nep-cba New Economics Papers
on Central Banking
Issue of 2023‒03‒13
fifteen papers chosen by
Sergey E. Pekarski
Higher School of Economics

  1. The Fiscal Transmission Mechanism of Inflation By Gmeiner, Robert; Larson, Sven
  2. Regulatory Collateral Requirements and Delinquency Rate in a Two-Agent New Keynesian Model By Aicha Kharazi; Francesco Ravazzolo
  3. Transmission mechanisms of conventional and unconventional monetary policies in open economies By Ivan Hajdukovic
  4. How Costly Will Reining in Inflation Be? It Depends on How Rational We Are By Jorge Alvarez; Allan Dizioli
  5. Macroeconomic Effects of Monetary Policy in Japan: An Analysis Using Interest Rate Futures Surprises By Hiroyuki Kubota; Mototsugu Shintani
  6. Negative rates, monetary policy transmission and cross-border lending via international financial centres By Andreeva, Desislava; Coman, Andra; Everett, Mary; Froemel, Maren; Ho, Kelvin; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Wong, Andrew; Wong, Eric; Żochowski, Dawid
  7. The Impact of Negative News on Public Perception of Inflation By Alina Evstigneeva; Daniel Karpov
  8. What Policy Combinations Worked? The Effect of Policy Packages on Bank Lending during COVID-19 By Mr. Maria Soledad Martinez Peria; Ms. Prachi Mishra; Mr. Divya Kirti; Jan Strasky
  9. The Benefit of Inflation-Indexed Debt: Evidence from an Emerging Bond Market By Cristhian Hernando Ruiz Cardozo; Jens H. E. Christensen
  10. The Canadian Neutral Rate of Interest through the Lens of an Overlapping-Generations Model By Martin Kuncl; Dmitry Matveev
  11. Is the Green Transition Inflationary? By Marco Del Negro; Julian di Giovanni; Keshav Dogra
  12. Gold as International Reserves: A Barbarous Relic No More? By Mr. Serkan Arslanalp; Chima Simpson-Bell; Mr. Barry J. Eichengreen
  13. Greenflation? By Olovsson, Conny; Vestin, David
  14. How Much Can the Fed’s Tightening Contract Global Economic Activity? By Julian di Giovanni; Neel Lahiri
  15. Currency Compositions of International Reserves and the Euro Crisis By Laser, Falk Hendrik; Weidner, Jan

  1. By: Gmeiner, Robert; Larson, Sven
    Abstract: The link between money creation and inflation has been theoretically demonstrated, but different inflation responses to Federal Reserve activity after the Great Recession and COVID recession showed the incomplete nature of the theory. We model a ``fiscal transmission mechanism'' whereby Federal Reserve purchases of Treasury securities lead to inflation as new dollars flow through fiscal deficits into the economy. In our model, other Federal Reserve activity generally lacks inflationary effects. Using a nonstructural vector autoregression approach, we test for the presence of this mechanism and offer near perfect predictions of the 2022 inflation rate using a time series extending back half a century. We explain the fiscal transmission mechanism and the reasons why other Federal Reserve activity lacks the same effects, and we propose an emphasis on controlling the money supply by limiting Federal Reserve purchases of Treasury securities as a better way to control inflation than setting an interest rate target.
    Keywords: inflation, transmission mechanism, monetary policy, fiscal policy, budget deficits
    JEL: E31 E58 E63 H63
    Date: 2023–02–04
  2. By: Aicha Kharazi (Free University of Bozen-Bolzano, Italy); Francesco Ravazzolo (BI Norwegian Business School, Norway; Free University of Bozen-Bolzano, Italy; Rimini Centre for Economic Analysis)
    Abstract: In light of the high levels of systemic risks and the elevated probability of a crisis occurring, understanding the effectiveness of macro-prudential policies is becoming increasingly crucial. We incorporate a collateral-based macro-prudential policy into a two-agent New Keynesian model, this policy adjusts counter-cyclically to the state of the borrowing sector. We show that regulators accommodate high delinquency rates by allowing for tighter collateral requirements. An active macro-prudential policy amplifies the impact of a monetary policy shock on output and labor supply, and this policy emerges as a potential tool to prevent the risk of delinquency in the short run.
    Keywords: macro prudential policies, credit supply, collateral constraint, monetary policy
    JEL: E32 E44 G21
    Date: 2023–02
  3. By: Ivan Hajdukovic (University of Barcelona)
    Abstract: This paper provides an empirical examination on the transmission mechanisms of conventional and unconventional monetary policies for two non-EMU countries, Switzerland and the United Kingdom, over the period 1990-2017. We investigate the role of stock prices and consumer expectations in the transmission of monetary policy. We propose two distinct structural VAR models. The model for the case of conventional monetary policy covers the pre-2009 period, while the model for the case of unconventional monetary policy covers the post-2009 period. The official bank policy rate and central bank's reserve assets are used as instruments for conventional and unconventional monetary policy. The analysis reveals that the inclusion of a forward-looking informational variable of near-term development in economic activity and a financial variable such as the stock prices is of key importance for the monetary policy assessment. We provide evidence for the existence of a consumer confidence channel in the transmission of conventional monetary policy. Moreover, the long-term government bond yields, the exchange rate and stock prices have an important role in the transmission of unconventional monetary policy. Our findings indicate that conventional and unconventional monetary policies have short-run expansionary effects in both countries by increasing output, consumption, investment, stock prices and wages, while reducing unemployment.
    Keywords: Conventional and unconventional monetary policies Consumer confidence Small open economy Stock market Vector autoregression JEL Classification: C32 E32 E52 F31 F41 G1, Conventional and unconventional monetary policies, Consumer confidence, Small open economy, Stock market, Vector autoregression JEL Classification: C32, E32, E52, F31, F41, G1
    Date: 2022–07
  4. By: Jorge Alvarez; Allan Dizioli
    Abstract: We document that past highly inflationary episodes are often characterized by a steeper inflationslack relationship. We show that model-generated data from a standard small Dynamic Stochastic General Equilibrium (DSGE) model can replicate this empirical finding when estimated with different expectation formation processes. When inflation becomes de-anchored and expectations drift, we can observe high inflation even with a mildly positive output gap in response to cost-push shocks. The results imply that we should not use an unconditioned (not controlling for expectations change) Phillips curve estimated in normal times to predict the cost of reining in inflation. Our optimal policy exercises prescribe early monetary policy tightening and then easing in the context of positive output gaps and inflation far above the central bank target.
    Keywords: DSGE; inflation dynamics; optimal monetary policy; forecasting and simulation; bayesian estimation
    Date: 2023–02–03
  5. By: Hiroyuki Kubota (University of California, Los Angeles); Mototsugu Shintani (The University of Tokyo)
    Abstract: We estimate the effects of monetary policy on the aggregate economy in Japan during the last three decades when the effective lower bound (ELB) on interest rates was occasionally binding. Using monetary policy surprises from the interest rate futures market as the external instrument to identify monetary policy shocks in the VAR model, we show that monetary policy has been effective in Japan for the entire sample period but its effect was more persistent in the ELB regime. Using a New Keynesian model with forward guidance, we further show that our empirical finding is consistent with theoretical predictions.
    Date: 2023–02
  6. By: Andreeva, Desislava; Coman, Andra; Everett, Mary; Froemel, Maren; Ho, Kelvin; Lloyd, Simon; Meunier, Baptiste; Pedrono, Justine; Reinhardt, Dennis; Wong, Andrew; Wong, Eric; Żochowski, Dawid
    Abstract: We study the effects of negative interest rate policies (NIRP) on the transmission of monetary policy through cross-border lending. Using bank-level data from international financial centres – the United Kingdom, Hong Kong and Ireland – we examine how NIRP in the economies where banks have their headquarters influences cross-border lending from financial-centre affiliates. We find that NIRP impairs the bank-lending channel for cross-border lending to non-bank sectors, especially for those banks that have only a weak deposit base in IFCs – and are thus relatively more exposed to NIRP in their headquarters. Using euro-area data, including bank-level data from France, we find that NIRP does not influence overall cross-border lending from banks’ headquarters’ economies, but NIRP does impair lending to financial sectors based in IFCs. This impairment is stronger for banks with a large deposit base in headquarter economies exposed to NIRP. JEL Classification: E52, F34, F36, F42, G21
    Keywords: bank lending, cross-border lending, International financial centres, monetary policy, negative interest rates, risk-taking
    Date: 2023–02
  7. By: Alina Evstigneeva (Bank of Russia, Russian Federation); Daniel Karpov (Bank of Russia, Russian Federation)
    Abstract: This study presents a novel approach to distinguishing the news that has the greatest impact on households’ perception of inflation in Russia. Narrowing down the long list of all news items to only the strongly negative requires taking into account the concept of rational inattentiveness by the implementation of a 'too costly to ignore' principle. The feature importance models return very close results about the high importance of three main factors: news about the acceleration of inflation and single prices, about economic crisis and recession, and about the devaluation of the ruble, which is closely related to geopolitics. We also report differences in 1) higher and lower income households' perception of inflation and 2) in the formation of expected and perceived inflation. With these findings, we shed more light on the nature of households’ perception of inflation, which might be useful for central bank communications, especially during crises.
    Keywords: : monetary policy, text analysis, inflation expectations
    JEL: D83
    Date: 2023–02
  8. By: Mr. Maria Soledad Martinez Peria; Ms. Prachi Mishra; Mr. Divya Kirti; Jan Strasky
    Abstract: This paper analyzes the impact of fiscal, monetary, and prudential policies during the COVID-19 pandemic on bank lending across a broad sample of countries. We combine a comprehensive announcementlevel dataset of policy actions with bank and firm-level information to analyze the effectiveness of different types of policies. We document that different types of policies were introduced together and hence accounting for policy combinations, or packages, is crucial. Lending grew faster at banks in countries that announced packages combining fiscal, monetary, and prudential measures relative to those that relied on some, but not all, policy dimensions. Within packages including all three types of policy measures, banks in countries with more and larger measures saw faster loan growth. The impact was larger among more constrained banks with low equity levels. Large packages combining fiscal, monetary and prudential policies also increased liquidity for bank dependent firms, but did not disproportionately benefit unviable firms.
    Keywords: COVID-19; policy packages; policy effectiveness; bank lending
    Date: 2023–02–03
  9. By: Cristhian Hernando Ruiz Cardozo; Jens H. E. Christensen
    Abstract: Portfolio diversification is as important to debt management as it is to asset management. In this paper, we focus on diversification of sovereign debt issuance through greater reliance on inflation-indexed bonds for a representative emerging economy, Colombia. Using an arbitrage-free dynamic term structure model of fixed-coupon and inflation-indexed bond prices, we account for inflation and liquidity risk premia and calculate the net benefit of issuing inflation-indexed bonds over nominal bonds. Our results suggest that the Colombian government could lower its funding costs by as much as 0.69 percent by increasing its issuance of inflation-indexed debt, in particular at long maturities.
    Keywords: term structures; Modeling; liquidity risk; financial market frictions; central bank credibility; debt management
    JEL: D84 E31 E43 E44 E47 E52 E58 G12
    Date: 2023–02–02
  10. By: Martin Kuncl; Dmitry Matveev
    Abstract: The neutral rate of interest is an important concept and communication tool for central banks. We develop a small open economy model with overlapping generations to study the determinants of the neutral real rate of interest in a small open economy. The model captures domestic factors such as population aging, declining productivity, rising government debt and inequality. Foreign factors are captured by changes in the global neutral real rate. We use the model to evaluate secular dynamics of the neutral rate in Canada from 1980 to 2018. We find that changes in both foreign and domestic factors resulted in a protracted decline in the neutral rate.
    Keywords: Economic models; Interest rates; Monetary policy
    JEL: E21 E22 E43 E50 E52 E58 F41
    Date: 2023–02
  11. By: Marco Del Negro; Julian di Giovanni; Keshav Dogra
    Abstract: We develop a two-sector New Keynesian model to analyze the inflationary effects of climate policies. Climate policies do not force a central bank to tolerate higher inflation, but may generate a tradeoff between the central bank's objectives for inflation and real activity. The presence and size of this tradeoff depends on how flexible prices are in the “dirty” and “green” sectors relative to the rest of the economy, and on whether climate policies consist of taxes or subsidies.
    Keywords: inflation; central bank's tradoffs; green transition
    JEL: E12 E31 E52 Q54
    Date: 2023–02–01
  12. By: Mr. Serkan Arslanalp; Chima Simpson-Bell; Mr. Barry J. Eichengreen
    Abstract: After moving slowly downward for the better part of four decades, central bank gold holdings have risen since the Global Financial Crisis. We identify 14 “active diversifiers, ” defined as countries that purchased gold and raised its share in total reserves by at least 5 percentage points over the last two decades. In contrast to the diversification of foreign currency reserves, which has been undertaken by advanced and developing country central banks alike, active diversifiers into gold are exclusively emerging markets. We document two sets of factors contributing to this trend. First, gold appeals to central bank reserve managers as a safe haven in periods of economic, financial and geopolitical volatility, when the return on alternative financial assets is low. Second, the imposition of financial sanctions by the United States, United Kingdom, European Union and Japan, the main reserve-issuing economies, is associated with an increase in the share of central bank reserves held in the form of gold. There is some evidence that multilateral sanctions imposed by these, and other countries have a larger impact than unilateral sanctions on the share of reserves held in gold, since the latter leave scope for shifting reserves into the currencies of other non-sanctioning countries.
    Keywords: International Reserves; Gold; Sanctions; aggregate gold share regression; gold appeal; share of gold; gold share; country level gold share regression; Gold reserves; Reserve assets; Gold prices; Global
    Date: 2023–01–27
  13. By: Olovsson, Conny (Research Department, Central Bank of Sweden); Vestin, David (Research Department, Central Bank of Sweden)
    Abstract: This paper examines the hypothesis of "Greenflation". We find that under flexible prices, the relative price adjustment of green and brown energy comes about without consequences for inflation. We extend the analysis to the case of sticky prices and wages and our findings continues to support the notion that a transition to a green economy may progress without too much worry about inflation, at least in the case where the fiscal measures are introduced in an orderly and well planned fashion.
    Keywords: Inflation; green transition; monetary policy; climate change
    JEL: E52 E58 Q43
    Date: 2023–02–01
  14. By: Julian di Giovanni; Neel Lahiri
    Abstract: What types of foreign firms are most affected when the Federal Reserve raises its policy rate? Recent empirical research used cross-country firm level data and information on input-output linkages and finds that the impact on sales and investment spending is largest in sectors with exposure to trade in intermediate goods. The research also finds that financial factors drive differences, with U.S. monetary policy spillovers having a much smaller impact on firms that are less financially constrained.
    Keywords: U.S. monetary policy spillovers; Foreign firms; international production linkages; financial constraints
    JEL: E52 F0
    Date: 2023–02–13
  15. By: Laser, Falk Hendrik; Weidner, Jan
    Abstract: During recent years, central banks have increased the levels of their international reserves at an unprecedented pace. In this paper, we introduce new country-specific reserve data and examine determinants of the composition of international reserves. Using a dataset of 36 countries (and the euro area) for the years from 1996 to 2016, we identify currency pegs and trade patterns as determinants of currency compositions. Our results emphasize the importance of transaction motives for the composition of currency reserves. The euro crisis appears to have been a setback for the euro, which temporarily seemed to challenge the US dollar as the most important international reserve currency and potentially impacted the determination of international reserve compositions.
    Date: 2022

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