-run Money Growth Rate in a Cash-in-Advance Economy with Labor-Market Frictions By Been-Lon Chen; Shian-Yu Liao; Dongpeng Liu; Xiangbo Liu
  15. ESG disclosure: regulatory framework and challenges for Italian banks By Tommaso Loizzo; Federico Schimperna

  1. By: Anil K Kashyap; Jeremy C. Stein
    Abstract: Recent research has found that monetary policy works in part by influencing the risk premiums on both traded financial-market securities and intermediated loans. Research has also shown that when risk premiums are compressed, there is an increased likelihood of a reversal that damages the credit-supply mechanism and the real economy. Together these effects create an intertemporal tradeoff for monetary policy, as stimulating the economy today can sow the seeds of a future downturn that might be difficult to offset. We introduce a simple model of this tradeoff and draw out its implications for the conduct of monetary policy.
    JEL: E44 E52 E58
    Date: 2022–12
  2. By: Laséen, Stefan (Research Department, Central Bank of Sweden)
    Abstract: How willing are individual primary dealers to alter their offered yields in central bank quantitative easing auctions of government bonds in order to sell an additional share of the outstanding amount of a bond to the central bank? This question is of great importance for a central bank’s potential to affect yields during quantitative easing purchase operations and the one I address in this paper. In order to do so I study a unique, and confidential, dataset consisting of all pairs of offered yields and quantities from individual dealers participating in the Riksbank’s (central bank of Sweden) quantitative easing auctions from 2015 to 2021. I find, on average, that an offer by individual dealers to sell an additional one percent of the outstanding amount of a bond is associated with between 0.6 to 7.5 basis points lower yields. However, offers depend in a non-linear way on offered amounts. Offers are less elastic (steeper) for offered quantities below 10 per cent and above 20 per cent of outstanding amounts of bonds. The finding of a non-linear slope is new in the literature and is only possible to uncover with access to the whole distribution and significant size of the offered amounts at each auction. Moreover, I find that marginal yields (yields where supply equals demand) at the auctions are highly, and persistently, correlated with changes in market yields for an extended period after the auction suggesting that purchase operations have a more persistent impact on market yields than what has previously been found.
    Keywords: Monetary Policy; Asset Purchases; Quantitative Easing; Sovereign Yields; Asset Purchase Auctions.
    JEL: D44 E52 E58 E63
    Date: 2023–01–01
  3. By: Sangyup Choi (Yonsei University); Kimoon Jeong (Yonsei University); Jiseob Kim (Yonsei University)
    Abstract: What accounts for contrasting economic paths between core and periphery countries in the euro area? Unlike many studies focusing on fiscal problems, we highlight the interplay of bank mortgage lending standards and imbalances created by the common monetary policy framework. To illustrate the mechanism, we derive a country-specific monetary policy stance gap and estimate the panel VAR model of core and periphery countries, respectively. While the widening monetary policy stance gap—the accommodative stance of the ECB given individual economic conditions—induces a similar increase in the demand for mortgage credit in both regions, it is followed by sharply different responses of the supply side of mortgage credit: bank mortgage lending standards are relaxed (tightened) in periphery (core) countries, which can rationalize vastly different paths in mortgage credit, residential investment, and housing prices between the two Europes. In searching for the source of different bank lending behaviors, we find that banks in core countries, where macroprudential policies on mortgage credit are tightened and bank lending margin decreases, increase their cross-border lending to periphery countries, which could fuel excessive risk-taking in periphery countries.
    Keywords: Euro area; Mortgage credit; Monetary policy stance gap; Bank lending survey; Macroprudential policy; Cross-border banking flows; Panel VARs.
    JEL: E21 E32 E44 F52 G21
    Date: 2023–01
  4. By: Monica Jain; Walter Muiruri; Jonathan Witmer; Sharon Kozicki; Jeremy Harrison
    Abstract: This paper provides the context, rationale and key considerations that informed the Bank of Canada’s decision to publish a summary of monetary policy deliberations. It includes an analysis of how other central banks disclose minutes and summaries of their monetary policy deliberations. Most other central banks surveyed publish some sort of summary of deliberations. The Bank of Canada’s existing communications already include aspects of these summaries. However, the Bank does not normally provide some information that they contain, such as: a review of the policy choices that were discussed, a diversity of viewpoints on the economic outlook and policy choices, the perspectives of individual members, Publishing a summary of deliberations could enhance transparency, accountability and credibility and also reinforce the Bank’s independence. However, these benefits must be balanced against the potential for constraints on internal debate or the sending of mixed messages about the Bank’s outlook and decisions. The Bank of Canada Act empowers the Governor to make decisions, but in practice, decisions are made by consensus among members of the Bank’s Governing Council. This decision-making by consensus could have implications for what could or should be included in a summary. In the Canadian context, assuming the Bank will provide additional information, we also discuss some advantages and disadvantages of providing a summary of deliberations as a separate communication product or as an enhancement to current communications products. The material in the paper originally served as background information for internal discussions at the Bank of Canada around publishing a summary of policy deliberations. Following those discussions, the International Monetary Fund (IMF) published a review of the Bank of Canada’s transparency, concluding that the Bank “… sets a high benchmark for transparency” (IMF 2022). In that review, the IMF provided a recommendation on how the Bank could further improve its transparency by providing more information on its monetary policy deliberations. In response to the IMF review and internal discussions at the Bank, the Bank has publicly committed to providing a summary of its policy deliberations beginning in February 2023.
    Keywords: Monetary policy communications
    JEL: D83 E58
    Date: 2023–01
  5. By: Hamid Raza; Thibault Laurentjoye; Mikael Randrup Byrialsen; Sebastian Valdecantos
    Abstract: After decades of relative consumer price stability, inflation is now making a come-back as a central topic in economic and political discussions, against a backdrop of various policy challenges. The aim of this paper is to provide a nuanced assessment of the different channels through which monetary, fiscal and income policies can affect prices and output in a small open economy, as well as discuss which policy measures are desirable and practically feasible when such an economy experiences inflationary shocks. To do so, we adopt a comprehensive modelling approach and build an empirical stock-flow-consistent model using sectoral national account data for Denmark over the period 2005Q1-2020Q1. We then replicate the inflationary environment in which Denmark and several other countries are currently operating and introduce a monetary policy reaction which leads to a modest reduction in inflation at the cost of further contracting the economy. Taking monetary tightening as a forced policy response in the case of a small open economy with fixed exchange rate, we explore a number of policies that, within the current institutional and legal framework, can potentially mitigate the adverse effects of inflation. Specifically, we introduce fiscal interventions - in the form of tax cuts on income and production - along with wage- and price-based income policies. Our main conclusion is that a close coordination of fiscal and income policies can help reduce the effects of adverse shocks to income without increasing inflation. Finally, we address a question of political relevance by exploring the effects of different policies on public budget and debt. Overall, we find that of all the policies implemented, monetary policy has the most dramatic effects on public debt sustainability.
    Keywords: Inflation, Fiscal policy, Monetary policy, Income policy, Stock-flow consistent model
    JEL: E12 E52 E61 E64
    Date: 2023–01
  6. By: Christopher Roth (University of Cologne, ECONtribute); Mirko Wiederholt (LMU Munich and Sciences Po, CESifo, CEPR); Johannes Wohlfart (Department of Economics and CEBI, University of Copenhagen, CESifo, Danish Finance Institute)
    Abstract: We study the effects of monetary policy on aggregate consumption combining a heterogeneous agent model with measured expectations under different policy counterfactuals. We express the consumption of non-hand-to-mouth households as a function of expectations only and elicit all expectations appearing in the consumption functions for alternative policy scenarios with tailored surveys. Feeding these individual-level expectations into the model illustrates that a modest forward guidance statement in March 2021 would have reduced aggregate consumption by 0.14 percent on impact and an interest rate hike of 40 basis points in March 2022 would have reduced aggregate consumption by 0.30 percent on impact.
    Keywords: Monetary Policy, Expectation Formation, Aggregate Consumption
    JEL: D12 D14 D83 D84 E32 G11
    Date: 2023–01
  7. By: Stefano Maria Corbellini
    Abstract: Optimal monetary and fiscal policy are jointly analyzed in a heterogeneous two-agents New Keynesian environment, where fiscal policy is modeled in the form of lump-sum transfers set by the government. The main result is that transfer policy does not serve as a substitute for forward guidance - as it entails consumption dispersion costs - and does not affect its optimal duration. Transfers indeed influence the length of stay at the zero lower bound through two offsetting channels: a shortening channel works through an initial increase in transfers that mitigates the recession (reducing the need for forward guidance), and a lengthening channel works through a later transfer cut that curbs the undesired expansion (making forward guidance desirable for a longer horizon). Imposing a homogeneous transfer policy across agents does not change the stabilization outcome or the effect on the duration of forward guidance, nor does so allowing for cyclical income differences.
    Keywords: heterogeneity, inequality, liquidity trap, optimal monetary policy, optimal fiscal policy, forward guidance
    JEL: E52 E62 E63
    Date: 2022–12
  8. By: Yuteng Cheng
    Abstract: This paper studies, theoretically and empirically, the unintended consequences of mandatory retention rules in securitization. The Dodd-Frank Act and the EU Securitisation Regulation both impose a 5% mandatory retention requirement to motivate screening and monitoring. I first propose a novel model showing that while retention strengthens monitoring, it may also encourage banks to shift risk. I then provide empirical evidence supporting this unintended consequence: in the US data, banks shifted toward riskier portfolios after the implementation of the retention rules embedded in Dodd-Frank. Furthermore, the model offers clear, testable predictions about policy and corresponding consequences. In the US data, stricter retention rules caused banks to monitor and shift risk simultaneously. According to the model prediction, such a simultaneous increase occurs only when the retention level is above optimal, which suggests that the current rate of 5% in the US is too high.
    Keywords: Financial institutions; Financial system regulation and policies; Credit risk management
    JEL: G21 G28
    Date: 2023–01
  9. By: Jan Pablo Burgard; Matthias Neuenkirch; Dennis Umlandt
    Abstract: Recursively identified vector autoregressive (VAR) models often lead to a counterintuitive response of prices (and output) shortly after a monetary policy shock. To overcome this problem, we propose to estimate the VAR parameters under the restriction that economic theory is not violated, while the shocks are still recursively identified. We solve this optimization problem under non-linear constraints using an augmented Lagrange solution approach, which adjusts the VAR coefficients to meet the theoretical requirements. In a generalization, we allow for a (minimal) rotation of the Cholesky matrix in addition to the parameter restrictions. Based on a Monte Carlo study and an empirical application, we show that particularly the "almost recursively identified approach with parameter restrictions" leads to a solution that avoids an estimation bias, generates theory-consistent impulse responses, and is as close as possible to the recursive scheme.
    Keywords: Monetary Policy Transmission, Non-Linear Optimization, Price Puzzle, Recursive Identification, Rotation, Sign Restrictions
    JEL: C32 E52 E58
    Date: 2023
  10. By: Aarti Singh (School of Economics, University of Sydney); Jacek Suda (Narodowy Bank Polski); Anastasia Zervou (Department of Economics, the University of Texas at Austin)
    Abstract: We study the heterogeneous effects of monetary policy on the labor market of large and small firms in the United States. We uncover the following facts: (i) Expansionary monetary policy boosts employment and hiring growth in small firms more than in large firms; however, a monetary contraction shrinks small firms’ employment and hiring growth less than in large firms. As a result, monetary policy has a countervailing effect on the employment concentration in large firms. (ii) There is an asymmetry in the effects of monetary contractions versus expansions with respect to firms’ employment and hiring growth. Not accounting for such asymmetry leads to the fallacious conclusion that small firms respond more than large firms to monetary policy shocks. This asymmetry also reveals that contractionary monetary policy shocks have immediate effects on the labor market while the effects of expansionary shocks are slower to manifest.(iii) The response of employment is weaker than that of hiring, highlighting the importance of using labor market flows. (iv) The growth of earnings of new hires decreases similarly across large and small firms in contractions but reacts more for small firms in expansions. We use a heterogeneous firms model with a working capital constraint, an upward-sloping marginal cost curve, and a financial accelerator effect. We augment this model with the wage effect summarized in fact (iv) and demonstrate how the additional wage effect can explain the differential response of the hiring and employment growth of small and large firms of fact (i).
    Keywords: Heterogeneous firms, financing constraints, labor market, monetary policy
    JEL: D22 E24 E52 J23 L25
    Date: 2023
  11. By: Bert Van Roosebeke (International Association of Deposit Insurers); Ryan Defina (International Association of Deposit Insurers)
    Abstract: The topic of Central Bank Digital Currencies (CBDC) is highly relevant to deposit insurers. As an increasing number of central banks further their research and planning efforts in CBDC, IADI members are encouraged to intensify their understanding of the potential impact of the introduction of a CBDC in their own as well as in other jurisdictions. To assess the potential impact of a CBDC, sound understanding of operating models and design features is crucial. These will affect factors of key interest to deposit insurers. This extends to the division of labour between central and commercial banks and the degree of privacy attached to CBDC usage. The paper offers a review of key issues relevant to deposit insurers regarding operating models and design features for CBDC, and links these to early global policy standards. Whilst not recommending a particular CBDC design, deposit insurers are encouraged to make their own determination based on developing a deeper understanding of the principles presented. This paper acts as a follow up to a previous IADI Fintech Brief which highlighted some key motivations for CBDCs by central banks.
    Keywords: deposit insurance, bank resolution
    JEL: G21 G33
    Date: 2022–12
  12. By: Freddy A. Pinzón-Puerto; Mauricio Villamizar-Villegas
    Abstract: We revisit an old question but with a new identification strategy, namely the difference in exchange rate effects between announced (“vocal”) and secret (“dirty”) foreign exchange intervention. Using a Regression Discontinuity Design, we exploit a rule-based intervention mechanism enacted by the Central Bank of Colombia that, under observable and deterministic conditions, triggered either the issuance of FX options or the ability to exercise them. We take the former (issuance) as central bank announcements under a sharp setting, since the rule and information that triggered the issuance of options was public, and we take the latter (exercise) as secret trades under a fuzzy setting, since traders could have chosen (but were not required) to exercise their options in the following days after issuance. Our results indicate that, unconditionally, both announcements and secret trades carry similar effects. However, the effects of announcements are considerably amplified conditional on: (i) higher central bank credibility, (ii) less frequent announcements, and (iii) episodes of higher FX volatility. **** RESUMEN: Revisitamos una antigua pregunta, pero con una nueva estrategia de identificación, concretamente, la diferencia entre los efectos de las intervenciones cambiarias anunciadas (“vocales”) y secretas (“sucias”). Para esto estudiamos un mecanismo de intervención basado en reglas del Banco de la República que, bajo condiciones observables y deterministas, activó la emisión de opciones (call y put) o la capacidad de ejercerlas. Interpretamos la primera (emisión) como anuncios del Banco bajo un diseño de regresión discontinua sharp, ya que la regla y la información cambiaria que la activó eran públicas, e interpretamos los ejercicios de las opciones como operaciones secretas bajo un diseño de regresión discontinua fuzzy, ya que los agentes del mercado podían haber elegido (pero no estaban obligados) a ejercerlas en los días siguientes a su emisión. Nuestros resultados indican que, de forma no condicional, tanto los anuncios como la intervención secreta tienen efectos similares. Sin embargo, el impacto de los anuncios se amplifica cuando se condicionan a: (i) una alta credibilidad del banco central, (ii) anuncios menos frecuentes y (iii) episodios de mayor volatilidad cambiaria.
    Keywords: Foreign Exchange Intervention effectiveness, Regression Discontinuity Design, Announced Intervention, Secret Intervention, Intervención cambiaria, Regresión discontinua, Intervención con anuncios, Intervención secreta
    JEL: E58 F31 C22
    Date: 2023–01
  13. By: Ruoyun Mao (Grinnell College); Wenyi Shen (Oklahoma State University); Shu-Chun S. Yang (Institute of Economics, Academia Sinica, Taipei, Taiwan)
    Abstract: Money financing returns to policy debate as governments around the world adopted massive fiscal measures during the pandemic. Using a fully nonlinear New Keynesian model with endogenous policy regime switching, we show thata moderate inflation- driven switching probability to a debt-financing regime reduces money-financed spending multipliers. When interacted with high government debt, money-financed spending multipliers fall below one, similar to the size of debt-financed spending multipliers. This result holds at the zero lower bound, with long-term government debt, and under a wide range of key parameter values. Policy regime uncertainty, on the other hand, has little effect on debt-financed spending multipliers.
    Keywords: government spending effects, fiscal multipliers, regime-switching policy, monetary and fiscal policy interaction, nonlinear New Keynesian models
    JEL: E32 E52 E62 E63 H30
    Date: 2022–09
  14. By: Been-Lon Chen (Institute of Economics, Academia Sinica, Taipei, Taiwan); Shian-Yu Liao (Fu Jen Catholic University); Dongpeng Liu (Nanjing University); Xiangbo Liu (Renmin University of China)
    Abstract: We revisit the Friedman rule in a labor search model and extend Heer (2003), Cooley and Quadrini (2004), and Wang and Xie (2013) to one that allows for endogenous growth. We show that, even without a liquidity effect or a CIA constraint on firms’wage payment, our model offers a different channel for moderate money growth to increase welfare. Intuitively, in a one-sector endogenous growth economy, the technology is of constant returns with respect to capital. When the labor market is frictional, a moderate increase in money growth induces an expansion in vacancy and employment. Labor and capital are complements in production. With an increase in employment, when the technology is neoclassical, the decreasing return in capital leads to a lower marginal product of labor. However, in an endogenous growth framework wherein the technology exhibits socially constant returns in capital, the marginal product of labor is constant. Due to a constant marginal product of labor, modest inflation raises employment, enlarges economic growth, and increases welfare. Moreover, the optimallong-run inflation rate departs from the Friedman rule, even when the Hosios rule holds. Fi-nally, wefind that our model with sustainable growthfits the data better than that withoutsustainable growth.
    Keywords: Endogenous Growth, Money Supply, Labor Search, Unemployment, Welfare
    JEL: E41 J64 O42
    Date: 2022–08
  15. By: Tommaso Loizzo (Bank of Italy); Federico Schimperna (Bank of Italy)
    Abstract: In line with developments at the global level, the attention of financial regulators on ESG factors, particularly on environmental and climate-related risks, has significantly increased over recent years. In this context, disclosure of relevant climate-related information plays a key role, for both financial and non-financial stakeholders. The EU regulatory framework on disclosure is rather advanced when compared with other jurisdictions and will be almost ready for implementation in the next few months. The Bank of Italy, in line with the ECB and other national supervisors, has started a number of initiatives aimed at actively contributing to major international projects, strengthening the dialogue with the national industry and assessing the progress made by supervised entities. The paper: i) summarises the main regulatory requirements for ESG disclosure; ii) investigates the areas of commonalities at the EU level between the Pillar 3 disclosure requirements and those envisaged by the standards under development by the EFRAG; iii) takes stock of the main supervisory initiatives undertaken so far and presents some preliminary thoughts on the major challenges ahead to be faced by Italian banks.
    Keywords: ESG, sustainability, climate change, disclosure, CSRD, banks, Pillar 3, ESRS
    JEL: G21 K20 M41
    Date: 2022–12

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