nep-cba New Economics Papers
on Central Banking
Issue of 2023‒03‒06
eleven papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. Evaluating monetary policy effectiveness in North Macedonia: Evidence from a Bayesian FAVAR Framework By Magdalena Petrovska; Jasna Tonovska; Miso Nikolov; Рртан Сулејмани
  2. Dependence on Independence. Central bank lawyers and the (un)making of the European economy By Stephanie L. Mudge; Antoine Vauchez
  3. From Bazooka to Backstop: The Political Economy of Standing Swap Facilities By Richtmann, Mathis L.; Steininger, Lea
  4. Back to the 1980s or Not? The Drivers of Inflation and Real Risks in Treasury Bonds By Carolin Pflueger
  5. Soft or strong: the art of monetary tightening By Christophe Blot; Jérôme Creel
  7. Monetary Policy and Local Industry Structure By Lea Steininger; Alexander A. Popov
  8. The Financial Conditions Index as an additional tool for policymakers in developing countries: the Mexican case By Capasso Salvatore; Oreste Napolitano; Ana Laura Vivero
  9. BANK DIVERSITY AND FINANCIAL CONTAGION By Emmanuel Caiazzo; Alberto Zazzaro
  10. Empirical DSGE model evaluation with interest rate expectations measures and preferences over safe assets By Gregory de Walque; Thomas Lejeune; Ansgar Rannenberg
  11. How the PBoC´s new MLF affects the yield curve By Makram El-Shagi; Lunan Jiang

  1. By: Magdalena Petrovska (National Bank of the Republic of North Macedonia); Jasna Tonovska (Faculty of Economics – Ss. Cyril and Methodius University in Skopje); Miso Nikolov (IUTE Credit Macedonia); Рртан Сулејмани (National Bank of the Republic of North Macedonia)
    Abstract: This paper has adopted a Bayesian FAVAR approach to examine the monetary transmission mechanism in North Macedonia. The model is based on a broad data set that encompasses 140 monthly time series spanning between January 2010 and January 2019. In particular, the impact of policy on bank portfolio variables, and the impact of policy on economic activity variables have been evaluated. Our findings show that monetary tightening, causes a fall in output, inflation rate, employment, bank lending, the stock of government securities held by banks, and equity prices. On the other hand, it increases short-term money market rates, lending rates, deposits, and only in the immediate aftermath of the key policy rate rise, the share of non-performing loans in the loan portfolio. The study is expected to provide useful input to monetary policy implementation in North Macedonia. The study as well enriches the literature in this domain by discussing the challenges facing monetary authorities of small open economies with fixed exchange rate regimes in understanding how their policy instruments work through the economy.
    Keywords: Monetary transmission mechanism, FAVAR, Bayesian estimation, Monetary policy
    JEL: E52 E47
    Date: 2023
  2. By: Stephanie L. Mudge (UC Davis - University of California [Davis] - UC - University of California); Antoine Vauchez (CESSP - Centre européen de sociologie et de science politique - UP1 - Université Paris 1 Panthéon-Sorbonne - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)
    Abstract: We analyze the trajectory of independence in the formation of the European Central Bank (ECB), conceptualized as a boundary organization that, by delineating the European economy, contributes to a supranational state effect. Success in the effort, however, requires the ECB to constantly assert a separate and special status, despite its embeddedness in multiple fields. Focusing on the European Monetary Institute, the ECB's predecessor, we trace how historically obscure bank-based legal experts enabled the ECB's assertion of separateness by reworking independence into a newly multivalent category that could be wielded in authority struggles with national central banks and European institutions. The ECB's dependence on independence, we argue, renders it uniquely vulnerable to the repoliticization of central banking.
    Keywords: central banks independence lawyers eurozone, central banks, independence, lawyers, eurozone
    Date: 2022
  3. By: Richtmann, Mathis L.; Steininger, Lea
    Abstract: The permanent international lender of last resort consists of a swap line network between six major central banks, centering around the US Federal Reserve. Arguably, this network is a solution to a long debated problem as it provides public emergency liquidity provision to the world's largest financial market, the Eurodollar market. Drawing on exclusive interviews with monetary technocrats as well as a textual analysis of Federal Open Market Committee meeting transcripts over the course of 14 years, we reconstruct how this facility came into being. Building on Kalyanpur (2017) and Braun (2015), we develop an interpretative framework of bricolage to set the formation into context: In times of crises, central bankers rely on retrospection, experimentation, and creative re-deployment to develop their tools. However, in non-crises times, those tools prevail which offer what we coin 'bureaucratic familiarity'.
    Keywords: Standing Swap Facilities, lender of last resort, International Monetary Policy, Central Bank Cooperation, Monetary Technocrats
    Date: 2023–02
  4. By: Carolin Pflueger
    Abstract: I use nominal and real bond risks as new moments to discipline a New Keynesian asset pricing model, where supply shocks, demand shocks, and monetary policy are the fundamental drivers of inflation. Endogenously time-varying risk premia imply that nominal bond risks—as measured by their stock market beta—are a forward-looking indicator of stagflation risks. Calibrating the model separately for the 1980s and the 2000s, I show that positive nominal bond betas in the 1980s resulted from a “perfect storm” of supply shocks and a reactive monetary policy rule, but not from either supply shocks or monetary policy in isolation.
    JEL: E0 E31 E40 G10 G12
    Date: 2023–02
  5. By: Christophe Blot (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po); Jérôme Creel (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)
    Abstract: The rise of inflation has sparked tightening measures by the ECB. The paper discusses the causes of this rise and the factors that impinge on the effectiveness of ECB policy at curbing inflation. Drawing on own assessment of the respective trends in these factors, we recommend a careful approach to monetary policy. This paper was provided by the Policy Department for Economic, Scientific and Quality of Life Policies at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 26 September 2022.
    Date: 2023–09
  6. 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
  7. By: Lea Steininger (Department of Economics, Vienna University of Economics and Business; Vienna Institute for International Economic Studies); Alexander A. Popov (Monetary Policy Research Division, European Central Bank)
    Abstract: We study how monetary policy affects local market competition in a union of countries experiencing different economic conditions: the euro area. We find that when monetary conditions tighten (loosen), from the point of view of an individual economy, market concentration increases (declines). This effect is more pronounced when interest rates have been low-for-long, and it is stronger in sectors that are relatively more sensitive to changes in financing conditions. The underlying mechanism is a decline (increase) in short-term debt and investment by smaller and medium-size firms, relative to large firms, following monetary policy tightening (easing).
    Keywords: Eurozone, Monetary Union, Monetary Policy, Low Interest Rates, Competition
    JEL: E2 G1 G12
    Date: 2023–02
  8. By: Capasso Salvatore (Università di Napoli Parthenope, ISMed-CNR, and CSEF.); Oreste Napolitano (Università di Napoli Parthenope, ISMed-CNR); Ana Laura Vivero (Universidad Nacional Autónoma de Mexico UNAM)
    Abstract: The nature of the financial crisis in 2008 posed new challenges for macroeconomic theory and policy-makers. In this context, a financial conditions index (FCI) could be a useful tool to identify the state of financial conditions in a country. We construct three FCIs for Mexico to analyse the role of financial asset prices in formulating monetary policy under an inflation-targeting regime. Using monthly data from 1995 to 2017, we estimate FCIs with three different methodologies and build the index by taking into account the mechanism of transmission of monetary policy and incorporating the most relevant financial variables. Our results show that, likewise for developing countries such as Mexico, an FCI could be a useful tool for managing monetary policy in reducing macroeconomic fluctuations.
    Keywords: Financial conditions index, VAR model, ARDL model, TVP-VAR model.
    JEL: C32 G01 E44 O54
    Date: 2023–01–17
  9. By: Emmanuel Caiazzo (University of Naples Federico II); Alberto Zazzaro (Department of Economics and Statistics, University of Naples Federico II, CSEF, and MoFiR)
    Abstract: This paper analyzes financial contagion in a banking system where banks are linked by interbank claims and common assets. We find that asset commonality makes banking systems more vulnerable to idiosyncratic shocks and helps to determine which interbank network structures are resistant to contagion. When the degree of commonality is homogeneous across banks, the most resilient structure is the complete interbank network in which each bank borrows evenly from all the others. However, when the bank most exposed to the defaulting bank is not the one whose portfolio is most similar to it, incomplete interbank networks are more resilient than complete. We also show that the degree and variability of asset commonality between banks and the way this intertwines with the cross-holdings of interbank deposits have important implications for macroprudential regulation.
    Keywords: Banking crisis; financial contagion; interbank network; asset commonality
    JEL: G01 G21 G28
    Date: 2023–02
  10. By: Gregory de Walque (Economics and Research Department, National Bank of Belgium); Thomas Lejeune (Economics and Research Department, National Bank of Belgium); Ansgar Rannenberg (Economics and Research Department, National Bank of Belgium)
    Abstract: We estimate a DSGE model with Preferences Over Safe Assets (POSA) on Euro Area macroeconomic data and interest rate expectations measures. The model with POSA has much better empirical fit than the otherwise identical model without, especially once interest rate expectations are added to the data set. Including measures interest rate expectations strongly improves the model forecast of GDP and its components, with the best forecast delivered by the POSA model. Finally, with POSA, ECB forward guidance increased GDP and inflation by 1.9 % and 0.1 percentage points by 2019Q4, respectively, much less than without POSA.
    Keywords: DSGE estimation with interest rate expectations in the data set, forecasting, forward guidance, preferences over safe assets
    JEL: E37 E43 E47 E52
    Date: 2023–02
  11. By: Makram El-Shagi (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan); Lunan Jiang (Center for Financial Development and Stability at Henan University, and School of Economics at Henan University, Kaifeng, Henan)
    Abstract: In this paper, we assess the impact of the Medium-term Lending Facility (MLF), an instrument recently introduced by the People's Bank of China (PBoC), on treasury and corporate bond yields. This instrument and, more specifically, the transmission of its use through treasury bond yields to corporate bond yields plays a major role in the more market-based policy the PBoC envisions for the future. Using a semi-parametric local projection framework, we show that the mechanism is already fairly effective, allowing the PBoC to manipulate the entire yield curve.
    Keywords: Monetary policy; yield curves; MLF; Chinese bond market
    JEL: E52 G12 E44
    Date: 2023–02

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