nep-cba New Economics Papers
on Central Banking
Issue of 2023‒02‒20
35 papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Information Acquisition ahead of Monetary Policy Announcements By Michael Ehrmann; Paul Hubert
  2. Asymmetric monetary policy rules for the euro area and the US By Junior Maih; Falk Mazelis; Roberto Motto; Annukka Ristiniemi
  3. Monetary Policy Communication and Financial Markets in India By Mr. Faisal Ahmed; Mahir Binici; Mr. Jarkko Turunen
  4. Digital Money and Central Banks Balance Sheet By Adrian Armas; Mr. Manmohan Singh
  5. The impact of changes in bank capital requirements By Raja, Akash
  6. U.S. and Euro Area Monetary and Fiscal Interactions During the Pandemic: A Structural Analysis By Jesper Lindé; Zoltan Jakab; Andrew Hodge; Vina Nguyen
  7. The Spending Cap and Monetary Policy Effectiveness By Ribeiro, Gustavo; Teles, Vladmir; Costa-Filho, João
  8. Currency Competition with Firms By Maxi Guennewig
  9. How Persistent are Climate-Related Price Shocks? Implications for Monetary Policy By Alain N. Kabundi; Jiaxiong Yao; Mr. Montfort Mlachila
  10. Climate change and monetary policy By Eisei Ohtaki
  11. Do Actions Speak Louder Than Words? Assessing the Effects of Inflation Targeting Track Records on Macroeconomic Performance By Mr. Zhongxia Zhang; Shiyi Wang
  12. Lessons from Haiti’s Recent Exchange Rate Developments By Neil Shenai; Ms. Rina Bhattacharya
  13. A Theory of Fear of Floating By Javier Bianchi; Louphou Coulibaly
  14. A Quarterly Projection Model for the WAEMU By Carlos de Resende; Alsim Fall; Demba Sy
  15. Stress relief? Funding structures and resilience to the Covid Shock By Forbes, Kristin; Friedrich, Christian; Reinhardt, Dennis
  16. Effects of Rising Base Rates on Major Manufacturing Industries and Policymaking By Kim, Hyun Seok
  17. Optimal policy under dollar pricing By Egorov, Konstantin; Mukhin, Dmitry
  18. DeÂ…cit sustainability and the Fiscal Theory of the Price Level: the case of Italy, 1861-2020 By Emilio Congregado; Silviano Carmen Díaz-Roldán; Vicente Esteve
  20. Households' probabilistic inflation expectations in high-inflation regimes By Becker, Christoph; Dürsch, Peter; Eife, Thomas A.; Glas, Alexander
  21. Connected Lending of Last Resort By Kris James Mitchener; Eric Monnet
  22. Automation and Nominal Rigidities By Takuji Fueki; Shinnosuke Katsuki; Ichiro Muto; Yu Sugisaki
  23. Welfare-enhancing inflation and liquidity premia By David Andolfatto; Fernando M. Martin
  24. News of disinflation and firms' expectations: new causal evidence By Martin Caruso Bloeck; Miguel Mello; Jorge Ponce
  25. Bond supply, price drifts and liquidity provision before central bank announcements By Lou, Dong; Pinter, Gabor; Uslu, Semih
  26. The post-covid inflation episode By Idoia Aguirre; Miguel Casares
  27. Macroprudential Regulation: A Risk Management Approach By Daniel Dimitrov; Sweder van Wijnbergen
  28. A DSGE model for macroprudential policy in Morocco By Chafik, Omar; Mikou, Mohammed; Slaoui, Yassine; Motl, Tomas
  29. The Sovereign-Bank Nexus in Emerging Markets in the Wake of the COVID-19 Pandemic By Mustafa Yenice; Yizhi Xu; Tara Iyer; Mr. Hamid R Tabarraei; Andrea Deghi; Mr. Salih Fendoglu
  30. Biases in Survey Inflation Expectations: Evidence from the Euro Area By Mr. Jiaqian Chen; Lucyna Gornicka; Vaclav Zdarek
  31. How does monetary policy affect household indebtedness? By Andreas Fagereng; Magnus A. H. Gulbrandsen; Martin B. Holm; Gisle J. Natvik
  32. Why European Banks Adjust their Dividend Payouts? By Mariusz Jarmuzek; Marco Belloni; Maciej Grodzicki
  33. Managing Guyana’s Oil Wealth: Monetary and Exchange Rate Policy Considerations By Ms. Rina Bhattacharya
  34. Real Exchange Rate and International Reserves in the Era of Financial Integration By Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
  35. Global financial cycle and liquidity management By Damiano Sandri; Olivier Jeanne

  1. By: Michael Ehrmann; Paul Hubert
    Abstract: How do financial markets acquire information about upcoming monetary policy decisions, beyond their reaction to central bank signals? This paper hypothesises that sharing information among investors can improve expectations, especially in the presence of disagreement or uncertainty about the economy. To test this hypothesis, the paper studies monetary policy-related content on Twitter during the “quiet period” before European Central Bank announcements, when policymakers refrain from public statements related to monetary policy. Conditional on large disagreement about the economic outlook, higher Twitter traffic is associated with smaller monetary policy surprises, suggesting that exchanging private signals among investors can help improve expectations.
    Keywords: Central Bank Communication, Quiet Period, Twitter, Market Expectations, Information Processing
    JEL: D83 E52 E58 G14
    Date: 2022
  2. By: Junior Maih; Falk Mazelis; Roberto Motto; Annukka Ristiniemi
    Abstract: We analyse the implications of asymmetric monetary policy rules by estimating Markovswitching DSGE models for the euro area (EA) and the US. The estimations show that until mid-2014 the ECB's response to inflation was more forceful when inflation was above 2% than below 2%. Since then, the ECB's policy can be characterised as symmetric, and we quantify the macroeconomic implications of this policy change. We uncover asymmetries also in the Fed's policy, which has responded more strongly in times of crisis. We compute an optimal simple rule for the EA and the US in an environment with the effective lower bound and a low neutral real rate, and find that it prescribes a stronger response to inflation and the output gap when inflation is below target compared to when it is above target. We document its stabilisation properties had this optimal rule been implemented over the last two decades.
    Keywords: inflation targeting, optimal monetary policy, effective lower bound, Bayesian estimation, Markov-switching DSGE
    JEL: E52 E58 E31 E32
  3. By: Mr. Faisal Ahmed; Mahir Binici; Mr. Jarkko Turunen
    Abstract: Forward-looking monetary policy communication has become a key element of flexible inflation-targeting regimes across advanced and emerging market economies. The Reserve Bank of India’s implementation of a flexible inflation targeting framework since 2016 has been supported by a broad set of communication tools, more recently aided by policy innovations such as forward guidance on policy rates and, asset purchases, increasing the predictability of monetary policy. A review of the recent innovations of monetary policy communications during the initial waves of the pandemic suggests forward guidance likely played a key role in moderating uncertainty and supporting some asset prices. We also find that the relationship between monetary policy surprises and yields for government and corporate securities across all maturities are positive and statistically significant. The results support an important role for monetary policy communication in guiding market expectations about the monetary policy stance, including the likely path of policy interest rates.
    Keywords: Monetary policy; communication; forward guidance; inflation targeting; India; monetary policy announcement; inflation-targeting regime; inflation targeting framework; asset purchase; monetary policy surprise; Monetary policy communication; Asset prices; Central bank policy rate; Inflation; Global
    Date: 2022–10–28
  4. By: Adrian Armas; Mr. Manmohan Singh
    Abstract: Digital money is a logical step in a process of continuous technological advancement in payment systems. In response, central banks are reviewing their conduct of monetary operations in light of the new shape of financial markets and systems. The impact of digital money will depend on the type of money substitution by digital money. The paper straddles several cases where substitution of CiC (currency in circulation), and bank deposits may take place via digital money such as CBDC or other e-money, and how it would impact the central bank balance sheet. Remuneration of CBDC, if aligned to a new objective, could potentially amplify the effect on the interest rate channel of monetary policy.
    Keywords: CBDC; digital money; currency-in-circulation; bank deposits; central bank balance sheet; money base (M0); seigniorage; impact of digital money; dollarization level; central bank of Brazil; unit of account; central bank liability; Fiat currency; central bank FX; Digital currencies; Currencies; Central Bank digital currencies; Treasury bills and bonds; Global; Caribbean
    Date: 2022–10–28
  5. By: Raja, Akash (Bank of England)
    Abstract: This paper studies how banks respond to capital regulation using confidential data on bank‑specific requirements in the UK. Banks do adjust their capital ratios following changes in requirements, though the pass-through is incomplete. While they lower capital ratios following a loosening of requirements, they eat into their existing capital buffers when facing tighter regulatory minima. I find that the main adjustment channels have changed since the financial crisis. Prior to the crisis, banks responded to changes in their requirements through capital accumulation and loan quantities; however, they have since then primarily altered the risk composition of assets.
    Keywords: Capital requirements; microprudential policy; banking; capital ratios
    JEL: E58 G21 G28
    Date: 2023–01–23
  6. By: Jesper Lindé; Zoltan Jakab; Andrew Hodge; Vina Nguyen
    Abstract: This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from flexible to average inflation targeting in the U.S. is shown to boost output and inflation in both regions. Meanwhile, the fiscal packages approved in the U.S. and the euro area, and a slower withdrawal of fiscal support in the euro area, have a similar impact on output and inflation as changing the monetary policy frameworks . Simultaneously implementing these policies is mutually reinforcing, but insufficient to fully explain the unexpected increase in core inflation during 2021.
    Keywords: Fiscal Policy; Monetary Policy; DSGE Model; inflation targeting in the U.S.; IMF working paper 22/222; changes in the U.S.; Phillips curve; AIT gap; Inflation; Fiscal stimulus; Interest rate floor; Public investment spending; Central bank policy rate; Global; Western Hemisphere
    Date: 2022–11–11
  7. By: Ribeiro, Gustavo; Teles, Vladmir; Costa-Filho, João
    Abstract: What is the impact on the transmission of monetary policy in Brazil under the fiscal ceiling implemented in 2016? We find empirical evidence of the response of fiscal variables to monetary policy shocks by estimating a dynamic model factor. Then, we analyze whether the imposition of an expenditure ceiling affected monetary policy effectiveness in Brazil. We propose a heterogeneous-agents new keynesian model (HANK) to the Brazilian economy with s spending cap and find that the expenditure ceiling adopted by the country might have “muted” a fiscal transmission channel for monetary policy, reducing its impact on the output gap.
    Keywords: Monetary Policy; Fiscal Policy; HANK; Brazil
    JEL: E12 E21 E24 E43 E52 E62
    Date: 2023–01–26
  8. By: Maxi Guennewig
    Abstract: This paper analyses the consequences for monetary policy if firms issue money which generates seignorage revenues and information on consumers. I present a benchmark economy with a unique monetary equilibrium in which firms form digital currency areas if information rents are large. The central bank loses its autonomy and is forced to implement deflationary monetary policy. I extend the benchmark to show that the central bank may regain policy autonomy when firms form currency consortia with decision powers and claims on seignorage concentrated in the hands of one firm.
    Keywords: Digital Currencies, Currency Competition, Seignorage Information, Facebook, Monetary Policy
    JEL: E4 E5 G2
    Date: 2022–12
  9. By: Alain N. Kabundi; Jiaxiong Yao; Mr. Montfort Mlachila
    Abstract: Climate change is likely to lead to more frequent and more severe supply and demand shocks that will present a challenge to monetary policy formulation. The main objective of the paper is to investigate how climate shocks affect consumer prices in a broad range of countries over a long period using local projection methods. It finds that the impact of climate shocks on inflation depends on the type and intensity of shocks, country income level, and monetary policy regime. Specifically, droughts tend to have the highest overall positive impact on inflation, reflecting rising food prices. Interestingly, floods tend to have a dampening impact on inflation, pointing to the predominance of demand shocks in this case. Over the long run, the dominant monetary policy paradigm of flexible inflation targeting faced with supply-induced climate shocks may become increasingly ineffective, especially in LIDCs. More research is needed to find viable alternative monetary policy frameworks.
    Keywords: climate change; monetary policy; monetary policy models; food price inflation drought; monetary policy paradigm; supply and demand shock; IMF working paper 22/207; IT country; Natural disasters; Inflation; Monetary policy frameworks; Global; Caribbean
    Date: 2022–10–28
  10. By: Eisei Ohtaki
    Abstract: Motivated by recent climate actions of central banks and supervisors, this study develops an overlapping generations model of the environment and money and explores a role of monetary policy on climate problems. It is shown that a stationary monetary equilibrium exists uniquely but be suboptimal so that this study explores optimal policies. When a policymaker can control money growth rates only, any monetary policy cannot attain an optimal allocation but a certain positive money growth rate can be the second-best policy. In contrast, when a policymaker can choose tax instruments in addition to money growth rates, there exists a continuum of optimal combinations of money growth rates and tax instruments, which implement an optimal allocation as a stationary monetary equilibrium allocation. These results suggest that, to resolve climate problems, monetary and fiscal authorities need to coordinate with each other.
    Date: 2023–01
  11. By: Mr. Zhongxia Zhang; Shiyi Wang
    Abstract: Inflation Targeting (IT) has become a prevalent monetary policy framework in the past three decades, as more central banks adopted and maintained price stability as their primary monetary policy mandate. Using a dataset of 68 major advanced countries and emerging markets economies, this paper evaluates the effects of inflation targeting countries’ track records on their macroeconomic performance, measured by real GDP growth and CPI inflation. This paper constructs three novel inflation targeting track record measures and establishes new stylized facts on the heterogeneity of inflation targeting countries’ tendency in managing inflation with respect to their stated objectives. This paper finds evidence that most targeters conduct dynamic inflation targeting by frequently updating inflation target bands, and their band sizes are wide-ranging across IT countries. We empirically study the contemporaneous and future effects of inflation targeting track records on countries’ macroeconomic performance. Results from the dynamic panel and local projection regressions suggest that better IT track records do not lead to superior growth and inflation rates in the short term.
    Keywords: inflation targeting; track records; dynamic target points and ranges; economic growth and inflation.; novel inflation targeting track record measure; inflation target band; countries' track records; effects of inflation targeting track records; better IT; Inflation; Monetary policy frameworks; Nominal effective exchange rate; Commodity price fluctuations; Global
    Date: 2022–11–11
  12. By: Neil Shenai; Ms. Rina Bhattacharya
    Abstract: From August to October 2020, the Haitian authorities were successful at bringing about a sharp appreciation in the gourde/U.S. dollar exchange rate. This paper analyzes the factors behind this appreciation and its spillovers on the economy. It finds that foreign exchange surrender requirements had a statistically significant effect on the nominal exchange rate, while foreign exchange intervention by the central bank did not. Surrender requirements were also found to have raised trading costs and volatility in the foreign exchange market and contributed to the development of a wider parallel nominal exchange rate premium. This appreciation contributed to a decline in headline inflation during the episode while delivering some fuel subsidy-related savings to the government. Remittance-dependent households and exporters saw a drop in their purchasing power, and Haiti’s net external buffers were adversely affected. Following from these findings, the paper offers recommendations on ways to facilitate foreign exchange management and boost external sustainability while contributing to the central bank’s overall policy objectives.
    Keywords: Haiti foreign exchange rate; fragile state monetary policy; foreign exchange surrender requirements; foreign exchange intervention in fragile states; reserve money programming in fragile states; exchange rate development; IMF working paper 22/225; Haiti foreign exchange exchange rate; foreign exchange management; money supply; Currency markets; Nominal effective exchange rate; Exchange rates; Exchange rate arrangements; Caribbean; Global; Central America; Sub-Saharan Africa
    Date: 2022–11–11
  13. By: Javier Bianchi; Louphou Coulibaly
    Abstract: Many central banks whose exchange rate regimes are classified as flexible are reluctant to let the exchange rate fluctuate. This phenomenon is known as “fear of floating”. We present a simple theory in which fear of floating emerges as an optimal policy outcome. The key feature of the model is an occasionally binding borrowing constraint linked to the exchange rate that introduces a feedback loop between aggregate demand and credit conditions. Contrary to the Mundellian paradigm, we show that a depreciation can be contractionary, and letting the exchange rate float can expose the economy to self-fulfilling crises.
    JEL: E44 E52 F33 F34 F36 F41 F45 G01
    Date: 2023–01
  14. By: Carlos de Resende; Alsim Fall; Demba Sy
    Abstract: This study describes a semi-structural New-Keynesian Quarterly Projection Model (QPM) for the WAEMU zone. In the context of a fixed exchange rate regime and relatively tight capital controls, the central bank for the WAEMU monetary union (Banque Centrale des États de l’Afrique de l’Ouest, BCEAO) can exert some influence on the domestic money markets and interest rates. We adjusted the canonical version of a New Keynesian semi-structural Quarterly Projection Model (QPM) to capture that feature and other aspects specific to the BCEAO monetary policy framework, including an implicit foreign exchange reserve target. The model, which is parametrized though and mix of calibration and Bayesian estimation techniques, displays dynamic properties for the main variables in response to various shocks that are in line with theoretical priors and empirical evidence. Medium-term forecasts considering the Covid-19 pandemic produce sensible results when compared with forecast produced by a standard VAR. Moments computed from artificial data generated with the model match well those observed in the data. Overall, the model displays desirable analytical properties and sensible data-matching and forecasting capabilities and could, therefore, be used by the BCEAO to identify relevant shocks, map their propagation into the WAEMU regional economy, and better support its monetary policy decisions.
    Keywords: WAEMU; BCEAO; Quarterly Projection Model; Monetary Policy; Transmission Mechanism; BCEAO monetary policy framework; cost-push shock; monetary policy shock; projection model; aggregate demand shock; International reserves; Inflation; Exchange rate arrangements; Return on investment; Real exchange rates; Global; West Africa
    Date: 2022–10–28
  15. By: Forbes, Kristin (MIT-Sloan School of Management, NBER and CEPR); Friedrich, Christian (Bank of Canada); Reinhardt, Dennis (Bank of England)
    Abstract: This paper explores whether different funding structures – including the source, instrument, currency, and counterparty location of funding – affected the extent of financial stress experienced in different countries and sectors during the early stages of the Covid-19 pandemic. We measure financial stress using a new data set on changes in credit default swap spreads for sovereigns, banks, and corporates during the Covid Shock – the period of acute financial stress in early 2020. Then we use country-sector and country-sector-time panels to assess if these different forms of financial intermediation and internationalisation tended to mitigate – or amplify – the impact of this risk-off shock. We find that banks with a higher share of funding from non-bank financial institutions (NBFI) and that were more reliant on US dollar funding were significantly more vulnerable. In contrast, whether funding was obtained in loans (instead of debt markets) or cross-border (instead of domestically) did not significantly impact resilience. The results suggest that macroprudential regulations should broaden their current focus to take into account reliance on NBFI and dollar funding, with less priority for regulations focusing on residency (ie, capital controls). Moreover, policies directly targeting these structural vulnerabilities (ie, focused on NBFIs and USD swap lines) can have significant effects even after controlling for broader macroeconomic responses and appear more successful at mitigating stress related to these funding structures than easing more generalised banking regulations.
    Keywords: Covid-19; financial stress; funding structure; non-bank financial institutions; shadow banks; macroprudential policy; swap lines
    JEL: E44 E65 F31 F36 F42 G18 G23 G38
    Date: 2022–11–18
  16. By: Kim, Hyun Seok (Korea Institute for Industrial Economics and Trade)
    Abstract: Soaring inflationary pressure and the ripple effects of the base rate spikes by the US Federal Reserve are expected to lead the Bank of Korea (BOK) to raise its base rate at least three times during the remainder of 2022. Korean firms rely primarily on indirect financing for their financial needs as the Korean capital market is strongly bank-based. However, small and medium-sized enterprises (SMEs) are far more dependent than large corporations on indirect financing. Monetary policy changes involving interest rates therefore exert a significantly greater impact on SMEs than they do on large corporations, and changes in monetary policy are estimated to transfer greater costs onto SMEs than onto large corporations. Whether in the short term or the long term, the burden of rising interest rates faced by SMEs is greater than that faced by large corporations. Low liquidity, high inflation rates, negative consumer sentiment, and excessive outstanding debt all threaten to increase risks to Korean capital markets today. Industries dominated by SMEs are expected to see their interest coverage ratios drop significantly and the percentage of zombie firms grow amid rising interest rates. This paper identifies the proactive policy action necessary needed to minimize the repercussions of rising base rates on industries where SMEs are concentrated.
    Keywords: capital markets; interest rates; monetary policy; Korea; base rate; small and medium-sized enterprises; SMEs; zombie firms; zombies; inflation; consumer sentiment; debt; financing
    JEL: E31 E32 E43 E44 E51 E52 E58 G18 G21 G23 G28 G32 G33 G38 H12 H24 H25
    Date: 2022–04–04
  17. By: Egorov, Konstantin; Mukhin, Dmitry
    Abstract: Recent empirical evidence shows that most international prices are sticky in dollars. This paper studies the policy implications of this fact in the context of an open economy model, allowing for an arbitrary structure of asset markets, general preferences and technologies, time- or state-dependent price setting, and a rich set of shocks. We show that although monetary policy is less eftcient and cannot implement the flexible-price allocation, inflation targeting and a floating exchange rate remain robustly optimal in non-U.S. economies. The capital controls cannot unilaterally improve the allocation and are useful only when coordinated across countries. Thanks to the dominance of the dollar, the U.S. can extract rents in international goods and asset markets and enjoy a higher welfare than other economies. Although international cooperation beneffts other countries by improving global demand for dollar-invoiced goods, it is not in the self-interest of the U.S. and may be hard to sustain.
    Date: 2023
  18. By: Emilio Congregado (Universidad de Huelva, Spain); Silviano Carmen Díaz-Roldán (Universidad de Castilla-La Mancha, Spain); Vicente Esteve (Universidad de Valencia and Universidad de Alcalá, Spain)
    Abstract: We address a test for sustainability of the Italian government deficit over the period 1861-2020, using the fiscal theory of the price level (FTPL). This approach takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level, even if monetary authorities pursue an inflation targeting strategy. We use a cointegrated model with multiple structural changes to characterize the sustainability of public finances and the prevalence of monetary versus fiscal dominance for sub-periods. We also use the recursive unit root tests for explosiveness to test Â…fiscal sustainability and to detect episodes of potential explosive behavior in Italian public debt.
    Keywords: Fiscal Theory of the Price Level; Monetary and …fiscal dominance; Fiscal sustainability; In‡ation; Public debt; Explosiveness; Cointegration; Multiple structural breaks
    JEL: E62 H62 O52
    Date: 2023–01
  19. By: Xavier Ragot (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: This paper derives the optimal money injection at the Zero Lower Bound (ZLB), in a tractable model where households hold heterogeneous money holdings due to explicit financial frictions, such as limited participation and temporary binding credit constraints. This framework is motivated by recent empirical findings. A deleveraging shock generates deflationary pressure and a fall in the real interest rate, pushing the economy to the ZLB. The main result is that open-market operations can stabilize the economy at the ZLB whereas lump-sum money transfers cannot. Moreover, an optimal money injection does not avoid the economy being at the ZLB.
    Keywords: liquidity trap, zero lower bound, heterogeneous agents, optimal policy
    Date: 2023
  20. By: Becker, Christoph; Dürsch, Peter; Eife, Thomas A.; Glas, Alexander
    Abstract: Central bank surveys frequently elicit households' probabilistic beliefs about future inflation. The responses provide only a coarse picture of inflation beliefs further away from zero. Using data from the Bundesbank household panel, we show that the current high-inflation environment induces respondents to allocate considerable probability to the rightmost open interval. This pile-up of probabilities negatively affects estimates of histogram moments and leads to a divergence between average expected inflation measured by probabilistic and point forecasts. The consistency of predictions can be improved by using an alternative design of the response scale that allows respondents to state more detailed beliefs for higher inflation ranges.
    Keywords: Probabilistic expectations, inflation, survey data
    JEL: D84 E31 E58
    Date: 2023
  21. By: Kris James Mitchener; Eric Monnet
    Abstract: Because of secrecy, little is known about the political economy of central bank lending. Utilizing a novel, hand-collected historical daily dataset on loans to commercial banks, we analyze how personal connections matter for lending of last resort, highlighting the importance of governance for this core function of central banks. We show that, when faced with a banking panic in November 1930, the Banque de France (BdF) lent selectively rather than broadly, providing substantially more liquidity to connected banks – those whose board members were BdF shareholders. The BdF’s selective lending policy failed to internalize a negative externality – that lending would be insufficient to arrest the panic and that distress via contagion would spillover to connected banks. Connected lending of last resort fueled the worst banking crisis in French history, caused an unprecedented government bailout of the central bank, and resulted in loss of shareholder control over the central bank.
    JEL: E4 E58 G01 G32 G38 N1 N24
    Date: 2023–01
  22. By: Takuji Fueki (Director and senior economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Lecturer, Kagawa University, E-mail:; Shinnosuke Katsuki (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Ichiro Muto (Associate Director-General, Institute for Monetary and Economic Studies (currently, General Manager, Aomori Branch), Bank of Japan (E-mail:; Yu Sugisaki (Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Boston College, E-mail:
    Abstract: This study examines how automation can have an impact on the effectiveness of monetary policy and inflation dynamics. We incorporate a task-based production technology into a standard New Keynesian model with two kinds of nominal rigidities (price/wage rigidity). When monetary easing raises wages, automation opportunities allow firms to substitute costly human labor with cheaper machines. This yields the automation effect of monetary policy, which increases labor productivity and magnifies the rise in real output. In turn, automation lowers real marginal costs for firms, thereby restraining the rise of inflation and flattening the Phillips curve. When prices are rigid and wages are flexible, the automation effect of monetary policy is particularly large, and the flattening of the Phillips curve is most pronounced. The automation effect also depends on the automation frontier, i.e., the remaining opportunities for automation, and a kinked Phillips curve emerges when firms face technological constraints on automation.
    Keywords: Automation, Monetary policy, Nominal rigidities, Phillips curve
    JEL: E22 E31
    Date: 2023–01
  23. By: David Andolfatto; Fernando M. Martin
    Abstract: The Friedman rule recommends eliminating liquidity premia on nominally risk-free government debt and following a deflationary monetary policy. The desirability of this prescription in a broad class of monetary models contrasts sharply with observation. In reality, the average rate of inflation is almost always positive and long-dated government securities are–as a matter of policy–allowed to trade at a discount relative to cash, even when these securities represent risk-free claims to cash. Our paper identifies a set of empirically-plausible conditions under which a strictly positive inflation and liquidity premium on long-dated government securities are both necessary to improve economic welfare. These conditions include: heterogeneous time-preferences, idiosyncratic risk over the timing of expenditure opportunities, and incomplete insurance markets. Our paper provides yet another rationale for a strictly positive inflation target and the use of penalty rates at central bank lending facilities.
    Keywords: Friedman rule; liquidity; inflation; term premium
    JEL: E4 E5
    Date: 2023–01
  24. By: Martin Caruso Bloeck (University of California, Berkeley); Miguel Mello (Banco Central del Uruguay); Jorge Ponce (Banco Central del Uruguay)
    Abstract: We causally identify how firms’ inflation and growth expectations respond to information about a comprehensive reform in the monetary policy framework by means of a randomized control trial. The reform is intended to lower inflation significantly in the coming years, making this experiment unique relative to previous ones that are carried out in stable and consolidated monetary policy frameworks. Firms treated with information about the reform lower their inflation and cost expectations by about 0.5 percentage points, with the effect being persistent sixth months after the treatment. Treated firms also expect temporarily lower GDP growth.
    Keywords: Inflation expectations, economic expectations, disinflation, monetary policy communication, randomized control trial, firms' survey
    JEL: C23 E52 E58
    Date: 2022
  25. By: Lou, Dong (London School of Economics); Pinter, Gabor (Bank of England); Uslu, Semih (John Hopkins Carey)
    Abstract: We document that UK government bond yields systematically rise in a two-day window before Monetary Policy Committee (MPC) meetings, which we refer to as pre-MPC windows. The effect concentrates on pre-MPC windows that coincide with new issuance of government bonds. Decomposing the effect into an expected short-rate and a risk premium component, we find that the majority of the yield drift is attributed to increases in risk premia. These effects are present in the US as well. Using UK transaction-level data and analysing trading activity after primary issuances, we find that the dealer sector sells significantly more to the client sector during pre-MPC windows, consistent with dealers’ limited risk-bearing capacity. Importantly, we find significant changes in the composition of liquidity providers: hedge funds buy a large share of the issue outside pre-MPC windows, but they shy away from liquidity provision in pre-MPC windows, being replaced by less speculative investors such as foreign government entities and pension funds. We propose a theoretical model to rationalise the change in the composition of liquidity providers before high-informational events, which can also explain the price drift observed in the data.
    Keywords: monetary policy announcements; price drift; bond supply
    JEL: E52 E63 G10 G20
    Date: 2022–10–21
  26. By: Idoia Aguirre (Departamento de Economia, Universidad Publica de Navarra); Miguel Casares (Departamento de Economia, Universidad Publica de Navarra)
    Abstract: The recent inflation episode has been examined in an estimated New Keynesian model. The rise of US price inflation resulted from a combination of price-push shocks (45%), wage-push shocks (24%), expansionary monetary policy shocks (21%) and shocks that reduced the labor force (9%). On the projections of the disinflation path, results indicate that if either prices or wages are further indexed to lagged inflation, wage inflation will be higher and the price disinflation will slow down. Also, a severe tightening of Fed's monetary policy will barely reduce inflation at the cost of higher unemployment.
    Date: 2023
  27. By: Daniel Dimitrov; Sweder van Wijnbergen
    Abstract: We address the problem of regulating the size of banks’ macroprudential capital buffers by using market-based estimates of systemic risk combined with a structural framework for credit risk assessment. We develop a set of novel modeling mech- anisms through which capital buffers can be allocated across systemic banks: (1) equalizing the expected impact between a systemic and a non-systemic institution; (2) minimizing the aggregate systemic risk; (3) balancing the social costs and ben- efits of higher capital requirements. We apply the model to the European banking sector and find sometimes substantial differences with the capital buffers currently assigned by national regulators. Since capital buffers are one of the main policy instruments for managing banks’ potential contributions to systemic distress, our findings have substantial implications for systemic risk in the EEA.
    Keywords: systemic risk; regulation; implied market measures; financial institutions; CDS rates
    JEL: G01 G20 G18 G38
    Date: 2023–02
  28. By: Chafik, Omar (Bank Al-Maghrib, Département de la Recherche); Mikou, Mohammed (Bank Al-Maghrib, Département de la Recherche); Slaoui, Yassine (Bank Al-Maghrib, Département de la Recherche); Motl, Tomas (Bank Al-Maghrib, Département de la Recherche)
    Abstract: This working paper presents a DSGE model for macroprudential analysis in Morocco. The model has been calibrated to match stylized facts of the Moroccan financial sector and can be used for macroprudential policy analysis, scenario building, or stress-testing. The model provides a top-down perspective on the financial sector stability, complementing the more traditional financial supervision tools currently in use at Bank Al-Maghrib. The paper describes the model structure and highlights its features that make it suitable for the analysis of macroprudential issues– strong role of nonlinearities, endogenous macro-financial feedback loops, and explicit description of the aggregate bank balance sheet. The paper presents three simulations to illustrate key transmission mechanisms: (i) Macroeconomic impact of an increase in equity capital; (ii) The role of capital flows sensitivity to capital buffers building requirement and (iii) The Impact of the COVID-19 crisis on the banking sector.
    Keywords: Macroprudential-policy; Macroeconomic-modeling; Morocco-Financial sector
    JEL: F47
    Date: 2022–12–24
  29. By: Mustafa Yenice; Yizhi Xu; Tara Iyer; Mr. Hamid R Tabarraei; Andrea Deghi; Mr. Salih Fendoglu
    Abstract: The COVID-19 pandemic has brought the relationship between sovereigns and banks—the so-called sovereign-bank nexus—in emerging market economies to the fore as bank holdings of domestic sovereign debt have surged. This paper examines the empirical relevance of this nexus to assess how it could amplify macro-financial stability risks. The findings show that an increase in sovereign credit risk can adversely affect banks’ balance sheets and credit supply, especially in countries with less-well-capitalized banking systems. Sovereign distress can also impact banks indirectly through the nonfinancial corporate sector by constraining their funding and reducing their capital expenditure. Notably, the effects on banks and corporates are strongly nonlinear in the size of the sovereign distress.
    Keywords: Sovereign-bank nexus;emerging markets; financial stability; sovereign risk; COVID-19; banking sector; corporate investment; outcome variable; Annex I. data description; summary statistics; Emerging and frontier financial markets; Capital adequacy requirements; Commercial banks; Credit default swap; Global
    Date: 2022–11–11
  30. By: Mr. Jiaqian Chen; Lucyna Gornicka; Vaclav Zdarek
    Abstract: This paper documents five facts about inflation expectations in the euro area. First, individual inflation forecasts overreact to individual news. Second, the cross-section average of individual forecasts of inflation underreact to shocks initially, but overreacts in the medium term. Third, disagreement about future inflation increases in response to news when the current inflation is high, and declines when inflation is low, consistent with a zero lower bound of expectations. Fourth, overreaction of individual inflation forecasts to news increased after the global financial crisis (GFC). Fifth, the reaction of average expectations (and of actual inflation) to shocks became more muted post-GFC in the euro area, but not in the U.S.
    Keywords: expectations formation; surveys of expectations; informational rigidities; inflation expectation; survey inflation expectation; responses of inflation expectation; forecasts of inflation; Inflation; Zero lower bound; Oil production; Supply shocks; Global
    Date: 2022–09–30
  31. By: Andreas Fagereng; Magnus A. H. Gulbrandsen; Martin B. Holm; Gisle J. Natvik
    Abstract: Households’ debt-to-income ratios change due to (a) primary deficits or (b) "Fisher effects" from interest costs, income growth, and inflation. With Norwegian micro data, we estimate how monetary policy affects household indebtedness by debt levels. In response to interest rate hikes, channel (a) pulls debt-to-income ratios down while channel (b) pushes debt-to-income ratios up. Channel (a) dominates even among highly indebted households where Fisher effects are forceful. However, among indebted households with high unemployment risk, we find no discernible effect on debt-to-income ratios, indicating that monetary policy has limited potential to contain debt where the largest risks are concentrated.
    Date: 2021–08
  32. By: Mariusz Jarmuzek; Marco Belloni; Maciej Grodzicki
    Abstract: Using a panel data approach for two samples of listed and unlisted European banks, this paper provides evidence that, over a decade and a half preceding the pandemic, bank dividend payouts were adjusted in line with the motivations found in the literature. Banks change their dividend payouts because they would like to signal good profitability to shareholders to address information asymmetry, or use dividends to mitigate the agency costs, or could come under pressure from prudential supervisors and regulators to retain earnings. Banks are found not to discount expectations about future economic conditions or their own profitability when making payouts. Simulations show that, in the absence of supervisory sector-wide recommendations to suspend dividend payouts, banks would likely have reduced the payouts only slightly in the first year of the pandemic.
    Keywords: Bank dividend policy; banking regulation and supervision; panel data analysis.; bank dividend payout; bank profitability ratio; dividend payout; bank capital ratios; Capital adequacy requirements; Bank soundness; Global financial crisis of 2008-2009; Countercyclical capital buffers; Global
    Date: 2022–09–23
  33. By: Ms. Rina Bhattacharya
    Abstract: International oil producers have discovered commercially recoverable petroleum reserves of around 11 billion barrels that promise to transform Guyana's agricultural and mining economy into an oil powerhouse, while hopefully helping to diversify the non-oil economy. Oil production presents a momentous opportunity to boost inclusive growth and diversify the economy providing resources to address human development needs and infrastructure gaps. At the same time, it presents important policy challenges relating to effective and prudent management of the nation’s oil wealth. This study focusses on one of these challenges: the appropriate monetary policy and exchange rate framework for Guyana as it transitions to a major oil exporter.
    Keywords: monetary policy framework; Guyana; exchange rate policy; oil wealth; recoverable petroleum reserve; oil exporter; oil economy; passthrough to inflation; Exchange rate arrangements; Exchange rate flexibility; Exchange rates; Currency markets; Caribbean; Global; Western Hemisphere
    Date: 2022–11–11
  34. By: Joshua Aizenman; Sy-Hoa Ho; Luu Duc Toan Huynh; Jamel Saadaoui; Gazi Salah Uddin
    Abstract: The global financial crisis has brought increased attention to the consequences of international reserves holdings. In an era of high financial integration, we investigate the relationship between the real exchange rate and international reserves using nonlinear regressions and panel threshold regressions over 110 countries from 2001 to 2020. We find the buffer effect of international reserves is more pronounced in Europe and Central Asia above a threshold of 17% of international reserves over GDP. Our study shows the level of financial-institution development plays an essential role in explaining the buffer effect of international reserves. Countries with a low development of their financial institutions may manage the international reserves as a shield to deal with the negative consequences of terms-of-trade shocks on the real exchange rate. We also find the buffer effect is stronger in countries with intermediate levels of financial openness.
    JEL: F30 F40 F44
    Date: 2023–01
  35. By: Damiano Sandri; Olivier Jeanne
    Abstract: We use a tractable model to show that emerging markets can protect themselves from the global financial cycle by expanding (rather than restricting) capital flows. This involves accumulating foreign liquid assets when global liquidity is high to then buy back domestic assets at a discount when global financial conditions tighten. Since the private sector does not internalize how this buffering mechanism reduces international borrowing costs, a social planner increases the size of capital flows relative to the laissez-faire equilibrium. The model also shows that foreign exchange interventions may be preferable to capital controls in less financially developed countries.
    Keywords: capital flows, foreign exchange reserves, sudden stop, capital flow management, capital controls
    JEL: F31 F32 F36 F38
    Date: 2023–01

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